Commercial Real Estate (CRE) Loans: Complete Financing Guide

TL;DR: Commercial Real Estate loans help businesses purchase, build, or renovate commercial properties with the property itself as collateral. Terms range from 5-25 years with flexible downpayment options. Pre-qualification and pre-approval available to determine budget before property selection.

Commercial Real Estate (CRE) loans are designed for businesses that want to invest funds into commercial properties and repay over time rather than use their own capital to finance their goals.

What is a Commercial Real Estate loan and how does it work?

A CRE loan is a mortgage for businesses looking to buy, build, improve, or refinance properties that are solely used for business purposes or to generate income. Such properties include office buildings, retail shops, warehouses, hotels and motels, apartment buildings, and other commercial real estate ventures.

A CRE loan is typically made to a business entity rather than an individual, and the property itself is used as collateral (and its value is an important focus of the lender). However since these loans are not low-risk for lenders, lenders will review the stability and financial documents of the business owners as well.

What can a CRE be used for?

A CRE can be used to improve a business or to generate income. In other words, businesses can use a CRE to:

• Purchase commercial properties: Buy office buildings, retail spaces, warehouses, or other business properties
• Build new facilities: Construct new commercial buildings for business operations
• Renovate existing properties: Improve or expand current commercial real estate
• Investment purposes: Purchase commercial properties with the intent of renting them out to produce revenue

What are the benefits of a CRE loan?

CRE loans are practical for business owners who want to invest money in a commercial property in order to attain their objectives of growth or income generation.

A CRE is typically the easiest loan for business owners to get for commercial properties because these loans are designed specifically for this purpose, and the collateral for the loan is the valuable property itself.

In addition, CRE loans are often flexible with regard to the downpayment, term of the loan, and the repayment, as well as for how the funds are applied as long as they are for use on a commercial property.

Commercial real estate loans help businesses purchase, build, or renovate properties

How long are the terms for a Commercial Real Estate loan?

CRE loans typically range from 5 to 25 years. The terms of CRE loans generally depend on the risk posed to the lender, the stability of the business and owner, and the type of property being invested in.

The exception is bridge loans, which are for short term use and can range from 6 months to 3 years for businesses needing temporary financing while transitioning between properties or securing permanent financing.

How can my business qualify for a CRE loan?

Just like with any loan, lenders need to decide which amount they would be comfortable lending to the borrower and will want a solid business plan to show how investing in the commercial property will benefit the business as well as information about the property itself.

The lender will want to make sure that the borrower is stable with a reliable income to ensure repayment of the loan in a timely fashion. Therefore, besides background information on the owner(s) and the business, the financial information of both the business and the owner is reviewed. For example:

• Personal tax returns: Demonstrate individual financial stability
• Business bank statements: Show consistent cash flow and revenue
• Proof of investment: Document your contribution to the property purchase
• Summary of income sources: Verify multiple revenue streams if applicable
• Business plan: Detail how the property will benefit your business

While being in business for several years can help, lenders focus less on an owner's time in business than on what is brought to the table in areas such as experience, financial stability, and reliability to repay the loan, as well as the owner's own contribution to the investment.

How much of a CRE loan can my business qualify for?

Typically, the amount of a CRE loan is a relatively high percentage of the value of the property that is being used as collateral. However, this is determined by the lender only after the financial information has been submitted and reviewed.

Most commercial real estate loans range from 70% to 90% of the property value, depending on the property type, your financial strength, and the lender's requirements.

Do I need a property in mind before applying?

While most lenders expect a business to have a property in mind before beginning the approval process for a loan, getting pre-qualified or even pre-approved could be an option. This way a business knows what their investment budget might look like.

Pre-qualification vs. Pre-approval

Pre-qualification: You submit basic financial information and can receive a general estimate of how much of a loan you might be able to receive from a lender, and a decision is often quick.

Pre-approval: Detailed financial documents must be submitted for review. This process is longer than pre-qualification, but it is a more reliable estimate of how much a lender is willing to loan you. Having pre-approval also helps show sellers that you are qualified and are serious about an offer.

In both options, however, a specific property must be decided upon, and final approval must be received from the lender.

How long does the approval process take?

Whether or not you choose to be pre-qualified or pre-approved, receiving a decision after applying for a Commercial Real Estate loan can take anywhere from weeks to a few months. Being prepared with the proper paperwork can help move the process along.

The timeline depends on factors such as the complexity of the property, your financial documentation completeness, and the lender's current workload.

What if I need funding for other business purposes?

A CRE is a specialized loan for real estate related business ventures, but if you need a loan for something else, then there are several options:

• Equipment Financing: Tailored to the purchase of equipment that is required to run or expand a business
• Business Line of Credit: For flexible access to working capital as needed
• Business Term Loans: More general type of funding for various business purposes with fixed repayment schedules
• SBA (Small Business Administration) Loans: Government-backed loans with more flexible terms for qualified small businesses

Frequently Asked Questions

What types of properties qualify for CRE loans?

Office buildings, retail shops, warehouses, hotels and motels, apartment buildings, manufacturing facilities, and other income-producing commercial properties typically qualify for CRE financing.

What is the typical down payment for a CRE loan?

Down payments for commercial real estate loans typically range from 10% to 30% of the property value, depending on the property type, your creditworthiness, and lender requirements.

Can I use a CRE loan to refinance existing commercial property?

Yes, CRE loans can be used to refinance existing commercial properties to take advantage of better interest rates, access equity, or change loan terms.

What happens if I default on a CRE loan?

Since the property serves as collateral, the lender can foreclose on the commercial property to recover their investment. This is why lenders carefully evaluate both the property value and your ability to repay.

Are there industry restrictions for CRE loans?

Some lenders may have restrictions on certain industries or property types. It's important to work with a lender experienced in your specific industry or property type.

Our goal at LargeBusinessLoans.com is to build long-term relationships with our customers, so we care about your needs and your satisfaction. Let our experienced and knowledgeable advisors assist you and your business today.