About Commercial Mortgages
A Commercial Mortgage, sometimes referred to as “commercial real estate loan” is a loan option to finance any income producing property. This applies to retail space, restaurants, office buildings, warehouses, and even hotels and apartment buildings. Borrowers must have an operational business to qualify for a commercial mortgage. With any mortgage, the lender will hold a lien on the property until the loan is fulfilled. Commercial mortgages can be fairly flexible and borrowers often utilize them to open second locations, refinance existing commercial mortgages or to get cash to make upgrades to properties already owned. With commercial mortgages borrowers can even include build out and remodeling costs in the loan amount.
There are several different commercial mortgage options, but buyers should be prepared to come to the table with strong credit, an established business, and 10%-35% of the purchase price to put as a down payment. Buyers should also be prepared to appraisals, inspections, and closing costs.
Types of Commercial Mortgages
Permanent – The permanent commercial mortgage is the most similar to the conventional residential mortgage. There is no maximum loan amount, but borrowers will be expected to have 15%-35% down. The typical loan term is between 5 and 20 years and typically have higher qualifications and lower rates than hard money and bridge loans.
SBA 7(a) – A standard SBA 7(a) loan is commercial mortgage backed by the U.S. Small Business Administration (SBA). SBA 7(a) loans are available to new and existing businesses for up to $5 million for 10-25 years. The borrower must bring 10%-15% down payment and 2%-5% closing costs to the table. There are over 10 different variations of SBA backed commercial mortgages, talking to an advisor can help you quickly narrow down what you qualify for and what terms work best for your business.
CDC / SBA 504 – CDC / SBA 504 loans for commercial mortgages are SBA backed mortgages available to established businesses funded in part through a Certified Development Company (CDC). The typical term is 20 years and borrowers are required to have 10% of the purchase price as a down payment. CDC / 504 loans require the borrowing company’s average income for the previous 2 years be less than $5 million, the company can not have a net worth of over $15 million, and the loan amount must be less than the personal assets of the business owner. With so many requirements, it is best to discuss this option with your capital advisor.
Bridge – Commercial mortgage bridge loans are short term loans buyers can use solely for purchasing property until they are able to secure a longer-term mortgage. Bridge loans typically have maximum terms of 36 months and the payment structure is interest only with the principal due at maturity. Since they are shorter term, expect higher rates than Permanent and SBA backed commercial mortgages. Bridge loans do not require time in business but do want borrowers to have 1-3 prior completed projects to show a successful track record.
Hard Money – Commercial hard money loans are similar to bridge loans in that they are short term and typically used as an interim until longer-term financing can be put in place or for real estate projects with quick turn around. With hard money loans, borrowers can use the funds for purchase along with remodel and renovation costs. Hard money loans are easier to qualify for and borrowers can be funded in as little as 10 days. Hard money loans are meant to be paid paid within 36 months and can be structured with interest only payments. As with bridge loan, lenders want to see that borrowers have 1-3 prior commercial projects completed.
The exact loan requirements will vary depending on the type of commercial mortgage.
Bureau Scores – Personal Credit of at least 680 for the most qualified guarantor.
Collateral – Often the financed property can fulfill the collateral requirements.
Down Payment – A minimum down payment of 10% is almost always required.
Major Derogatories – Bureau reports stating open tax lien and judgments, unpaid collection
accounts, and charge-offs/repossession may limit the applicant’s financing options.
Occupancy – The majority of commercial mortgages require the property be at least 51% owner occupied.
Ownership – All owners with 10% or greater ownership will typically be required to be a personal guarantor