Deena ElGenaidi
Published on:
August 24, 2022
min. read

Demystifying the 6 Types of Commercial Real Estate Loans

When it comes to securing funding for commercial real estate, there are many different commercial property loan options available, depending on your specific needs. For starters, the type of commercial real estate you’re working with affects what kind of loan is best for you.

What Is a Commercial Real Estate Loan?

A commercial real estate loan is a type of mortgage used to finance commercial property purchases. Those types of properties include retail spaces, office spaces, industrial spaces, multifamily buildings and hotels. People take out commercial real estate loans to purchase property, renovate an existing location, or refinance real estate debt.

What Types of Commercial Real Estate Loans Can You Get?

There are three major types of commercial real estate lenders: institutional, noninstitutional, and government-backed.

An institutional loan for commercial property comes from a large institution like a bank, credit union, trust company, or savings and loan institution. A noninstitutional loan is a loan from someone other than a federally regulated banking or financial institution. And a government loan is a loan coming directly from the government., which is given for certain types of properties.

To get into more specifics, though, there are many different categories of commercial real estate financing that fall into those three major types of commercial loans.

1. Commercial Mortgage

A commercial mortgage loan includes financing secured by any business property or investment property, said Noah Grayson, Strategic Financing Advisor at PropertyCashin.

Matt Wurtzebach, a Senior Vice President in the Commercial Finance Group of Draper and Kramer, Inc, added that a commercial mortgage is a loan on any income-producing property. He also noted that a “commercial mortgage” is more of a broad umbrella term covering other loan types as well. For instance, a bridge loan and a hard money loan could both fall under the category of a commercial mortgage.

Commercial Mortgage Terms

Commercial mortgage terms vary greatly, especially because they cover other types of loans. According to Grayson, terms can range from a one-year interest only loan to a 30-year fixed mortgage. Interest rates also vary and can start as low as 4% or as high as 12% or more. Many commercial mortgage loans also include a prepayment penalty, Grayson said. This dynamic means that if a borrower sells or refinances the secured property during the prepayment period, a fee must be paid to the lender.

2. Commercial Bridge Loans

A commercial bridge loan is a short-term, usually higher interest rate commercial mortgage, Grayson explained. A borrower would use a bridge loan when a commercial property does not yet qualify for permanent financing from a bank. The loan therefore bridges a borrower from their current situation into a more favorable one, until they can secure bank financing. “It’s a bridge from a current state to hopefully a permanent state after conducting some renovations or leasing,” Wurtzebach said.

“For example, a borrower may take out a bridge loan to pull cash out of his property to pay off debt obligations and improve a low credit score, so he can refinance into a fixed loan at more favorable terms,” Grayson added.

Bridge Loan Terms

Bridge loan terms usually range from one to three years and are interest only, Grayson said. The interest rates typically range from 6% to 12% and are backed by collateral. Interest pricing is usually commensurate with risk, meaning a lower credit score equals higher interest. Commercial bridge loans can also carry higher fees, added Grayson, including origination fees (when a percentage of the final funded loan amount is paid at closing) and exit fees (when a percentage of the remaining balance is paid at the end of the loan).

Bridge Lenders

3. Commercial Hard Money Loans

A commercial hard money loan and a commercial bridge loan are interchangeable terms in most situations, Grayson explained. The main difference is that hard money lenders usually have higher rates, whereas “a bridge loan may be priced above conforming rates but may still be palatable,” Grayson noted. Essentially, not all bridge loans are hard money loans, but all hard money loans are bridge loans. Hard money loans are priced for a higher degree of risk, as they oftentimes come into play during transactions involving bankruptcy or foreclosure bailout. They are designed for borrowers who aren’t eligible for traditional mortgage loans and as such carry the highest fees.

Hard Money Loan Terms

The terms of a hard money loan are similar to that of a bridge loan, Grayson said, but they “tend to veer toward the shorter end of the loan term spectrum and the higher end of the rate spectrum.”

Hard Money Lenders

  • Fort Amsterdam Capital
  • Bloomfield Capital
  • Silver Arch Capital Partners
  • B&B Capital Group
  • TruStone Financial

4. Mezzanine Loan

A mezzanine loan or mezzanine financing is “an additional layer of financing or investor equity that takes a subordinate position to the senior debt or mortgage,” Grayson said. A mezzanine loan is used after a borrower has taken out a traditional loan but still needs more capital to fund a purchase or capital expenditures.

Mezzanine Loan Terms

Mezzanine loan terms can vary greatly, Grayson said, but typically they’re short term, rarely ever exceeding five years. Mezzanine loans also come with a higher interest rate than traditional bank loans — sometimes around 9 to 16%, depending on the risk of the borrower and business plan.

Mezzanine Lenders

5. SBA 7(a) Loan

An SBA 7(a) loan is government-guaranteed small business financing provided by a Small Business Administration (SBA) approved lender. What this means is that the SBA 7(a) lender funds the full business loan, Grayson said. In the event of a default, the SBA will reimburse the lender up to 85% of the loan amount if that lender has followed the right protocol.

In some instances, high leverage financing of up to 100% of a property’s value is also available with the 7(a) program.

Through the 7(a) program, Grayson added, funds can be used for expenses like the purchase, refinance, renovation or ground-up construction of commercial real estate. Funds can also be used for expenses like working capital, equipment, inventory, partnership buyouts, debt consolidation, business purchases, leasehold improvements, expansions and more.

SBA 7(a) Loan Terms

Loans usually range from $25,000 up to $5 million, Grayson said. The rates can be fixed, but most lenders offer an adjustable rate, adjusted quarterly.

SBA 7(a) Lenders

6. SBA 504 Loan

An SBA 504 loan is another government guaranteed small business loan. In most cases, Grayson said, an SBA 504 loan will be funded 50% by the participating lender, up to 40% by a Certified Development Company (CDC), with the remaining 10% contributed by the borrower as cash or equity.

Unlike other SBA loans, funds cannot be used for working capital, inventory, debt refinancing, or investments. However, borrowers can use the money to purchase machinery and other equipment, business land or new facilities. They can also modernize existing facilities, land, streets or utilities.

SBA 504 Loan Terms

SBA 504 loans range in size from $500,000 to $20 million+, Grayson said. And the loans are long-term, out to about 25 years and fixed interest currently in the 5% range.

SBA 504 Lenders

Make Sure to Understand Your Financial Needs

Before seeking out commercial loans for real estate, it’s important to understand your own financial needs. A financial advisor is often recommended to help figure out what you can realistically borrow and what commercial real estate loan type you need. It’s also a good idea to talk to a mortgage broker who can get you set up with the right lender.