Manual: Commercial Real Estate Loans

  • Many lenders expect borrowers to have a credit score over 660 in order to apply for a commercial real estate loan.
  • CRE loans may include term loans, SBA loans, credit lines or portfolio loans.
  • CRE loans usually have a term of 5 to 10 years, but are amortized for a period of up to 25 years, which could leave them with a significant balloon payment at the end of the period.
  • This article is intended for business owners who need a CRE loan to purchase or reconstruct an existing asset for their enterprise.

A CRE loan is a form of financing utilized to purchase real estate for enterprise reasons. In order to secure a commercial loan, you would need to have good credit, make a down payment of 25% or more and intend to use the majority of the property financed for your own business.

Why do I need a CRE loan?

Although the majority of us connect CRE loans with CRE investing, the use of them is much more complex than you think. CRE loans are intended to fund the acquisition or renovation of asset utilized for your own enterprise. To get a CRE loan, you must utilize a bigger part of the asset to secure the loan for your own business needs.

This means that you may still lease a portion of the asset, but a minimum of 51 percent of it has to be utilized for your enterprise. If, on the other side, you intend to lease half or more of your asset, then you require a different form of loan, as it is perceived to be a more speculative operation.

We will present some examples where a CRE loan could be suitable:

  • Buy an office building to register your enterprise
  • Expanding or relocating retail space for your shop
  • Buy a warehouse to store your inventory
  • Purchasing, constructing or renovating your own hotel

CRE Loan Rates, Conditions and Charges

Interest rateBegins around 3.5 percent
Down paymentMinimum 25 percent
Loan condition5-10 years, with a maximum 25-year amortization
Debt-to-income requirementMin debt-service coverage ratio (DSCR) of 1.25
Min. credit score660
Eligible asset kindsOffice, retail, industrial, hotels, restaurants, medical, entertainment and specialty assets

Forms of CRE loans

You can find many kinds of loans that are utilized to fund CREs. Every choice has its prices, conditions, eligibility criteria and application procedures. So, prior to applying, determine which form of loan is correct for you. Below are some of the suggestions to consider:

Loan kindWho will it suit
Bank term loanBorrowers with proper bank relationships
SBA loanBusiness owners who attempted to get a loan at a conventional bank
Line of creditThose who already own their asset and wish to borrow against their equity
Portfolio loanMultilocation enterprises

Under SBA loans, there are many loan products that can be utilized for the acquisition, development or renovation of CREs. The SBA 504 Loan Program is, though, expressly developed for this reason. The funds issued under the 7(a) program may theoretically be utilized to purchase or develop property, but the program is not suitable for financing properties.

Also, in the field of portfolio loans, it is significant to remember that such loans are mostly used by landlords who got a number of assets that they lease to renters . The lenders see this to be a more speculative operation, with varying rates, conditions and eligibility requirements. If you got a firm that owns several facilities that you utilize for your own needs, state it clearly prior to discussing portfolio lending chances with the lender.

Picking a CRE lender

If you are attempting to get a CRE loan, there are a lot of varying loans and lenders to pick from, so it’s crucial to locate a lender that not just provides the kind of loan you want, but also holds the rates you can afford and the qualification criteria you are in the position to fulfill.

Remember these things when choosing a lender:

  • Loan options on offer
  • Charges for origination
  • Interest rate at the beginning
  • Requirements for the docs
  • Time-in-business criteria
  • Punishments for prepayment
  • Requirements for personal warrants
  • Fast-funding or bad-credit choices (if needed)
  • Better Corporate Office scores and consumer concerns

Requirements for CRE loans

Qualifying for a commercial real estate loan is somewhat different from securing a home loan. Since you’re going to use the property for commercial purposes – and you’re going to pay back the business income loan – lenders want to make sure that your business will pay for the loan.

The conditions for obtaining a loan fall into 3 key categories:

  1. Safety

Before you accept a loan, the lender may want to know if the loan is adequately secured by the asset you borrow against. This means that you will usually require a minimum of 25 percent to 30 percent equity in the asset; if you are to buy, you will require to put in a down payment of 25 percent or more to qualify.

Moreover, the lender may want to ensure that you have sufficient asset insurance to provide some security against asset loss (collateral). The lender may also conduct title work on the asset and review the act to ensure that there aren’t any outstanding ties or similar claims against the property.

  1. Revenue

When processing the application, lenders require to see that you have a lot of revenue compared to what you spend, so to be assured that you can make your loan payments on a monthly basis. One metric lender used to make this judgment is the debt-service coverage ratio (DSCR). The min. DSCR varies depending on the asset you borrow against, but the majority of lenders wish for a DSCR of 1.25 or more.

In order to determine your income with your lender, you will need to have 2 years of tax returns – typically both business and personal – since you will be borrowing funds for business reasons, but you will also have to sign a personal warrant. You may also need to include your business association records and operating agreements, and personal docs like a W-9 and a copy of your birth certificate or ID.

3. Credit

If you get a business asset loan, your lender would probably wish to review your business credit score. Though, in the majority of situations, lenders will also wish for you to have a personal warrant, so they will also want to check your personal credit.

Min. credit scores change from lender to lender but are usually amid 660 and 680 for the majority of traditional loans.

Besides testing your score, lenders may wish to know how long you’ve been in business to determine your credit risk. You typically have to be in operation for a min. of 1 or 2 years to apply for a commercial loan. In that case, the lender can be assured in the income of your company, which will be the main source of repayment for the loan.

How do CRE loans vary from consumer loans?

CRE loans vary from individual (consumer) loans. These loans have quite different collateralization and underwriting standards, and rates, conditions and other characteristics.

On the one hand, there are less schemes for the securitization of business loans relative to personal loans. This means that lenders normally have to keep lots of the loans after they have been given, instead of selling them off to investors who bear the risk of failure if the borrower does not repay the loan.

As an outcome, lenders are much more risk-averse when offering commercial loans. Min. credit ratings are typically higher than down payments. Mortgage insurance is often not an option for commercial loans, so income standards and interest rates are typically bigger.

Additionally, commercial loans usually don’t last as long as personal loans. Not like home loans, which are usually issued for periods of a maximum of three decades, CRE loans frequently last just 5 to 10 years. But, debt amortizations may frequently be longer – usually to a maximum of a quarter of a century – leaving borrowers with balloon payments that they either need to pay off or refinance at the end of their debt.

FAQ: CRE Loans

CRE loans are much more complicated than traditional home ones, and there are several specifics that confuse small business owners. To support, we have been trying to clear up some of the main sources of uncertainty for borrowers. Here are some of the answers to some of the most popular questions:

What is the min. down payment on a CRE loan?

The min. down payment needed for most commercial loans is usually twenty percent of the buying price of the asset (not counting in closing costs). But, down payments can be smaller – as low as fifteen percent if you use mezzanine financing along with a property loan, or ten percent if you use an SBA loan.

How long do CRE loans going to last?

CRE loans usually last no longer than 5-10 years. But, credit amortizations will also be a lot longer – up to twenty five years. Although this ensures that loan payments are significantly smaller than if they were to be entirely repaid in 5 or 10 years, it also ensures that the borrowers will have a balance due at the end of their loan period, at which time the borrowers will have to refinance the debt or pay it in a lump sum.

Can you utilize the SBA 7(a) loan to purchase properties?

Technically, funds provided under the SBA 7(a) program may be utilized for properties (purchase, development, renovation or expansion). But, these loans are not intended for that reason – for instance, they are not backed by properties. As an outcome, these loans are usually costlier than other credit options, counting in SBA 504 loans.

What credit score is required for an SBA loan?

Usually, a min. credit score of 660 is required to apply for an SBA loan. The min. for SBA 504 loans is typically 680.

A second thing to be aware of with SBA loans is that the Small Business Administration is not meant to be a 1st-choice lender, but instead a last resort lender. You can obtain funding from other lenders prior to applying for a loan from the SBA.