Knowledge Base

Commercial Property Loans

Most commercial property loans today are made by commercial banks. A property is only considered a "commercial property" if it is other than a house, a condo, a duplex, a triplex, or a fourplex. Surprisingly, it doesn't matter whether the property in question is owner-occupied or not. For example, a loan on a non-owner-occupied fourplex is still considered a residential loan because Fannie Mae and Freddie Mac will buy loans secured by non-owner-occupied fourplexes.

Because commercial property loans cannot be sold to Fannie Mae or Freddie Mac, they are fairly illiquid assets. In other words, if a bank makes a commercial property loan on an office buiding, the bank is pretty much stuck with that loan in its portfolio for the entire term of the loan. If the bank suddenly needs liquidity to meet higher than expected withdrawals, a bank cannot easily sell off an office building loan for cash. Another way of saying the same thing is that most commercial mortgage loans are portfolio loans.

As a result of this illiquidity, commercial property loans are typically a little more expensive than residential loans. How much more expensive? Typically around 0.75% to 1.50% higher. (For more details, please see my article on commercial mortgage rates.) Therefore it is not to your advantage as a borrower to have your property classified as "commercial property". Nevertheless, interest rates on all forms of mortgage loans today are at 30-year lows, so even commercial property loans today are priced at deliciously low rates.

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Examples of commercial property loans include mortgages on apartment building of 5+ units, office buildings, strip centers, shopping centers, industrial buildings and warehouses, restaurants, bars, special use properties, and even raw land.

A loan on a five-unit apartment building will usually come from a commercial property lender, even though such a property is more precisely known as a multi-family property or a residential income property. In other words, all multi-family loans are considered to be commercial property loans, but not all commercial property loans are multi-family loans. Commercial property loans are the larger set.

What if the property consists of a single apartment unit over a storefront? Is this a commercial property or a residential property? After all, there is only one living unit. This kind of property is known as a mixed use property. A mixed use property is considered to be a commercial property, and you would go to a commercial real estate lender to get a loan on such a property.”

Commercial property loans are just one form of commercial financing. Other forms of commercial financing include accounts receivable financing, equipment loans, inventory loans, asset-backed lines of credit, and unsecured business loans.

Throughout the world of commercial real estate finance you will see the term, "commercial". Commercial is just another word for "business". Therefore, if you see the expression "commercial property loan", what the writer is simply describing is a "business property loan". You will also see the term, "commercial bank". A commercial bank is just a garden variety bank that is in the business of accepting deposits and making loans, as opposed to an investment bank (stockbroker) or a merchant bank (a very rare kind of bank that actually invests in companies and ventures as opposed to making loans).

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