Commercial property loans are loans provided to real estate professionals like developers, investors, or corporations to invest in a property type that is designated for commercial use rather than residential. These types of properties are often used to develop storefronts, multi-family housing units, office complexes, warehouses, etc. Individuals utilizing commercial loans can finance the cost of the purchase, development, and construction of commercial property.
Commercial Loan Qualifications
The qualifications for being approved for a commercial property loan are quite similar to a private individual applying for a residential loan. Since commercial loans are granted to a business entity rather than a person, lenders will review the following factors of a business to qualify them for a commercial real estate loan:
• The value of the property as it stands and its potential value following development—the loan-to-value ratio of the commercial property.
• The creditworthiness of the business and the responsible parties of the loan.
• The financial strength of the business—reviewing three to five years of tax returns and bank statements.
Depending on the age of the business and its credit worthiness, lenders may require more financial documentation from the responsible parties, using their individual information and finances to help the business get approved for the loan.
Commercial Loan Terms
Commercial loans are set up similar to balloon payment loans and interest only loans—a low monthly payment requirement for a set number of years and then the remaining balance due in full at the end of that period. Typically, commercial loans have a term of 5 to 20 years and may also have a higher interest rate than a residential loan. This is because of the higher risk issuing a commercial loan can be—building a new store or multi-family residential complex only generates value if other people are interested in shopping or living at the complex.
Like a residential loan, it is also common for commercial loans to have additional fees. These fees are either wrapped into the loan amount or included as a part of the closing costs. As for paying the commercial property loan off early, it is unadvisable. Most commercial loans are issued with prepayment restrictions to protect lenders from losing potential yields on high risk loans.