- Commercial real estate loans include bank loans, SBA-backed options, and private lending, each with varying requirements and timelines.
- Lenders typically evaluate factors such as credit history, loan-to-value ratio, and property income to assess borrower eligibility and risk.
- The financing process often involves preparing documentation, comparing lenders, completing underwriting, and finalizing terms before funding.
- Preparing in advance, maintaining strong credit, and understanding loan terms may help businesses secure more favorable financing conditions.
- Working with a trusted financial partner may provide guidance and help align financing solutions with long-term business goals.
What Is Commercial Real Estate Financing?
Companies often use real estate investments as part of an overall financial portfolio, but what happens when a business wants to make shifts in the budget or move in a different direction? What if an emergency happens at an existing location or an investment opportunity arises? Commercial real estate financing may be able to help.
Definition of Commercial Real Estate Loans
Commercial real estate financing provides funds to buy property, develop a property, or refinance to make use of existing value. These loans are typically secured, with the property itself used as collateral.
How It Differs from Residential Mortgages
The biggest differences between these and residential or homeowner loans are:
- The property is income-producing and used for business purposes.
- The borrower is a business owner or developer.
- Lending terms are usually shorter than residential loans.
- Down payments may be more than for residential loans, with slightly higher interest rates depending on the borrower’s credit history.
These loans may use the financed property itself as collateral to secure the loan, much like residential loans, but some may also use other business assets.
How are Commercial Real Estate Loans Typically Used?
- Purchase new property: Businesses may be able to expand to larger facilities or purchase space instead of continuing to rent.
- Refinance existing property: Refinancing may provide funds from equity or help reduce interest costs as rates change.
- Construction costs: Loans may offer short-term funding for ground-up development or other construction costs associated with new developments.
- Renovation costs: Commercial Real Estate loans may also be used to renovate buildings and commercial spaces, either for necessary repairs and updates or expansion-related projects.
- Bridge loans: Businesses and developers may use these to bridge gaps between projects or project phases.
Types of Commercial Real Estate Loans
Borrowers have several options for securing a commercial real estate loan. Here are some common options for how to finance commercial real estate.
Bank Loans (Traditional Lenders)
Traditional bank loans are one of the most common financing options for commercial real estate. They typically offer competitive interest rates and longer repayment terms, which may help support predictable, long-term planning. However, they often require strong credit and detailed financial documentation, and may have a longer approval timeline.
SBA Loans
Loans backed by the U.S. Small Business Administration are designed to make financing more accessible for small businesses. Options like SBA 504 and SBA 7(a) may offer lower down payments and longer repayment terms, easing upfront financial pressure. At the same time, these loans may involve more documentation, eligibility requirements, and a longer review process.
CMBS Loans (Commercial Mortgage-Backed Securities)
CMBS loans are bundled and sold to investors as securities, in which multiple commercial real estate loans are grouped together, and investors may buy into them as a pool. This bundling may allow lenders to offer fixed interest rates and longer loan terms. However, CMBS loans tend to offer less flexibility, particularly for refinancing or early repayment, and may include prepayment penalties.
Debt Fund Loans (Private Lenders)
Debt funds are private, non-bank lenders that may offer more flexible underwriting than traditional banks. They focus more on higher-risk or transitional loans. This may result in faster approvals and access to capital for borrowers with more complex situations. In exchange, these loans typically come with higher interest rates and potentially shorter terms.
Hard Money Loans
Hard money loans are short-term and primarily backed by property value rather than the borrower's creditworthiness. These are better suited to urgent needs or quick renovations. While they generally carry higher rates and shorter terms than other loans, they may provide fast funding when timing is critical.
Key Factors Lenders Consider
Much like residential loans, certain factors determine whether a potential borrower is creditworthy.
Credit Score and Borrower History
Lenders may look at the credit history of both the individual and the business. They want to know how responsible the potential borrower is with credit and whether there are any red flags, such as a high debt service-to-coverage ratio or past defaults.
Loan-to-Value (LTV) ratio
The Loan-to-Value (LTV) ratio compares the loan amount to the appraised value of the property. A lower LTV ratio may indicate lower risk for the lender. Higher LTV ratios may still be possible, but could result in stricter terms or higher down payment requirements.
Debt Service Coverage Ratio (DSCR)
The Debt Service Coverage Ratio (DSCR) determines a property’s ability to make enough income to cover its debt payments. Many lenders may look for a DSCR above 1.0, which shows that income will likely exceed debt obligations. A higher ratio may provide additional confidence in the borrower’s ability to repay the loan.
Collateral Requirements
Commercial real estate loans are typically secured by the property being financed, but lenders may also require additional collateral depending on the borrower’s financial profile. This may help reduce risk and provide assurance that the loan is backed by sufficient assets.
Minimum Loan Amounts
Many commercial lenders set minimum loan amounts, which may vary based on the type of property, loan program, and lender guidelines. For example, a traditional bank loan may have a minimum loan amount of $1 million, but an SBA loan may offer smaller amounts designed for small business borrowers. Short-term loans might offer even smaller loan minimums.
The Commercial Real Estate Financing Process
Securing a commercial real estate loan involves several steps, although timelines and specific requirements may vary by lender and loan type.
Assess Your Needs and Eligibility
Begin by determining how much funding you’ll need for your specific real estate project and information about the risk of that property. This might include information about whether you have equity in the property, if it’s income-producing, or if you have other debt leveraged by the property.
You may also consider checking into your personal and business credit history to determine what you may qualify for, as well as current cash flow and overall financial position, including business forecasts.
Gather Documentation
Lenders may require different pieces of documentation during the process of your loan, but some common ones are:
- Financial statements
- Tax returns
- A business plan
- Information about the property
Shop Different Lenders and Compare Terms
Different types of lenders may offer a variety of terms to help your business match a commercial real estate loan to your needs and goals. Comparing interest rates, repayment terms, fees, and flexibility may help you identify a solution that aligns best.
Submit the Application and Undergo Underwriting
Once you select a lender, you’ll submit a formal application. During underwriting, the lender evaluates your financials, the property, and overall risk. This step may include appraisals, credit checks, and additional documentation requests.
Review and Accept Terms
Once you’ve received your loan terms, go over the proposal to make sure you understand the conditions. Looking at rates, any fees, and the outlined repayment structure might help prevent misunderstandings later.
Closing and Funding
Once your loan is approved and you’ve accepted the terms, you’ll sign any final documents and satisfy any remaining conditions. Funds will be disbursed, though timing may vary by lender and loan type. Funds may appear anywhere from a few days to a few weeks.
Tips for Securing the Best Financing Terms
Preparing in advance and understanding your options may help you secure more favorable loan terms.
Improve Your Credit Profile
A strong business credit profile may help secure ideal loan conditions. To prepare, you might consider checking your credit score beforehand. Work to make any changes or corrections before applying for a loan.
Prepare a Strong Business Case
Having a clear business plan may help ease the process of obtaining financing because it shows lenders you’re likely to repay loans with little difficulty. Improving your business's long-term health may also help with this.
Compare Multiple Offers
Evaluating offers from different types of lenders and for different types of loans may give you more flexibility. You might better understand which loan types are realistically available to you and which match your short- and long-term business goals.
Understand All Fees and Terms
It may be helpful to review all the terms of your loan offer. Beyond the interest rate, it’s important to review closing costs, prepayment terms, and any additional fees that may affect the loan's total cost.
Frequently Asked Questions
What are typical terms for commercial real estate loans?
Loan terms may vary, but many commercial real estate loans range from 5 to 25 years, with amortization periods that may extend beyond that. Interest rates and structures may differ depending on the lender, loan type, and the creditworthiness of the business and individual.
What properties qualify?
Commercial real estate loans may cover things like office buildings, retail spaces, industrial facilities, multifamily housing, and certain mixed-use developments. Qualifying for this type of loan may depend on how the property is used and its income potential.
How much down payment is needed?
Down payments may range from 10% to 30% or more, depending on the lender and loan terms.
Can you get financing for renovations or construction?
Yes, some loan options are designed specifically for property improvements or ground-up construction. These loans may have different structures, such as phased funding, and you may need to provide more detailed project plans.
Why Work with a Trusted Financial Partner?
A good relationship with your business banker may provide a solid foundation for starting the loan process. Expert guidance from lenders like PNC may help you determine your loan eligibility and what it will take to secure approval. You’ll be able to explore different loan options to align more closely with your goals, without having to become a sudden expert in business lending.
How PNC Bank supports businesses and investors with tailored solutions
PNC Bank works with businesses and investors to provide financing solutions aligned with their goals. With a range of lending options and advisory support, PNC may be able to help clients evaluate opportunities, manage risk, and plan for long-term growth.
Supporting Your Next Move in Commercial Real Estate
Financing commercial real estate processes involves multiple factors, and learning about all the options may help you decide on the right type of loan for your project. Understanding your own credit history, as well as the credit history and financial picture of your business, may smooth the lending process.
Even more, working with a trusted bank that’s knowledgeable about small business lending may provide you with a clearer understanding of how to finance commercial real estate. PNC may be able to help you throughout the process of funding your real estate goals. Connect with a PNC bank advisor for personalized guidance and step-by-step handling of your banking needs.
