Feb 14 2020

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Commercial real estate


5 Types of Commercial Real Estate Loans 2018

A commercial real estate loan is most commonly used to purchase and/or renovate an owner-occupied commercial property. An “owner-occupied” commercial property is generally considered to be a property where the business occupies at least 51% of the building. Commercial mortgages are used to finance such commercial properties as mixed-use buildings, retail centers, and office buildings.

If you’ve been in business for 3+ years, plan on occupying at least 51% of the building, and have a credit score above 675, you may qualify for an SBA 7(a) loan with SmartBiz. SmartBiz is an experienced SBA lender that offers rates as low as 7.00% and loans up to $5MM. Pre-qualify online in minutes.

5 Types Of Commercial Real Estate Loans

Now that you understand what a commercial mortgage can be used for, let’s take a look at the 5 main types of commercial real estate loans. Each of these loans has specific terms and qualifications that make them suitable for certain types of commercial buildings.

Summary: 5 Types of Commercial Real Estate Loans

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Time in Business:
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In this article, we’re going to focus on financing options for owner-occupied commercial properties. Owner-occupied commercial real estate can include office, retail, industrial, and hospitality properties, which together account for 64% of commercial real estate loans in 2016.

Here are the 5 types of commercial real estate loans:

1. SBA 7(a) Loan For Commercial Real Estate

An SBA 7(a) loan is a mortgage backed by the U.S. Small Business Administration. SBA 7(a) loans are the most common type of SBA loans and they help businesses purchase or refinance owner-occupied commercial properties up to $5,000,000. In 2016, 65% of all SBA 7(a) loans were issued to existing businesses while 35% were issued to new businesses. However, the majority of SBA 7(a) loans are used for working capital, although they can be used to purchase commercial real estate, too.

SBA 7(a) Loan for Commercial Real Estate: Costs, Terms, Qualifications

SBA 7(a) Loan Amount & Down Payment

An SBA 7(a) loan for commercial real estate typically finances between 85% – 90% of a commercial property’s purchase price. The U.S. Small Business Association also guarantees a maximum loan amount of $5,000,000.

This means that you should expect to cover a down payment between 10% – 15% of your commercial property’s purchase price. However, well-qualified buyers can have their cash down payment requirements waived. For example, an existing SBA-eligible business can receive this waiver if it meets the following requirements:

  • Personal Credit Score: 680+ (check your credit score for free here)
  • Business cash assets: 10% – 15% of purchase price
  • Cash Flow: 2 years stable cash flow

Financing is available for specific business types, such as:

  • Medical practices
  • Dental practices
  • Veterinary clinics
  • CPAs
  • Attorneys
  • Architects
  • Independent pharmacies
  • Funeral homes

SBA 7(a) Interest Rates & Fees

The interest rate on SBA 7(a) loans are typically between 5% – 8.75%. SBA 7(a) loans are can have both fixed rates as well as variable interest rates. For example, variable rates are calculated as the prime rate (4%) plus a maximum of 2.75%. Variable rate SBA loans are typically fixed for 3 – 10 years before adjusting.

Typical SBA 7(a) loan fees:

These fees are typically taken directly out of the loan and don’t come out of pocket. Further, some SBA lenders assess a prepayment penalty if you pay off the loan early. However, prepayment penalties are dependent on the lender. Standard penalties for prepayment are around 1% of the loan.

SBA 7(a) Loan Terms

The typical loan term of an SBA 7(a) loan for commercial real estate is between 10 – 25 years. Monthly payments are fully amortized over the 10 – 25-year term. The standard time for approval and funding is between 60 – 90 days.

SBA 7(a) Loan Qualifications

The Small Business Administration enforces strict qualifications for SBA loan approval. Specifically, you should expect to have the following prior to applying for an SBA 7(a) loan:

  • Personal Credit Score: 680+ (check your credit score for free here)
  • Time in Business: 3 years or more
  • Debt-Service-Coverage-Ratio: 1.25 or more
  • Owner-Occupied Property: 51% or more

Further, if you expect to finance the construction of a new commercial property, your business will need to occupy 60% of the building with plans to occupy up to 80% of the space.

Who SBA 7(a) Loans Are Right For

SBA 7(a) loans are designed to help businesses that might otherwise be denied by a bank. These loans are also geared towards stimulating economic development. For these reasons, the SBA typically only issues 7(a) loans to businesses that fall below certain revenue thresholds, which you can find a list of here.

What’s more, SBA 7(a) loans are permanent loans for long-term investors. This is why buy-and-hold investors who might get denied by the bank are good candidates for these types of loans.

Where To Get an SBA 7(a) Loan

SBA 7(a) loans can be obtained through any SBA-approved lender. These lenders range from larger traditional banks to smaller credit unions and private lenders. If you have a prior relationship with a bank or credit union, it’s best to check with them first to see if they’re approved to make SBA loans and if they’re PLP lenders.

SmartBiz can qualify you for up to $5 million in commercial real estate funding through an SBA 7a loan.They offer fixed rates as low as prime plus 2.0%, and can fund all kinds of projects through the SBA loan program. Using technology to speed up the process, SmartBiz can fund your approved loan in as quick as 30 days. Pre-qualify online in minutes.

2. CDC / SBA 504 Loan For Commercial Real Estate

A CDC / SBA 504 loan for commercial real estate is backed by the U.S. Small Business Association. CDC / SBA 504 loans help new and existing businesses purchase or refinance an owner-occupied commercial property. A CDC / SBA 504 loan is considered two loans and there is no maximum loan amount.

However, there were 5 times more SBA 7(a) loans originated in 2016, making CDC / SBA 504 loans less common. Let’s take a moment to discuss a CDC / SBA 504 loan for commercial real estate in depth.


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