Types of Commercial Loans

Commercial real estate loans help owners get through tough times

man signing loan document in front of banker
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Commercial property owners often need mortgages to construct buildings. Once the buildings are constructed, owners sometimes need financing to keep their buildings fully leased and in good condition. That’s why banks, private lenders, insurance companies, pension funds and even the U.S. Small Business Administration offer commercial real estate loans that can bring deals to fruition, create business partners and even help owners avoid foreclosure.

The incentive for lenders to make loans to commercial real estate owners is that their properties typically attract wealthy tenants and sometimes produce millions of dollars in revenue. Although the risk is high, the money-making incentives can be higher. Knowing about the various loan options and how they work can help real estate professionals and commercial building owners better understand the financing options available to them in times of need.

Bridge Loan

A bridge loan gives the borrower instant cash flow to finance a project’s immediate needs. Bridge loans are temporary, with a term of one year or so, and are normally obtained while the borrower is waiting for long-term financing to come through. Bridge loans usually are offered by private lenders. A bridge loan requires excellent credit scores and proof of income. Borrowers also need to show that they have enough cash to cover property's existing expenses plus the new loan.

Real Estate Purchase Loan

Real estate purchase loans are similar to fixed-rate and adjustable-rate commercial mortgages. To qualify for this type of loan, borrowers must have excellent credit -- credit scores of 700 or higher -- and significant savings in both business and personal bank accounts. Lenders require the commercial property to be used as collateral, and the loan’s rate is determined by the loan-to-value ratio.

Hard Money Loan

To qualify for a hard money loan, the owner must list the commercial property as collateral, even though the loan may be used to save it. Hard money loans are normally offered by private lenders who don’t have to meet the same standards as mainstream commercial lenders. Because of this, hard money loans carry a high risk of default, and therefore, a high interest rate. These loans are temporary and are only offered when time is of the essence, such as during a foreclosure proceeding.

Joint Venture Loan 

A joint venture loan may be appropriate when all parties will share in a property's profits and losses equally. This type of loan can be advantageous if neither party can obtain proper financing separately. Private investors and investment firms usually offer joint venture loans. Typically, two partners in a group apply for the financing. Note that, unlike a true real estate partnership, the relationship between the loan applicants does not need to be official or extend beyond the financed property.

Participating Mortgage

In a participating mortgage, the lender is allowed to share in part of the revenue generated by a commercial property. The lender receives its monthly mortgage payment, along with interest, as well as a share in the property’s rental income or sales proceeds.

A participating mortgage is popular among office and retail properties where well-known, financially stable tenants have signed long-term leases.