The Basics of Commercial Real Estate Financing
It’s hard to quantify how important it is to choose the right financing when you’re investing in real estate. There are more than a dozen products designed for land and building purchases, construction and redevelopment, or rehabilitation. Some are restricted to certain uses or industries, but most are built with a specific investment model in mind. If you’re just starting out and you aren’t planning on ground-up construction, there are fewer choices you’re likely to run into, but it’s still important that you understand when each one will be the right fit for your commercial real estate purchase.
Bridge Loans, AKA Fix and Flip Loans
There are a lot of terms for this loan type, but the key components are the same or very similar across them. You can recognize bridge loans built to help flip properties by their short terms, interest-only payment options, and large final payments. They’re typically fixed-rate products but they are also typically 12 to 18 months long, so a variable rate wouldn’t see a lot of change during that time frame under most circumstances. Most are secured with the property, but you will find some hard money options that are priced a little higher. They are designed to keep your overhead low so you can fix up a property and put it back out on the market as turnkey-ready. They can also be very useful if you are buying commercial real estate that you intend to improve and refinance before moving into, so keep them in mind if you are bargain hunting for your company’s next building.
Traditional and CMBS Loans
Fixed-rate loans with amortizing payments and terms of 10 to 20 years are very popular with companies looking to buy facilities and investors looking for income properties alike. If you are looking to hold onto a property for the long term, they minimize your overhead. The biggest difference to the borrower when comparing the two? CMBS loans give you a discounted interest rate, but they lock in prepayment restrictions designed to help the backers enjoy a mature investment. Traditional loans typically involve no prepayment restrictions.
SBA Loans
Many companies have a hard time buying commercial real estate for their own facilities because traditional lenders often have very conservative views of risk, and as a result, their restrictions render new companies and those below the lender’s income threshold ineligible. To mediate this, the Small Business Administration allows for property purchases under its 7a and 504 programs. There are restrictions on the size of the company applying for a loan, as defined by its income. There are also requirements attached to its enrichment of the local economy. At the same time, though, they are often the most affordable option for new businesses.
