Whether you’re small business owner looking for a new place to sell your goods or you’re an accomplished investor gearing up to purchase your next commercial property — you should know the basics of a Commercial Real Estate (CRE) loan before putting pen to paper.
We’ll get your gears turning with a quick rundown on CRE loan basics with help from Investopedia:
1. What is a CRE loan?
CRE loans are most often used to purchase or renovate commercial property you already own. Typically, they’re mortgage loans, which are secured by legal obligations (a.k.a. liens) on commercial property, as opposed to residential. Investors can obtain these loans through banks, independent lenders, insurance companies, pension funds, private investors and other sources, including the U.S. Small Business Administration.
2.How do I get one?
As opposed to residential loans, CRE loans are often granted to business entities that focus solely on purchasing and selling commercial property. A credit history is required, as well as a detailed business plan that highlights the intended use for the space. Investors have to prove the financial strength and capacity of their business by providing relevant documents, like accounting reports, asset statements and tax returns.
3.How long is the typical repayment period?
Unlike 30-year loans issued for residential properties, commercial terms often require a quicker turnaround of about 5 to 20 years for repayment. It’s not a surprise to see terms of a CRE loan impose a seven-year repayment period of an amount based on a 30-year loan. A final “balloon” payment of the remaining balance is often paid last.
4.What about interest rates?
Interest rates are often higher than residential loans and additional costs for appraisals, legal, loan applications and other fees are also applied. In an example from Investopedia, a CRE loan could have a one-time origination fee of 1 percent and an annual fee of .25 percent until the loan is paid. A $1 million loan would require the $10,000 origination fee be paid up front with $2,500 paid annually in addition to interest.
5.Can I pay off a CRE loan early?
It’s important to note that you can negotiate prepayment terms in the form of a loan document. Often, CRE loans impose restrictions on prepayment plans in order to preserve the lender’s yield. The most common form of a prepayment penalty varies in size, but is often multiplied against the remaining balance.
Stefanie Donahue is a freelance writer based in Bellingham, Washington. She’s a well-versed communicator with an extensive background in journalism and media production. Her writing draws from the insight of industry experts to uncover best practices for real estate investors.