Commercial Loan Rates

Commercial mortgage rates are deliciously low right now, making this a superb time to buy commercial-investment real estate or to expand your business. You and I will probably never see commercial mortgage rates or business loan rates this low again in our lifetimes.

There is a reason why commercial loan rates are so low right now. Life companies, commercial banks, and even credit unions are sitting on an ocean of cash. Commercial banks alone hold more than $2 trillion in excess reserves at the Federal Reserve.

Commercial banks therefore actually want to make commercial loans right now - both commercial real estate loans and business loans - but commercial real estate investors and business owners are still too traumatized by the Great Recession to want to borrow. As a result, commercial banks and competing commercial real estate lenders are being forced to offer their commercial loans at fire sale prices.

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But which type of commercial lender is the best for your particular situation? Should you apply to a life insurance company, a conduit, a commercial bank, a credit union, an SBA lender, a USDA Business and Industries lender, or maybe even a hard money commercial lender?

Without a doubt, the type of commercial real estate lender with the most attractive commercial loan rates is a life insurance company, known in the industry as a life company. Life companies offer commercial real estate loans at rates that are only 0.35% to 0.50% higher than the prime residential mortgage rate - defined as the market rate for 30-year home loans. Therefore, if 30-year home loans are going for 3.75%, life companies will be making commercial real estate loans at 4.10% to 4.25%.

That's the good news. The bad news is that few life companies will touch commercial real estate loans smaller than $5 million. In addition, the property must be very standard (multifamily, office, retail, industrial, or hospitality) and cannot be any older than about 20 years old. This rules out most borrowers.

The next cheapest commercial real estate lender in the pecking order is the conduit or CMBS lender. A conduit is a company that securitizes their commercial mortgage loans and sell off bonds backed by these mortgages - hence the expression, commercial mortgage-backed securities (CMBS). Conduits offer commercial loan rates that are typically 50 to 65 basis points (0.50% to 0.65%) over the prime residential mortgage rate.

Once again size will work against most commercial mortgage borrowers. Conduits also seldom touch commercial loans smaller than $3 million to $5 million, and the property type must still be standard. The difference between life companies and conduits is that conduits will finance older properties.

Commercial banks and credit unions finance the smaller, good-credit commercial loans. Commercial loan rates from commercial banks and credit unions are typically written at 0.75% to 1.50% over the prime, 30-year residential mortgage rate.  The good news about banks and credit unions is that they will finance, not only small commercial real estate loans, but also less standard commercial properties, like self-storage projects, bars, and restaurants.

If you qualify for an SBA loan, it is a commercial loan that you should seriously consider. The interest rate on a standard 7a SBA loan is 2.75% over prime floating. Therefore, if the prime rate is 3.25%, then a garden variety SBA commercial real estate loan will be at 6.0%, which is a fairly attractive rate. Please note, however, that the rate is NOT fixed but floating over prime. The nice thing about an SBA loan, however, is that (1) you can often qualify for a loan of 90% loan-to-value, and (2) the loan is fully-amortized over 25 years. In other words, there are no balloon payments. There is nothing worse than having a balloon payment come due during a recession, when commercial real estate values are plunging and banks are very nervous.

USDA Business and Industry ("B&I") loans are attractive as well. These loans are very similar to SBA loans. They are made by banks but largely guaranteed by the USDA. They are designed to create and save jobs in rural areas. The pricing of USDA B&I loans is very similar to SBA loans - typically 2.75% over prime floating. These loans are typically fully-amortized over 20 to 25 years.

In conclusion, most conventional commercial loan rates roughly follow the prime residential mortgage rate, but just 0.35% to 1.50% higher. The larger the commercial loan - assuming the property type is standard - the lower the spread. Government loans - SBA loans and USDA B&I loans - are priced at a floating rate over prime (not the prime residential rate but rather the Wall Street Journal prime rate).

So why are commercial mortgage rates higher than residential mortgage rates? It has to do with liquidity. Residential loans can quickly be sold to Fannie Mae or Freddie Mac. Commercial loans cannot. As a result of this illiquidity, commercial loan rates are almost always higher than the prime residential mortgage rate.

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