Everything You Need to Know About Commercial Real Estate Loans

Everything You Need to Know About Commercial Real Estate Loans

A commercial mortgage, or a commercial real estate loan is financing received from a lender to acquire, refinance or redevelop a commercial or business property. Banks, conduit lenders, government agencies, insurance companies, mortgage brokers and correspondent lenders all offer commercial real estate loans in the Unites States, the Small Business Administration also offers a 504 Loan program for commercial real estate. Commercial real estate loans are typically considered to be mortgage loans secured by liens on commercial, rather than residential, property. 

Although an individual may receive a commercial real estate loan, it is worth mentioning that most of the time these types of loans are awarded to business entities (corporations, LLC’s, trusts or funds). In order to receive a loan, the entity or individual must have a good, or positive financial history. If no financial history is available, the lender may require the owners of the entity to guarantee the loan or find a guarantor for the loan. This is important in the case of default; a lending institution must be certain that whatever loan they provide can be recovered. A lender may not take a guarantor and instead hold the property in case of default, called a non-recourse loan.

Commercial loans typically range in term from five to twenty years and the amortization period is usually longer than the loan term, and the rate of lender charges are dependent upon the length of the loan and the amortization period. In general, the longer the loan repayment schedule (amortization), the higher the interest rate. Interest rates on commercial real estate loans are typically higher than on residential loans and have more fees including appraisal, legal, loan origination, survey fess and loan application fees.

Loan to Value Ratio

LTV or loan to value ratios is a figure that measures the value of a loan against the value of the property. The value is calculated by the lender by dividing the amount of the loan by the lesser of the property’s appraised value or purchaser price. Lower LTV’s typically qualify for more positive financing rates that higher LTV’s, this is because they have more stake in the property, which means the lender takes on lesser risk.

Commercial loan LTVs, typically fall between 65 and 80%. There are not any VA or FHA programs in commercial lending and no private mortgage insurance either.

 

Debt-Service Coverage Ratio

DSCR (Debt-Service Coverage Ratio) compares a property’s annual net operating income to its annual mortgage debt service, including principal and interest. Overall SDCR measures the property’s ability to recover from its debt by dividing the NOI by the annual debt service. This ratio is used by lenders to determine the maximum loan size based on cash flow generation. 

Key Terms

1. Amortization: is the distribution of payment into multiple cash flow installments, as determined by an amortization schedule. Unlike other repayment models, each repayment installment consists of both principal and interest.

2. Loan Amount: the loan amount of a commercial mortgage is generally determined on LTV and DSCR

3. Loan Structure: can be structured as a first liens or, if greater than loan amount is desired the borrower may be able to obtain subordinate financing (although it may carry a greater interest rate).

4. Interest Rate: Interest rates for commercial mortgages may be fixed-rate or floating rate. Fixed-Rate mortgages are generally priced based on a spread to swaps, with the swap spread matched to the term of the loan. Market interest rates as well as underwriting factors will affect the interest rate quotes.

 

Commercial real estate loans typically have higher interest rates, longer terms and require much more collateral on the part of the borrower than residential loans. Most lenders require a guarantor, and consider the creditworthiness of the entity or individual (including 3-5 years of financial statements and income tax returns, and financial ratios). For more information call Celtic Bank at 1.877.281.6594 or visit us www.celticbank.com

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