Knowledge Base

Types of Commercial Loans

June 10, 2019

Below is a list containing many of the various types of commercial real estate loans.  To learn even more about a particular type of commercial loan, simply click on the associated hyperlink.

 

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    1. Permanent Loans - A permanent loan is a garden variety first mortgage on a commercial property.  To qualify as a permanent loan, the loan must have some amortization and a term of at least five years.
    2. Bridge Loans - A bridge loan is a short-term, first mortgage loan on commercial property.  The term could be from 6 months to three years.  The interest rate on bridge loans is typically much higher than on permanent loans.
    3. Commercial Construction Loans - A loan of one to two years used to build a commercial property.  The loan proceeds are controlled by the lender in order to make sure they are only used in the construction of the new building.
    4. Takeout Loans - A takeout loan is a garden variety permanent loan where the proceeds of the loan are used to pay off a construction loan.
    5. Conduit Loans - A conduit loan is a large permanent loan on a fairly standard type of commercial property, which is underwritten to secondary market guidelines and which has an enormous prepayment penalty.   Such loans enjoy very low interest rates.  Conduit loans are later assigned to pools and securitized to become commercial mortgage-backed securities.
    6. SBA Loans - Loans to users of commercial real estate which are written by private companies, such as banks and specialty finance companies, but which are largely guaranteed by the Small Business Administration.  SBA loan guarantees were created by Congress to encourage the formation and growth of small businesses.

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  1. SBA 7(a) Loans - The SBA 7(a) program is a 25-year, fully-amortized, first mortgage loan program with a floating rate, tied to the Prime Rate.
  2. SBA 504 Loans  - The SBA 504 loan program starts with a conventional, fixed-rate, first mortgage and then adds a 20-year fully-amortized, SBA-guaranteed, second mortgage behind it.  It is the most common way to get a fixed rate SBA loan.
  3. SBA Construction Loans - Many SBA lenders will write conventional construction loans that convert automatically to 25-year SBA loans upon completion.
  4. USDA B&I Loans - The Department of Agriculture’s Business and Industry loan program is very similar to the SBA loan program, where a conventional lender makes the loan but the USDA guarantees most of it.  USDA Business and Industry loans were created to help create jobs in rural areas.
  5. Hypothecations - A hypothecation is actually a personal property loan secured by a note and mortgage owned by the borrower.  The borrower’s note and mortgage are often created when the borrower sells a piece of real estate and carries back the financing.  Later the borrower might need cash and pledges his mortgage receivable as collateral.
  6. Fix and Flip Loans - Fix and flip loans are renovation loans that are similar to construction loans.  Typically the loan is used to acquire property with enough additional proceeds to renovate the property for a quick sale.

 

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Importance of Net Worth:

When applying for a commercial loan from a bank, a borrower needs to make sure that the size of his commercial loan request is reasonable in light of his net worth.  For example, a borrower with a net worth of just $100,000 probably is not going to qualify for a $5 million loan.  The general rule is that the borrower's net worth needs to be at least as large as the size of the commercial loan he is seeking.  In the parlance of commercial real estate finance (CREF), the Net-Worth-To-Loan-Size Ratio needs to be at least 1.0.

 

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