Commercial Real Estate Loans: What You Need to Know

If you need a small business loan to buy a commercial real estate property – whether it is for a commercial office space or a multi-family unit you intend to lease out, you can consider the various commercial real estate loans

How a Commercial Real Estate Loan Work

A commercial real estate loan is intended to help borrowers buy a new commercial or income-generating property, renovate an existing one, or refinance a real estate loan on an already owned property.
The loan is similar to a traditional individual mortgage loan in many ways. However, there are several important key differences that you should know.

Loan-to-Value Ratio (LTV)

The LTV is a metric used by borrowers in determining the amount of money they can loan. You can compute for it by dividing the projected loan amount by the value of the property.

As a property buyer, you are eligible for a traditional mortgage loan with a high LTV figure such as 97%. If you qualify for a government-guaranteed loan or a 1st-time homebuyer program, you can even get financing of as much as 100%.

According to NAR or the National Association of Realtors, a typical commercial real estate loan provider would look for an LTV of around 75 to 80%. Thus, you need to either buy an undervalued property or prepare a 20 to 25% down payment before approaching a lender if they use LTV in determining the maximum amount of the loan.

NAR also said that only 60% of commercial real estate loan providers use LTV as one of the criteria to determine the maximum amount a business can avail. The rest of the lenders use what is referred to as the DSCR or debt service coverage ratio.

This ratio is used to measure a borrower’s ability to meet their current financial obligations with their existing cash flow. To compute for the DSCR, just divide the annual net operating income by the total annual debt payments. The DSCR median is pegged at 1.25, according to NAR.

Personal Guarantee Loans vs. Non-Recourse Loans

Whether you are applying for a commercial real estate loan or a mortgage, the loan provider will use the underlying property as the debt collateral. However, there are cases when lenders may also ask for a personal guarantee.

If a business has been in business for a relatively short period, it may not yet have the track record that lenders may be looking for in a commercial real estate loan applicant. In this case, the lender may require the owners or principals to personally guarantee the loan.

Thus, if the business cannot pay back the debt, the borrower will agree to be liable in his personal capacity for meeting the monthly payments, in case the collateral does not fully cover the amount owed.

Another possible scenario is if the lender does not ask for a personal guarantee and merely uses the property as the sole means of recovering the loan proceeds in case of a payment default. This is known as a non-recourse loan since the lender can’t get more money from the business owners or principals in case the property cannot cover the owed amount fully.

Commercial Real Estate Loan Types: There are 6 main types of commercial loans that can be used to meet your goals, depending on the needs and qualifications of your business.

These are the following:
1. Permanent loans
2. Bridge loans
3. SBA loans
4. Hard money loans
5. Lines of credit
6. Owner financing

We are specialists in facilitating applications for Commercial Real Estate Loans. Get in touch with us to know how you can get your Commercial Real Estate Loan!