Lending and real property financing are key concepts in both commercial and residential real estate. Many commercial real estate transactions are only possible through financing, which is most often secured through commercial real estate loans. While the nature of a commercial real estate loan varies significantly from a home mortgage, both involve working with either banks or independent lenders. Investors and aspiring homeowners should be thorough and make sure to understand all of the details of any real property financing or loan agreement before signing it.
If you have questions related to lending, real property financing, or another real estate matter, you can learn more by speaking with the California real estate attorneys of Polymath Legal PC at (833) 931-6418.
Differences Between Commercial Real Estate Loans and Residential Loans
The Federal Deposit Insurance Corporation defines commercial real estate lending as the financing of income-generating real estate. The terms of a typical commercial real estate loan are usually much different from a residential mortgage:
- While a residential mortgage is usually given to an individual borrower looking to purchase a home, commercial real estate loans are usually made to business entities – such as developers, corporations, limited partnerships, trusts, and funds.
- Most residential mortgages are amortized loans that have regular installments for paying back the debt (most commonly 30-year fixed rate mortgages). Commercial loans are usually between five and 20 years with an amortization period that extends beyond the term of the loan.
- Commercial real estate loans have loan-to-value ratios between 65% and 80%, while residential mortgages have higher loan-to-value ratios, sometimes up to 100%.
Common Types of Commercial Real Estate Loans
The specific terms of a commercial real estate loan will be set based on a variety of unique circumstances, including the type of loan, lender, property, and other factors. Some of the most common forms of commercial real estate loans include:
- Permanent loans – This type of loan is a first-time mortgage on a commercial real estate property, which can be either fixed-rate or variable rate. Permanent loans usually have longer amortization schedules than other types of business loans.
- Hard money loans – Private companies and individuals can issue hard money loans, which usually do not require proof of the business entity’s ability to pay back the loan.
- Small Business Administration (SBA) loans – The United States Small Business Administration has two loan programs dedicated to commercial real estate financing. These loan programs are guaranteed by the SBA, which means that the business entity must apply and be approved for the loan by a commercial lender. These funds will then be backed by the SBA.
- Bridge loans – Lenders offer bridge loans as short-term options with high interest rates. These loans are designed to provide funds and maintain cash flow while the business improves, refinances, or leases their commercial property. Businesses also often use these loans while waiting for approval on long-term financing.
- Blanket loans – These loans are often used by business entities looking to buy multiple properties. Blanket loans can make this process easier by providing the business with one lender, one payment, and one list of loan terms for all of these properties. However, this can be risky, as it may be difficult to sell an individual property when all of them are linked, and one failing property could put all of the properties at risk.
Guarantees For Commercial Real Estate Loans
The entities that are granted commercial real estate loans are typically constructed with the specific intention of purchasing commercial real estate. These business entities often lack a financial history or credit rating. Lenders account for this lack of a financial track record by requiring the owners of the entity to find a third party to guarantee the loan. Typically, this third party has the financial history that the entity lacks, and the lender can recover from the guarantor if the entity defaults on the loan.
In certain situations, lenders may allow an entity to take out a commercial real estate loan without a guarantor. This is known as a non-recourse loan, which means that the lender will have no legal recourse to collect from any individual or entity if the loan defaults, and the property itself will be the only way to recover. Business entities with questions related to guarantees or other matters related to lending and real property financing can learn more by discussing their situation with Polymath Legal PC experienced California real estate attorneys.
Commercial Real Estate Loan Repayment Schedules
Residential loans are typically amortized over the lifespan of the loan, meaning that the plan is to have the loan fully repaid after the loan term. Commercial real estate loans usually have amortization periods that are longer than the loan term. For example, a lender may issue a commercial loan with a term of seven years and an amortization period of 30 years. For this type of loan, the investor would make installment payments for seven years with an amount based on a loan payoff period of 30 years, with a final “balloon payment” of the remaining balance of the loan at the end of those 7 years.
The lender’s fees are usually based on the length of the loan term and amortization period. Some investors may be able to negotiate more favorable terms if they have a high credit score. In most cases, the interest rate will be higher if the loan repayment schedule is longer.
Learn More About Lending and Real Property Financing
If you are seeking lending and real property financing, it is vital to find the right type of loan and set of conditions based on your unique circumstances. At Polymath Legal PC, our team of dedicated California real estate lawyers has experience helping our clients find fair deals that allow them to grow their commercial enterprises. Contact us today at (833) 931-6418 to discuss your options.