Ten Types of Commercial Loans
November 8, 2023
What Are the Types of Commercial Loans?
There are ten major types of commercial loans - permanent loans, bridge loans, commercial construction loans, takeout loans, conduit loans, SBA 7a loans, SBA 504 loans, USDA Business and Industries loans, hypothecations, and fix-and-flip loans. Most borrowers simply need a permanent loan, which is just a garden-variety first mortgage on a commercial property.
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Types of Commercial Loans:
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.
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.
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.
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.
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.
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.
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.
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.
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.
SBA Construction Loans - Many SBA lenders will write conventional construction loans that convert automatically to 25-year SBA loans upon completion.
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.
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.
Fix and Flip Loans - Fix and flip loans are renovation loans that are similar to construction loans. Typically the loan is used to acquire residential property with enough additional proceeds to renovate the property for a quick sale.
Commercial Mortgage Rates Today:
Here are today's commercial mortgage interest rates for permanent loans from banks, SBA 7a loans, CMBS permanent loans from conduits, and commercial construction loans. Be sure to bookmark our Commercial Loan Resource Center, where you will always find the latest interest rates on commercial loans; a portal where you can apply to 750 different commercial lenders in just four minutes; four huge databanks of commercial real estate lenders; a Glossary of Commercial Loan Terms, including such advanced terms as defeasance, CTL Financing, this strange new Debt Yield Ratio (which is different from the Debt Service Coverage Ratio), mezzanine loans, preferred equity, and hundreds of other advanced terms; and a wonderful Frequently Asked Questions section, which is designed to train real estate investors and professionals in the advanced subject areas of commercial real estate finance ("CREF").
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.
What Are the Common Rate Indexes Used By Commercial Lenders?:
Prime Rate – The prime rate is used by SBA lenders and construction lenders. Here is the Wall Street Journal Prime Rate.
Five-Year Treasuries – Commercial banks across the country all make pretty much the same ten-year permanent loan. This loan is fixed for the first five years. At the beginning of year six, the rate is readjusted one time, and then the rate is fixed for five more years. The rate is fixed, based on a margin or spread of 2.75% to 3.5% over five-year Treasuries. The better the deal, the closer to a 2.75% margin the deal enjoys. Here is where to find today’s five-year Treasuries.
Swap Spreads – When you apply for a fixed rate loan from a conduit, the loan will float over an agreed margin while the property is being appraised and until the deal is ready to close. Here is where you will find today’s swap spreads.
LIBOR – Many bridge loans larger than $1 million are floating rate loans, based on LIBOR. LIBOR stands for the London Inter-Bank Offer Rate, and it is roughly equivalent to the Federal Funds Rate in the U.S. The typical rate on a floating rate bridge loan is 2% to 4% over LIBOR. The better deals get the lower margins. You will find today’s LIBOR here.