Navigating the Different Types of Commercial Real Estate Loans: A Complete Guide to Financing Success

When businesses close their doors, it could be attributed to a slew of varying factors like an undesirable location or difficulties in repaying their commercial mortgages. Sadly, statistics show that around 20% of new businesses fail within two years. To steer clear of the same fate, it's crucial to have a comprehensive understanding of the various types of commercial real estate loans. With the right financing and a well-chosen location, you can position your business for long-term success.

If you're eager to expand your knowledge of commercial real estate loans, you've landed on the perfect resource with Farmers Bank. Here, we've compiled a practical guide to commercial real estate loans, designed to provide you with a solid starting point. 

Whether it is office buildings, industrial buildings, retail complexes, or apartment complexes, commercial real estate is a dynamic and thriving industry. It is common for business owners to require substantial financial support from commercial real estate loans in order to fuel this industry's growth. These loans play a pivotal role in helping entrepreneurs acquire, develop, and renovate commercial properties. In this comprehensive guide, we will delve into the three primary types of commercial real estate loans, exploring their purposes, benefits, and considerations.

What Exactly Is a Commercial Real Estate Loan?

A commercial real estate loan serves a distinct purpose: to provide financial support for the financing, construction, or revitalization of commercial properties. These loans are versatile, and commonly utilized for various purposes such as acquiring office buildings, purchasing land for development, and renovating existing properties.

Commercial real estate loans are all about collateralization, where the property itself serves as security. When a loan defaults, the lender takes over the property and sells it to recoup their investment. This makes them different from individual mortgages and allows borrowers to access larger sums, although credit criteria differ by loan type and amount. Usually, borrowers have to pay a down payment of at least 25% of the property's total value, which represents equity in the property.

To secure financing for commercial mortgage loans, borrowers typically turn to two primary sources – Banks, and the Small Business Administration (SBA)


Traditional Banks

Traditional banks – like Farmers Bank – have long been a top pick for countless borrowers, and it's not difficult to see why. The interest rates they offer are competitive and can save you a lot of money over the life of your loan. They also have extensive experience in the lending world, so you can rely on them to provide guidance.

Banks have served the financial industry for years, earning a reputation for reliability. So, when it comes to securing financing for your commercial real estate ventures, they're a trusted choice that's stood the test of time.


SBA Loans

The Small Business Administration (SBA) offers government-backed loans that come with favorable terms and reduced down payment requirements. This financing solution caters specifically to small businesses that have been operational for a minimum of one year and generate annual revenues below $5 million. These SBA loans are especially appealing to small business owners, providing them with accessible and cost-effective financing options for their commercial property needs. 

To secure an SBA loan, businesses are required to apply through a bank or another suitable lender, selecting the SBA program that aligns best with their specific requirements. The SBA provides a guarantee for the loan, while a local bank handles the loan administration and repayment collection.


How to Choose the Right Lender

Selecting the right bank or lender for your financing needs is a large decision that can significantly impact the success of your business ventures. It is a choice that requires careful consideration since it involves not only securing the necessary funds but also establishing a long-term financial partnership. This guide will help you make an informed decision and help guide you through choosing the right lender. 


Research And Compare

Let's begin that journey with some research. Thorough research on various banks and lenders is key to finding the right one. Seek out the institutions that have a solid reputation in the industry and a history of being reliable. Take some time to compare their offerings, including interest rates, loan terms, and customer feedback. In addition, consider researching institutions that specialize in the property category you are looking for. Their expertise in your niche can be a valuable asset.


Explore Loan Options

There are many types of commercial real estate loans, each with specific purposes tailored to your needs. While some can be used for property acquisition, others can be used for construction or renovation projects. Because of the range of loan options, it's important to evaluate the potential lenders and assess how well they align with your project goals. Choose a lender that provides the type of financing your business needs. 


Local Presence and Customer Satisfaction

Word of mouth is a large component of finding a reputable company to look for. We ask our neighbors, our coworkers, and friends for advice on finding someone to partner with. While that is a great option in finding a lender for your loan, local presence can also be a plus. Since most banking transactions happen digitally, having access to a local branch can be valuable for in-person meetings, account management, and addressing complex financial matters. It can enhance communication and foster a sense of comfort in accessibility. Another enhancement to your banking experience is the customer service they provide. If you are greeted by a friendly, responsive, and knowledgeable staff at a branch, you are more likely to prioritize that lender. 


Scrutinize Interest Rates and Terms

Getting into the nitty gritty of choosing a bank or lender isn’t the most riveting thing; however, it is important to examine key aspects– like looking into the interest rates and terms. Begin by thoroughly assessing interest rates, repayment terms, and any concealed fees associated with the loans in question. Make sure you understand the terms and that they align with your financial capabilities and project objectives. When the loan terms and conditions are clear, it makes it easier to avoid unexpected financial burdens. 

By diligently evaluating these factors and conducting comprehensive due diligence, finding the right bank or lender that best aligns with your commercial real estate financing needs will be a breeze. Make an informed decision that not only secures the necessary funds but also lays the foundation for a successful and prosperous venture in the world of commercial real estate.


Ensuring Compliance and Evaluating Track Record

Another thing to check off before finalizing your choice of lender is verifying their compliance with legal and regulatory requirements. This will assure you that any financial transactions are conducted ethically and within the bounds of the law. A trustworthy lender should maintain transparency regarding their adherence to industry regulations. Additionally, inquire about their track record in successfully facilitating commercial real estate loan transactions. A demonstrated history of assisting businesses similar to yours can instill confidence in their capacity to effectively fulfill your financing requirements.

When searching for the best place to secure a loan, it's imperative to set high standards. You want assurance that your finances are in capable hands, your transactions are secure, and your sensitive information remains safeguarded. The bank you choose should hold Federal Deposit Insurance Corporation (FDIC) insurance, ensuring the protection of your funds in the face of market fluctuations, theft, or unforeseen challenges. 


Understand the Pre-Approval Process

The last step in choosing the right bank or lender for the types of commercial real estate loans is to understand the pre-approval process and the documentation required. A lender with a streamlined and efficient pre-approval process can save you time and effort. Having clarity in the application process is key to ensuring that the application process is as seamless as possible. 

By diligently evaluating these factors and conducting comprehensive due diligence, you can identify the bank or lender that best aligns with your commercial real estate financing needs. In the dynamic world of commercial real estate, making an informed decision not only guarantees the necessary funds but also lays the groundwork for success and growth.


Questions to Ask a Potential Bank or Lender

It's a good idea to come prepared with a set of essential questions before you meet with a commercial real estate loan broker. The questions below will help you figure out why you should choose that broker. Here are the key questions to ask when meeting with a new commercial real estate loan broker:

What Are the Interest Rates? Inquire about the current interest rates for the specific loan type you're interested in. Ask whether the rates are fixed or variable and how they may change over the life of the loan.

What Are the Loan Terms? Explore the loan terms, including the repayment period and any associated fees. Clarify whether there are prepayment penalties and how the loan amortization works.

What Documentation Is Required? Gain a clear understanding of the documentation needed for the loan application. This typically includes financial statements, tax returns, and property-related documents.

Are There Hidden Fees? Ask about any additional or hidden fees associated with the loan, such as origination fees, closing costs, or appraisal fees.

What Is the Approval Process? Learn about the steps involved in the approval process. Understand the timeline for loan approval and funding to plan accordingly.

Can the Loan Be Customized? Inquire whether the lender offers flexibility in tailoring the loan to your specific needs. Customization options can be valuable for businesses with unique requirements.

What Is the Down Payment Requirement? Clarify the down payment amount required for the loan. Different loan types and lenders may have varying down payment criteria.

What Are the Repayment Options? Explore the repayment options available, including monthly installments, interest-only payments, or balloon payments. Choose the option that aligns with your financial strategy.

Is SBA Financing Available? Inquire whether the lender participates in Small Business Administration (SBA) loan programs, which can offer favorable terms and lower down payment requirements.

These questions can help you gather the information you need to make an informed decision about most types of commercial real estate loans. Understanding the terms, requirements, and options before applying for financing is key to your long-term success.

Commercial Mortgage Loans

Now that you know how to select a lender, let’s talk about commercial mortgage loans - the backbone of commercial real estate loans. These loans are designed for businesses to cover the cost of acquiring existing commercial properties. Whether you're looking to establish a new headquarters, expand your operations, or diversify your investment portfolio, commercial mortgage loans provide essential funding options. These loans are typically used for office buildings, industrial buildings, retail spaces, and even vacant land.

When it comes to considering the types of commercial mortgage loans, it's crucial to assess factors like interest rates, loan terms, down payments, and the repayment structure. 

Interest Rates

Interest rates can vary widely, so it's essential to shop around for the most favorable terms.

Loan Term

Determine the loan term that aligns with your financial goals and business plans.

Down Payment

Be prepared for a substantial down payment, which can range from 10% to 30% of the property's value.

Repayment Structure

Understand the repayment structure, whether it's a fixed-rate or adjustable-rate mortgage.

Commercial Construction and Renovation Loans

The second type of commercial real estate loans are commercial construction and renovation loans. Because this industry thrives on growth and development, construction and renovation loans are indispensable. These types of commercial real estate loans are designed to provide funds to contractors and business owners involved in building new commercial properties or enhancing existing ones.

Construction loans are instrumental in bringing new commercial projects to life. They cover the costs of land acquisition, architectural plans, materials, and labor, enabling entrepreneurs to construct various types of commercial properties, including office buildings, strip malls, apartment complexes, warehouses, and even hotels.

Renovation loans cater to projects that involve enhancing the functionality, aesthetics, or structural integrity of existing commercial properties. They can finance a wide range of renovations, from simple cosmetic updates like painting and carpet replacement to more substantial improvements such as elevator installations, roof replacements, HVAC system upgrades, and accessibility enhancements.

Most types of commercial real estate loans are available through traditional banks but commercial construction and renovation loans are typically offered by specialized lenders. Because these lenders are specialists, they can provide a more tailored solution and flexibility to meet your project-specific needs.

Before embarking on a construction or renovation project,  consider essential factors like budgeting, project timeline, and risk management. 

Budgeting: Develop a detailed budget to ensure you have adequate funding to cover all project expenses.

Project Timeline: Construction and renovation projects often have tight schedules, so plan accordingly to minimize delays.

Risk Management: Assess potential risks, such as construction delays or unexpected costs, and have contingency plans in place.

Commercial Refinance Loans

Another type of commercial real estate loan is the commercial refinance loan. Oftentimes businesses can improve their financial position by refinancing their existing mortgages with a new one that offers better terms. This type of loan is particularly useful for borrowers struggling with high interest rates or seeking to optimize their cash flow.

Commercial refinance loans serve various purposes. They can lower interest rates which in turn reduces the overall borrowing costs, it can improve cash flow by lowering the monthly payments, and borrowers can take advantage of the property’s equity to fund new projects or pay off other debts. 

To qualify for a commercial refinance loan, borrowers typically need a history of on-time mortgage payments, sufficient equity in the property, and a strong credit history. Once that history is established the process of getting a commercial refinance loan is fairly straightforward. 

Step 1:Application: Submitting a loan application with the necessary financial documentation.

Step 2: Appraisal: The lender assesses the property's value to determine the loan amount.

Step 3: Underwriting: The lender reviews the borrower's creditworthiness and financial stability.

Step 4: Closing: Once approved, the new loan replaces the existing one, and the borrower begins making payments under the new terms.

Overall, commercial refinance loans are beneficial to many business owners. They improve cash flow, help with debt consolidation, and make equity more accessible for business expansion or investment opportunities. However, borrowers should also consider potential downsides, including the financial implications of closing costs and the impact on the property's overall debt load. Consider these factors when assessing a refinance loan's feasibility and long-term sustainability.

Hard-Money Loans vs. Commercial Real Estate Loans

Getting ready to apply for any commercial real estate loan involves careful preparation, as the process can be lengthy and often requires extensive documentation. On the opposite end of the spectrum, securing a hard money loan can be swift, often without the need for copious financial information.

For real estate investments, hard money loans are a short-term, collateral-based financing option. They are easier to secure due to less stringent qualification criteria, quick approval processes, and a focus on property value rather than borrower credit. However, they come with higher interest rates, shorter terms, and risk of property seizure in case of default. 

In general, both banks and lenders will typically request the following common information:

  • Business tax returns
  • Financial records and reports for your business
  • The last three months or more of bank statements
  • Details about the collateral you're offering
  • A third-party appraisal of the property
  • A comprehensive business plan

Conversely, hard-money lenders tend to focus more on the current and projected value of the property, requiring fewer financial disclosures. Whether a hard money loan is a better choice than a commercial real estate loan depends on factors like the project's timeline, property condition, exit strategy, risk tolerance, and financial goals. It's advisable to consider these factors carefully and seek professional guidance when deciding between the two loan types.

When applying for different types of commercial real estate loans, your goal is to get approved without any issues, and there are ways to enhance your odds of getting approval. 

Unfortunately, poor credit or operating a newer business may present challenges when seeking a commercial real estate loan. To bolster your chances of approval, consider these strategies:

Debt Management: Prioritize paying off existing debts and take steps to improve your credit scores.

Additional Collateral: If available, offer extra collateral to secure the loan.

Investor or Cosigner: Consider bringing in an investor or cosigner to strengthen your application.

Larger Down Payment/Higher Interest Rate: Be willing to commit to a larger down payment or accept a higher interest rate if necessary.

Property Selection: Choose a property that aligns with your budget and financial capacity, opting for a less expensive option if needed.


Local Approval Process

The right financing is essential for business expansion, and securing that funding can make or break the expansion plans of a company. At Farmers Bank, we recognize the critical role that financing plays in business development. We understand that each business is unique and faces its own set of challenges and opportunities. That's why we've tailored our approach to commercial lending with a strong emphasis on local approval.

Our local approval process sets us apart from many other lenders. When you choose Farmers Bank for different types of commercial real estate loans, you're not just dealing with a distant financial institution. Instead, you're working with professionals who have an intimate understanding of your local business environment. This local touch is invaluable because it ensures that your financing needs are assessed in the context of your community and its specific economic dynamics.

Our commitment to local approval means that we can provide you with more than just funds; we provide timely responses, personalized guidance, and solutions that are finely tuned to your unique requirements. We don't just aim to be a lender; we strive to be your trusted local financial partner, supporting your business's growth and success within the community.


Transparency with No Origination Fees

When it comes to financing, transparency is key. We believe that our clients should have a clear understanding of their borrowing costs, without any hidden surprises. That's why Farmers Bank is committed to keeping your borrowing costs clear and straightforward.

One of the key aspects of this transparency is our fee structure. With Farmers Bank, you won't encounter any origination fees for our commercial real estate loans. We believe that the terms you agree to should be the terms you receive, ensuring that your financial planning remains predictable and manageable.

Your success is our priority, and we believe that transparent financial solutions are the foundation of a strong business partnership. At Farmers Bank, we're not just your lender; we're your trusted financial ally, supporting your business's growth and financial stability.

An Essential Tool to Empower Business Owners

Commercial real estate loans are essential tools that empower business owners and investors to achieve their goals in the dynamic world of commercial properties. Whether you're looking to purchase a new office building, embark on a renovation project, or optimize your existing mortgage terms, understanding the three primary types of commercial real estate loans is essential.

Commercial mortgage loans facilitate property acquisitions, while construction and renovation loans drive development and enhancement projects. Commercial refinance loans, on the other hand, offer financial flexibility by replacing existing mortgages with more favorable terms.

To make informed decisions about commercial real estate financing, it's imperative to consider your specific needs, financial capabilities, and long-term objectives. By doing so, you can leverage these financing options to navigate the ever-evolving landscape of commercial real estate successfully. 

When it comes to applying for a commercial mortgage, the first step after exploring the various types of commercial real estate loans and their financing options is finding a reputable lender. A lender with a strong track record and expertise can guide you in securing the optimal financing for your business requirements.

At Farmers Bank, tradition meets reliability. With a century of experience in serving the commercial real estate industry, we have consistently delivered trusted financial solutions. If you're in search of a lender for your commercial mortgage, don't hesitate to reach out to us at (208) 734-1500. We eagerly anticipate the opportunity to work with you!