Title: Understanding the Different Types of Commercial Real Estate Loans
Introduction:
Commercial real estate loans play a vital role in financing various types of properties, from office buildings and retail spaces to industrial warehouses and multifamily housing. These loans are specifically designed to meet the unique needs of businesses and investors in the commercial real estate sector. In this article, we will explore the different types of commercial real estate loans available in the market today.
Traditional Commercial Mortgages:
Traditional commercial mortgages are the most common type of commercial real estate loan. They are offered by banks, credit unions, and traditional lenders. These loans typically have fixed interest rates and repayment terms ranging from five to 20 years. Traditional commercial mortgages require collateral in the form of the property being financed and often require a down payment of 20% or more.
SBA 7(a) Loans:
The U.S. Small Business Administration (SBA) offers the 7(a) loan program, which includes financing for commercial real estate. SBA 7(a) loans are government-guaranteed loans that provide longer repayment terms and lower down payment requirements compared to traditional commercial mortgages. These loans are particularly beneficial for small businesses looking to purchase owner-occupied commercial properties.
SBA 504 Loans:
Another SBA loan program for commercial real estate is the 504 loan program. This program allows businesses to finance the acquisition or construction of fixed assets, including commercial real estate, with long-term, fixed-rate financing. SBA 504 loans require a down payment of at least 10%, and the loan structure involves a partnership between a Certified Development Company (CDC), a lender, and the borrower.
Bridge Loans:
Bridge loans are short-term loans used to bridge the gap between the purchase of a new property and the sale of an existing property or the securing of long-term financing. These loans are ideal for real estate investors who need quick funding to take advantage of time-sensitive opportunities. Bridge loans generally have higher interest rates and fees due to their short-term nature.
Construction Loans:
Construction loans are specifically designed to finance the construction or renovation of commercial properties. These loans disburse funds in stages or “draws” as the construction progresses. During the construction period, borrowers typically only pay interest on the disbursed amount. Once the construction is complete, the loan converts to a traditional commercial mortgage.
Commercial Real Estate Investment Loans:
Commercial real estate investment loans cater to investors seeking financing for income-generating properties, such as apartment buildings, shopping centers, or office complexes. These loans consider the property’s income potential and the investor’s financial profile. The terms and rates for investment loans may vary depending on factors like the property’s location, occupancy rate, and cash flow projections.
Hard Money Loans:
Hard money loans are asset-based loans secured by the commercial property itself. These loans are typically offered by private investors or specialized lending firms. Hard money loans are known for their quick approval process but often come with higher interest rates and shorter repayment terms. They are commonly used for short-term financing or when traditional financing options are unavailable.
Conclusion:
Understanding the different types of commercial real estate loans is crucial for businesses and investors looking to finance their real estate ventures. Each type of loan has its unique features, eligibility criteria, and repayment terms. By carefully considering their specific needs and financial situation, borrowers can choose the most suitable commercial real estate loan to achieve their goals and maximize their investment potential
Loans
Agency vs. Balance Sheet
MULTIFAMILY LENDING – BANKS vs. AGENCY LOANS
Agency Lending refers to Government-Sponsored Enterprises such as Fannie Mae, Freddie Mac, and the Federal Housing Authority.
One difference between bank and agency financing is whether the loan is recourse or non-recourse. Fannie Mae and Freddie Mac (agency) loans are used for purchasing or refinancing primarily multifamily properties and are non-recourse with bad boy carve outs. This means that the debt is secured only by the loan collateral (e.g. the apartment community). If you default on a non-recourse loan, the lender can only recoup the pledged collateral. They can’t go after your personal assets. One of the biggest benefits of working with non-recourse lenders is that your personal liability is protected.
Multifamily financing from a bank has traditionally been non-recourse as well, but since COVID we have seen banks start to require recourse on their loans. This means that you and your partner(s) are personally liable for the full loan amount in the event of a default. If the property sale does not cover the loan amount, the lender can go after assets that were not used as loan collateral.
When it comes to interest rates, Banks have been offering a slight advantage on 5-year fixed rates, while Agencies have been offering lower rates on their 7, 10- and 12-year fixed rate products.
Agencies also have the benefit of higher leverage, which top out at 80% loan to value (LTV). Banks in this environment have been comfortable at about 70% LTV with select banks going up to 75% LTV.
You are also going to want to consider prepayment penalties. Bank loans typically feature a stepdown 5,4,3,2,1% prepayment penalty, while Agency products have declining prepayment penalties or yield maintenance. Agency’s have mitigated this by offering supplemental loans during the loan term, and also allow their financing to be assumable. Agencies have required higher COVID reserves of anywhere from 6-18 months P&I which gets released after a certain period of time, compared to the banks who may require 3-6 months or possibly no COVID reserves.
For value add investments, It should be noted that there are balance sheet lenders that offer low cost bridge loans on multifamily properties. These can be 2-3 year terms plus extensions and used towards acquisitions that require cap ex work, or lease up to stabilization. Interest rates start at L+3.50% on an interest-only basis, with flexible prepay and up to 75-80% LTC. Minimum loan amounts are generally $5-7 Million.
While there is no right or wrong choice, as an investor, arming yourself with the knowledge needed to determine which loan products work best for you should ALWAYS be the first step.
Let us help you evaluate the various financing options available and advise in choosing the right loan for your business plan and investment strategy.
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