What Is a Commercial Real Estate Loan (CRE)?
A commercial real estate loan, as opposed to a residential real estate loan, is a mortgage secured by a lien on business property. Commercial real estate (CRE) is any income-producing real estate utilized for commercial purposes, such as offices, shops, hotels, and apartments.
KEY LESSONS
- A CRE loan is a mortgage that is secured by a lien on commercial real estate.
- CRE loans are often granted to investors who own and run commercial real estate, such as firms or organizations.
- Banks, independent lenders, insurance companies, pension funds, private investors, and other financial sources, such as the US Small Business Administration's 504 Loan Program, make CRE loans available.
- When considering commercial real estate loans, lenders evaluate the type of the collateral (the property being acquired), the borrower's creditworthiness, and financial ratios.
- Commercial real estate loans are often more costly than residential loans.
- Commercial Real Estate (CRE) Loans: An Overview
- Small companies who want to buy, expand, or refurbish their properties may look for a CRE loan. CRE loans are often granted to companies, developers, partnerships, funds, trusts, and real estate investment trusts, or REITs.
In other words, company firms founded specifically to own and operate commercial real estate. The company buys commercial property, rents out space, and then collects rent from the companies that operate inside it. Commercial real estate loans are used to fund the enterprise, which includes the purchase, development, and construction of these assets.
CRE loans are actively provided by banks, independent lenders, pension funds, insurance companies, individual investors, and other capital sources, such as the US Small Business Administration's 504 Loan Program.
Commercial lenders, like residential lenders, take varying amounts of risk and provide varied conditions to borrowers.
The 30-year fixed-rate mortgage is the most common residential loan; CRE loans are often shorter. The loan lengths span from 5 years (or less) to 20 years, with the amortization time often being greater than the loan term. For example, a lender may provide a 7-year CRE loan with a 30-year amortization. During the seven-year period, the borrower pays monthly installments. The monthly payments are calculated as if the loan were being paid off over 30 years, with one final "balloon" payment consisting of the whole outstanding loan total.
When evaluating CRE loans, lenders take into account the nature of the collateral (the property being purchased); the creditworthiness of the entity (or principals/owners), which includes three to five years of financial statements and income tax returns; and financial ratios such as the loan-to-value ratio and the debt-service coverage ratio.
Commercial real estate loans are often more costly than residential loans. Down payments are normally between 20% and 30% of the purchasing price. Interest rates are also often higher, ranging from 10% to 20% for the majority of borrowers. As of July 2022, loans guaranteed by the Small Business Administration (SBA) (see below), which are among the most affordable, ranged from 2.25% to 4.25% for variable loans and 5.0% to 6.0% for fixed loans, depending on the amount and term of the loan.
CRE loans are designed to finance real estate that is only utilized for commercial purposes and to create revenue.
Commercial Real Estate (CRE) Loan Varieties
The following are the most prevalent forms of commercial real estate loans:
Permanent Loans are commercial property first mortgages. A permanent loan must have some kind of amortization and a duration of at least five years in the contract.
Traditional and non-traditional lenders write SBA loans, but the SBA guarantees them. The most common SBA loan is the 7(a) loan, which caters to many sorts of borrowers.
Bridge Loans are short-term first mortgage loans on commercial property with terms ranging from six months to three years. Bridge loans are often acquired by borrowers while they wait for longer-term funding or are seeking to refinance an existing debt.