Commercial Real Estate Loans: Types, Top Options, Rates, and How to Apply

Real Estate Investment View
2 days ago
6 min read

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Investing in or managing commercial real estate often requires significant capital. Whether you’re developing a retail center, purchasing an office building, or refinancing existing debt, commercial real estate loans are essential for funding these ventures.

In this blog, we’ll discuss the different types of commercial real estate loans, highlighting the top options available this year, explain typical loan rates, and walk you through the application process.

Key Takeaways:

Commercial Real Estate Loans Are Crucial for Business-Focused Properties: Commercial real estate loans provide the funding needed for buying, developing, or refinancing business properties like retail spaces, offices, and warehouses. These loans are tailored for income-producing properties and involve different rates, terms, and qualification requirements.
Multiple Loan Types Serve Different Business Needs: From SBA loans for small businesses to bridge loans for time-sensitive deals and hard money loans for high-risk projects, borrowers can choose from various loan types based on their risk level, project size, and funding timeline. Understanding the purpose and structure of each loan type is essential for securing the best terms.
Loan Rates Vary by Type, Borrower, and Market Conditions: Interest rates for commercial real estate loans range widely—from 3% to 20%—depending on the loan type, borrower qualifications, and economic factors. Comparing rates and terms helps businesses align financing with long-term profitability.
A Thorough, Multi-Step Application Process is Required: Applying for a commercial real estate loan involves pre-qualification, gathering essential documentation, underwriting, and final closing. Being prepared with a solid DSCR, strong credit, and organized financial records helps boost approval odds and funding speed.

Traditional Real Estate and Commercial Real Estate: Key Differences

While conventional and commercial real estate involves property ownership, traditional (residential) and commercial real estate have different purposes. Each real estate type follows distinct rules for usage, financing, and returns.

Conventional real estate is primarily used for living purposes, with properties including single-family homes, townhomes, and condos. Traditional real estate is designed to generate passive income through rent, as this type of real estate deals with families or individual tenants.

Commercial real estate is designed for business activities, including retail stores, office buildings, multi-family apartments, and warehouses. Commercial real estate often yields higher returns through rental income and property appreciation because business tenants mean longer leases.

What are Commercial Real Estate Loans?

A commercial real estate loan is a mortgage used to buy, develop, or refinance property intended for business purposes. These loans are designed for income-generating properties like warehouses, office buildings, retail spaces, and multi-family apartments.

The demand this year for new financing and refinancing is booming, so understanding your commercial real estate loan options is vital for securing the best terms while keeping your business projects on the right track.

Types of Commercial Real Estate Loans

There are multiple types of commercial real estate loans available, each designed for specific financial situations and property needs. Whether you’re buying, developing, or refinancing a property, the right loan option relies on factors like business goals, project size, and repayment terms.

Knowing how each loan works and what they’re intended for will help you make more informed decisions and secure the best terms.

Conventional Commercial Mortgages

Long-term financing from credit unions and banks.
Variable or fixed interest rates.
Ideal for established businesses with strong credit.

2SBA 504 and SBA 7(a) Loans

Supported by the U.S. Small Business Administration (SBA).
SBA 504 is for buying real estate or equipment with fixed rates.
SBA 7(a)is for more flexible use, including working capital.
Perfect for small to medium-sized businesses.

Bridge Loans

Short-term, interest-only loans.
Used to “bridge” financing gaps (until permanent funding is obtained).
Higher interest rates but quick to close.

Construction Loans

Capital used to fund significant renovations or build new properties.
Typically interest-only during construction.
Converts to permanent financing at project completion.

CMBS (Commercial Mortgage-Backed Securities) Loans

Loans pooled and sold as secure terms to investors.
Non-recourse financing.
Typical loans for large-scale commercial projects.

Hard Money Loans

Financing from private lenders based on assets.
High-interest, short-term loans.
Useful for unconventional or high-risk projects.

Top Commercial Real Estate Loan Options

With so many types of commercial real estate loans available, selecting the right option depends on the property type, your business type, and funding needs. Some loans offer lower rates but have stricter qualifications, while others provide more flexibility at higher costs.

Let’s take a look at the top commercial real estate loan options for this year.

Small Businesses and Startups

SBA 504 loans offer competitive rates and are perfect for owner-occupied properties.

Large-Scale Investors

CMBS loans provide non-recourse financing and are ideal for big-ticket assets.

Time-Sensitive Deals

Bridge loans offer fast access to capital for refinancing or acquisitions.

High-Risk Projects

Hard money loans fill the gap when conventional financing isn't an option.

Current Commercial Real Estate Loan Rates

As of May this year, commercial real estate loan rates differ based on the lender, loan types, and borrower qualifications. Doing your research about each loan type and their rates can help you make smarter, more informed decisions that can make or break your business endeavors.

Here’s an overview of typical loan interest rates:

Traditional Bank Loans: Approximately 3% to 9.50%. These loans are offered by credit unions and conventional banks. Rates rely on factors like loan-to-value (LTV) ratio, property types, and borrower creditworthiness.
SBA 504 Loans: Approximately 6.2% to 6.48%. SBA 504 loans are backed by the U.S. Small Business Administration, meaning they’re designed for buying fixed assets like equipment or real estate.
SBA 7(a) Loans: Approximately 6.00% to 9.50%. Also supported by the SBA, 7(a) loans are more flexible and can be used for different business purposes.
CMBS Loans: Approximately 5.88% to 7.49%. CMBS loans are pooled and sold to investors, providing non-recourse funding. They’re most often used for income-generating properties and have fixed terms.
Bridge Loans: Approximately 6% to 12%. Bridge loans help bridge the gap between immediate financing needs and long-term solutions. These loans are often used for property renovations while securing permanent financing.
Construction Loans: Approximately 5% to 14%. Construction loans typically have variable rates and can convert to more permanent financing when projects are completed.
Mezzanine Loans: Approximately 9% to 20%. Mezzanine loans are a hybrid of equity and debt financing. These loans are subordinate to primary loans and are often used to fund larger projects with higher leverage.

Factors Influencing Loan Rates:

Borrower’s credit
Loan-to-Value (LTV) ratio
Debt Service Coverage Ratio (DSCR)
Property location and type
Federal Reserve policy and economic outlook

Applying for a Commercial Real Estate Loan: A Ste-By-Step Guide

The application process for securing a commercial real estate loan involves more steps than traditional (residential) real estate loans. Lenders review essential factors, from property details and business finances to borrower qualifications and credit. Knowing what to expect can help you be prepared and better your chances of approval.

Step 1: Pre-Qualification

Prequalification is all about determining how much you qualify to borrow. During this stage, lenders will assess your income, credit, property value, and business finances.

Step 2: Gather Documentation

The next step is to prepare for applying by gathering all essential information and documentation. These essential documents include personal and business tax returns, financial business statements, property appraisals, rental rolls, and a detailed business plan for future projects.

Step 3: Underwriting and Approval

Lenders evaluate borrower risk through creditworthiness, LTV, and DSCR during the underwriting stage. Expect requests for additional documentation so your lender has all the information they need. Approval times can vary, with SBA loans taking weeks while bridge loans often close faster.

Step 4: Closing and Funding

Your loan agreements are signed and collateral finalized during the closing and funding stage. Loan funds are disbursed based on the agreed-upon terms (draw schedule or lump sum).

Quick Tips for Success:

Maintain a DSCR of at least 1.25x.
Keep business and personal credit scores solid.
Provide clear and organized documentation.
Consider working with a commercial real estate loan broker.

Conclusion

Commercial real estate funding requires a strong understanding of available loan types, best options, rates, and the application processes for each. With thorough research and the right strategy, you can secure funding that best suits your business goals.

Need help? Visit trusted online platforms and resources like Investopedia, The Small Business Administration (SBA), NerdWallet, and The Funding Family for more detailed information about commercial real estate loans. You can also consult with lender partners to explore your options!