There are many different kinds of financing options for commercial real estate deals. And understanding the mix of commercial loan products available to you and your clients could make the difference between completing a transaction and losing it. 2013 was a very good year for commercial real property investors. According to CoStar COMPs data, sales of office, industrial, retail, multifamily, hospitality and land totaled $366 billion. The vast majority of these commercial real estate acquisitions were financed using third party firms like banks, non-bank SBA lenders, and commercial real estate lenders.
The Five Commercial Real Estate Loan Products
There are five basic types of commercial real estate term loan products. (A term loan is a loan with a specific, fixed principal amount and a set maturity date and repayment schedule, which does not include line of credit financing (e.g., revolving construction lines)).
- Permanent Loan
- Mini Permanent Loan
- 7A Loan
- 504 Loan
- Bridge Loan
Below is a cheat sheet on these five loan products and some fun facts about each:
1. Permanent Loan
Description: Conventional, long-term commercial real estate financing from a bank
Eligibility Criteria: You must be near perfect. Translation: you need to have a 700+ credit score (or a good story as to why you don’t), lots of positive net cash flow businesses and/or investment properties, high balances in your business and personal bank accounts, and the property needs to have at least 1, but ideally 2 years of positive net operating income (NOI).
Permanent Loan Pros:
- 15 to 30 year terms
- Prime to near-prime interest rates
Permanent Loan Cons:
- Hard to qualify
- 30-60 days approval time
2. Mini Permanent Loan (Mini Perm)
Description: Conventional, short-term commercial real estate financing from a bank
Eligibility Criteria: You pretty much need to meet all of the criteria for a permanent loan, except the target property does not have to have positive net operating income (NOI). However, your Sources and Uses statement needs to show how you will use the loan funds to make the subject property income producing (e.g., acquire property, do construction/rehab, lease up, etc.) so you can qualify for long-term financing before your Mini Perm loan matures.
Mini Perm Pros:
- 1 to 5 year terms
- Prime to near-prime interest rates
Mini Perm Cons:
- Hard to qualify
- 30-60 days approval time
3. 7A Loan
Description: Alternative funding for commercial real estate, equipment, and/or working capital from a bank or non-bank lender certified by the U.S. Small Business Administration
Eligibility Criteria: Can only be used by eligible small businesses. If you are close, but do not yet qualify for a conventional loan from a bank you may qualify for this funding.
7A Pros:
- Up to 25 year terms
- 6 to 10% interest rates
- Can also use for working capital and equipment
7A Cons:
- Max loan amount: $5 million
- 30-60 days approval time
4. 504 Loan
Description: Alternative funding for commercial real estate and/or heavy equipment from a bank and a non-bank lender certified by the U.S. Small Business Administration
Eligibility Criteria: Can only be used by eligible small businesses who own or occupy 51% or more of the commercial property. If you are close, but are not yet qualified for a conventional loan from a bank you may qualify for this funding.
504 Pros:
- 10 to 20 year terms
- 6 to 10% interest rates
- Can also use for working capital and equipment
504 Cons:
- Lots of paperwork required
- 45-90 days approval time
- Max loan amount: $20 million
5. Bridge Loan
Description: Alternative funding for commercial real estate from a private and/or hard money lender
Eligibility Criteria: If you don’t yet qualify for funding from a 7A or 504 lender and you have a plan to acquire and/or improve an asset that will eventually secure better funding, then you may want to try a bridge loan. However, it won’t be a cake walk, the cardinal rule still applies. You need to show you have a history of mostly paying your bills on time (minimum 620 credit score) and enough cash flow from personal and investment income to cover the property operating expenses and the debt service (principal and interest) for all existing loans that you have and the new loan you are applying for.
Bridge Loan Pros:
- 1 to 5 year terms
- Easier to qualify
Bridge Loan Cons:
- 10-20% interest
- 30-60 days approval time
- Max loan amount: $20 million
There they are: the five jewels of the commercial real estate financing market. Depending on who you are, what your financial profile is, and how you plan to use the commercial real estate, one or more of these loan products will be right for you.
Now that you have a good handle on what the options are and the pros and cons of each, you should take a look at your existing commercial real estate investment portfolio and make sure you are currently getting the best possible deal with respect to interest rate and term. If you are not, you could save yourself a lot of cash by refinancing. That’s cash that could be used to reinvest in your business, buy more commercial real estate properties, or reserve for a rainy day. And for those that work with and/or support commercial real estate investors, encourage them to explore their options and evaluate the financing on their current properties and/or planned purchases. If you help save them some money today, I can assure you, that you will continue to be their go to resource for commercial real estate in the future.
