Businesses often turn to a commercial real estate loan at some point to plan for a start-up or an expansion. These loans are an essential part of commercial lending and can offer tremendous benefits to your company, but they operate differently compared to a residential real estate loan.
What Is a Commercial Real Estate Loan?
A commercial real estate loan, or CRE, is a type of financing used for the purchase, development, or refinance of a business property. Unlike residential loans, which finance homes or personal dwellings, commercial real estate loans exclusively fund properties such as office buildings, retail spaces, industrial facilities, multi-family apartment complexes, and hotels.
Companies utilize these loans to expand operations, generate rental income, purchase land, or enhance their portfolio. They are typically larger than residential loans and come with unique requirements. Commercial real estate loans take into account the risks and opportunities associated with business properties. Organizations, corporations, or real estate investment firms typically take advantage of these loans, but individuals and partnerships may also qualify.
Key Features of a Commercial Real Estate Loan
Let’s look at what makes a commercial real estate loan so unique.
Loan Terms and Amounts
Commercial loans usually offer terms ranging from 5 to 20 years, depending on the type of loan and lender. Loan amounts can vary widely based on the property's value, the borrower’s qualifications, and the financial institution you’re working with. The lender will also consider the potential amount of income the property may produce.
Interest Rates
Rates for commercial real estate loans are fixed at PNB. The borrower’s creditworthiness, type of property, and the loan structure all impact the interest rate.
Down Payment Requirements
Commercial real estate loans typically require higher down payments than residential loans, but this also depends on the type of commercial real estate loan you’re applying for. Lenders expect borrowers to have significant equity in the property to reduce the risk of default, and down payment amounts are required to be at least 20% of the property’s value.
Amortization Schedule
Many commercial loans follow an amortization schedule that extends beyond the loan term. Loans may be amortized up to a 25 year period, however it is the bank's desire to strive for a 20 year schedule if possible.
How to Qualify for a Commercial Real Estate Loan
Borrowers will need an extensive amount of documentation, such as tax returns, business plans, financial statements, and property details. Other qualifications include:
- Creditworthiness: Lenders do consider the credit score of a borrower, but they also look at net worth, debt-to-income ratio, liquidity, and overall experience with commercial real estate.
- Down payment and equity: A significant down payment or equity stake is often required. By offering this, it demonstrates the borrower’s commitment to the investment and reduces the amount of exposure for the lender.
- Income and debt coverage ratio: Lenders assess the property’s income potential and require a Debt Service Coverage Ratio (DSCR) ranging from 1.1 to 1.4 typically. For example, if a property has $125,000 in net cash flow and $100,000 in mortgage debt service annually then DSCR is 1.25.
Every financial institution has its own requirements for obtaining a commercial real estate loan. Our lending experts at Peoples National Bank of Kewanee are ready to work with your company to find the best loan and the most favorable terms. Contact us today.
