How does a commercial real estate loan work?

NEW YORK – September 23, 2021 – (Newswire.com)

iQuanti: Commercial real estate loans are designed to help business owners purchase high yield real estate such as retail stores or office buildings. Just as home buyers can use home loans to finance new home ownership, business owners can use commercial real estate loans to obtain a mortgage on their next property.

Still, it can be difficult to find your way around commercial real estate loans. It is important to understand the different loan types available, the terms of each loan agreement, and the application criteria.

What is a Commercial Real Estate Loan?

A commercial property loan is a loan given by a lender to a business or entrepreneur for the purpose of purchasing or renovating commercial property.

Examples of these commercial properties are:

  • Shopping centers
  • Restaurants
  • office building
  • Apartment building
  • camp
  • Hotels

While home loans are often made to individuals, such as potential homeowners, commercial home loans are commonly made to companies such as corporations, partnerships, and trusts.

The types of commercial real estate lenders also vary. Common lenders are commercial banks, credit unions, and private companies. The US Small Business Administration (SBA) also offers two types of SBA loans for businesses.

What conditions apply to commercial real estate loans?

Many different factors play a role in the creation of commercial real estate loans. These terms are set based on the individual needs of the lender and the borrower.

Repayment plan

The repayment periods for commercial real estate loans are usually between five and 20 years.

However, the payback period is usually longer than the repayment period. For example, a borrower has 10 years to repay the loan, but the amortization schedule is 30 years. At the end of these 10 years, they make one final balloon payment to cover their remaining balance.

Prepayment penalties

Many commercial real estate loans come with prepayment penalties or fees that discourage borrowers from paying off their loans early.

The main types of these penalties include:

  • Basic fee for prepayment – a fixed percentage set by the lender multiplied by the current outstanding balance
  • Interest guarantee – an interest rate that the borrower must pay even after the loan has been repaid in full
  • lockout – a certain period of time during which the borrower cannot repay the loan

Loan-to-value ratio

The loan-to-value (LTV) ratio is the amount of the loan divided by the value of the property. This helps lenders determine how much money they can realistically lend to a borrower.

LTVs for commercial real estate loans are typically in the 65-80% range. That means commercial property buyers may have to put 20-30% on their property before applying for a loan.

Debt service coverage ratio

The debt service coverage ratio (DSCR) is the property’s annual net operating income divided by its annual mortgage debt payments. This helps lenders calculate their loan based on the expected income from the commercial property.

The median of the DSCR is 1.25, according to the National Association of Retailers. A DSCR of less than 1 tells lenders that the company does not have enough cash flow to cover its annual debt.

Interest and Fees

Commercial real estate loan interest rates average in the 5-7% range. However, these prices depend on many factors. For example, borrowers with lower LTVs may qualify for lower interest rates because their loans pose less risk to the lender.

Commercial real estate may also come with a number of fees payable during closure, such as:

  • Appraisal fees
  • Legal fees
  • Registration fees
  • Survey fees
  • Origination fees

How can you apply for a commercial real estate loan?

A commercial real estate lender usually considers various criteria when deciding whether to grant a loan. These factors include:

  • safety. The commercial property itself is often used as security.
  • Business credit. This includes a company’s creditworthiness, debt, and payment history.
  • Personal credit. If a business doesn’t exist long enough to have a credit history, the lender can view the business owner’s personal credit history.

It is important for business owners to understand these loan terms and criteria while searching for a commercial real estate lender and preparing for their next big financial investment.

Press release service
from
Newswire.com

Original source:

How does a commercial real estate loan work?

Source link

About Paige McCarthy

Check Also

What you should know about flex financing

Springhill Suites / Element Hotel | Colorado Springs, Colorado and Metro | St. Petersburg, Florida …

Leave a Reply

Your email address will not be published. Required fields are marked *