Commercial Real Estate (CRE) Loan
A commercial real estate loan is a mortgage secured by a lien on commercial property as opposed to residential property. Lenders consider the nature of the collateral (the property being purchased); the creditworthiness of the entity (or principals/owners), including three to five years of financial statements and income tax returns; and financial ratios such as the loan-to-value ratio and the debt-service coverage ratio when evaluating CRE loans. CRE loans tend to be more expensive than residential loans. As with residential property, banks, independent lenders, pension funds, insurance companies, private investors, and other capital sources, such as the U.S. Small Business Administration’s 504 Loan Program are actively involved in providing CRE loans. Like residential lenders, commercial lenders assume different levels of risk and have different terms they are willing to offer to borrowers. Here are the most common types of CRE loans: **Permanent Loans** are first mortgages on a commercial property. A permanent loan must have some amortization and a term of at least five years written into the contract. A commercial real estate loan is a mortgage secured by a lien on commercial property as opposed to residential property.
What Is a Commercial Real Estate (CRE) Loan?
A commercial real estate loan is a mortgage secured by a lien on commercial property as opposed to residential property. Commercial real estate (CRE) refers to any income-producing real estate that is used for business purposes; for example, offices, retail, hotels, and apartments.
Understanding Commercial Real Estate (CRE) Loans
In other words, business entities formed for the specific purpose of owning and operating commercial real estate. The business entity purchases commercial property, leases out space, and then collects rent from the businesses that operate within the property. The financing for the venture, including the acquisition, development, and construction of these properties, is accomplished through commercial real estate loans.
As with residential property, banks, independent lenders, pension funds, insurance companies, private investors, and other capital sources, such as the U.S. Small Business Administration’s 504 Loan Program are actively involved in providing CRE loans. Like residential lenders, commercial lenders assume different levels of risk and have different terms they are willing to offer to borrowers.
The most popular residential loan is the 30-year fixed-rate mortgage, CRE loans are typically shorter. The terms range from 5 years (or less) to 20 years, and the amortization period is often longer than the loan term. For example, a lender might provide a CRE loan with a term of 7 years and a 30-year amortization. The borrower makes monthly payments during the seven years. The monthly payments are determined as if the loan were being paid off over 30 years followed by one final “balloon” payment composed of the entire remaining balance on the loan.
Lenders consider the nature of the collateral (the property being purchased); the creditworthiness of the entity (or principals/owners), including three to five years of financial statements and income tax returns; and financial ratios such as the loan-to-value ratio and the debt-service coverage ratio when evaluating CRE loans.
CRE loans tend to be more expensive than residential loans. Down payments typically range from 20% to 30% of the purchase price. Interest rates also tend to be steeper: around 10% to 20% for most borrowers. Loans backed by the Small Business Administration (SBA) (see below), which are some of the cheapest, ranged from 7.75% to 10.25% as of January 2019 depending on the size and the length of the loan.
CRE loans are intended to finance real estate used strictly for business purposes and to generate income.
Types of Commercial Real Estate (CRE) Loans
Here are the most common types of CRE loans:
Related terms:
Amortization : Formula & Calculation
Amortization is an accounting technique used to periodically lower the book value of a loan or intangible asset over a set period of time. read more
Bridge Loan
Learn more about bridge loans, which are short-term loans used until permanent financing is secured or an existing obligation is removed. read more
Chattel Mortgage
A chattel mortgage is a loan used to purchase an item of movable personal property, such as a vehicle, which then serves as security for the loan. read more
Commercial Real Estate (CRE)
Commercial real estate (CRE) is property, used solely for business purposes and often leased to tenants for that purpose. read more
Debt-Service Coverage Ratio (DSCR)
In corporate finance, the debt-service coverage ratio (DSCR) is a measurement of the cash flow available to pay current debt obligations. read more
Floor Loan Defintion
In real estate construction, a floor loan is the minimum amount that a lender agrees to advance in order for a builder to commence construction on a project. The floor loan is often the first stage of a larger construction loan or mortgage. read more
Income Property
An income property is bought or developed to earn income through renting, leasing, or price appreciation. read more
Lender
A lender is an individual, a public or private group, or a financial institution that makes funds available to another with the expectation that the funds will be repaid. read more
Loan-to-Value (LTV) Ratio & Formula
The loan-to-value (LTV) ratio is a lending risk assessment ratio that financial institutions and other lenders examine before approving a mortgage. read more
Pension Plan
A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. read more