Commercial Property Loans: How to Get a Financing For Commercial Properties

The commercial real estate market continued strong growth again in 2015, with many metrics having reached highs not seen in decades. In the third quarter of 2015 there was a net increase of 155,000 commercial office-jobs in the United States — the largest quarterly gain office-using jobs in 15 years. Also in the third quarter of 2015, total U.S. industrial acquisition volume was nearly $13 billion, which happens to be the 5th largest volume amount in a single quarter in two decades. 

These indicators are in-line with what economists are seeing with the surge in commercial real estate prices, as the value of commercial real estate transactions in the United states increased by 36% from a year earlier.

Commercial property is land or buildings owned by a business that are used for business purposes and to generate a profit. Types of commercial property include commercial land, office buildings, industrial real estate, retail storefronts and hotels and motels. 

Commercial property loans are used to purchase business real estate, refinance commercial real estate mortgages, cash-out equity in a piece of commercial property, or used to get capital by placing a new mortgage on company-owned real estate.

Whether you’re looking to purchase a piece of commercial real estate, refinance your company’s property, or build-out and do renovations to an existing business property, a bank term loan or business line of credit are usually the most sought after choices for commercial property loans. 

Why? Because bank property loans offer the best rates and terms of all commercial lenders. With rates starting in the 4-6% range, and with terms ranging from 5-10 years, a bank financing facility used to purchase or refinance commercial property allows company’s the best way to service the debt in an affordable fashion.

But there is a catch: banks offer the best rates and terms because they only fund the most creditworthy of businesses. Because of their strict credit and cash-flow requirements, only about 20% of bank loans are approved. So a strong personal and business credit are required, along with strong business cash-flow that will show the banks you have the ability to service the new debt. 

SBA loans allow small businesses looking to purchase and/or refinance commercial property through a preferred-SBA lender, that they may not have been able to secure through a traditional bank loan.

The SBA doesn’t actually loan money to businesses, but instead agrees to take a large percentage of the lenders’ losses should the small because default on their loan. In theory, by guaranteeing a large portion of the loan, the SBA hopes to get lenders to approve funding for small businesses that wouldn’t necessarily be able to secure traditional bank financing without that SBA-enhancement.

The SBA’s two main loan programs for financing business property are the SBA 7(a) program, and the SBA 504 programs.  

For company’s looking for a commercial property loan that doesn’t qualify for traditional bank-rate or SBA financing, there are plenty of alternative mortgage options. 

Alternative lenders are able to offer specialized commercial real estate financing by using the property as collateral to provide term loans and lines of credit in both a 1st, 2nd and even third lien position.

But while these loans are easier to secure than traditional bank financing for commercial real estate, they do have higher rates and shorter terms than you’d usually see from more traditional financing vehicles.