Commercial Real Estate Loan RatesCommercial real estate financing comes in many sizes, and interest rates are the lowest they’ve been in years. Business.org breaks down the lender numbers.
Whether you’re purchasing new property for your business, remodeling and expanding your current digs, or constructing a 100-foot neon Belgian waffle to attract diner customers from outer space (no judgement: aliens like breakfast too), now is a prime time to take out a commercial real estate loan. Interest rates are at historic lows (currently averaging between 4% and 6%), and lenders are so motivated to work with borrowers that they might not even question a colossal flashing waffle sign as a business expense.
|Loan||Average rates||Get a loan|
|SBA 7(a) Loan||5.25%–9.25%||Apply Now|
|CDC/SBA 504 Loan||4.38%–4.49%||Apply Now|
|USDA Business & Industry Loan||5.25%–9.25%||Apply Now|
|Traditional bank loan||4.2%–8%||Apply Now|
|Construction loan||5.5%–6.5%||Apply Now|
|Conduit (CMBS) loan||4.3%–5%||Apply Now|
|FHA Hospital/ Senior Care Loan||3.8%–4.7%||Apply Now|
|Fannie Mae apartment loan||3.01%–5.06%||Apply Now|
|Freddie Mac apartment loan||3.59%–4.27%||Apply Now|
|Bridge loan||9%–13%||Apply Now|
|Soft money loan||6.5%–17.5%||Apply Now|
|Hard money loan||10%–20%||Apply Now|
|Building type||Average rates||Get a loan|
|Apartment complex||3%–8.5%||Apply Now|
|Office building||3.2%–8.5%||Apply Now|
|Retail building||3%–9.9%||Apply Now|
|Industrial building||3%–8.5%||Apply Now|
|Healthcare/ senior housing||3.4%–9.9%||Apply Now|
|RV/mobile home||3.2%–11.1%||Apply Now|
|Self-storage facility||3.3%–8.5%||Apply Now|
|Special purpose building||3.8%–14%||Apply Now|
Determine your commercial mortgage payments
Not sure how much money you’d be paying out every month on a commercial real estate loan? Forecast your payments quickly and easily with this commercial mortgage calculator.
How commercial loan rates work
Commercial real estate loans aren’t the same as residential home mortgages, and they come with higher interest—usually 0.5% to 1% above the 30-year prime residential rate. Commercial loans also have shorter repayment terms, between 5 and 25 years, and are considered a higher risk for lenders because business real estate is typically harder to resell upon default than residential property.
An interest rate—what a lender charges you for the service of loaning capital—is determined by three factors: a base rate, which can be the US Prime Rate (5.25% as of November 2018) or the international LIBOR (London Interbank Offered Rate, measured monthly and measured at 2.28% as of November 2018); the length of the loan’s repayment term; and the overall amount of the loan. Interest on loans can be set at variable rates (meaning the percentage will fluctuate as the base rate does) or fixed rates (meaning the percentage remains consistent throughout the loan’s repayment term).
The worth of income-producing properties is measured by the loan-to-value (LTV) ratio, which is the total amount of the loan divided by the appraised property value or purchase price. The LTV for an $80,000 loan on a $100,000 property would be 80% ($80,000 ÷ $100,000 = 0.8 or 80%), for example.
What is a prepayment penalty?
Commercial loans come with a built-in expectation that interest will be paid over a set amount of time, ensuring that the lender will receive a continuous stream of revenue for the duration of the loan’s term. When a borrower decides to pay off a loan early, whether to refinance at a lower interest rate or get out early in anticipation of a higher rate in the future, they can—and most likely will—face prepayment penalties.
The borrower would then pay the difference between the loan’s original interest rate and the current rate for the remainder of the term of the loan (called yield maintenance) or offer up another mode of collateral, such as treasury bonds (referred to as defeasance). If your business is doing well and you can afford it in the short term, you’re in a slightly better position to take the hit of a prepayment penalty. A cash-strapped business, on the other hand, should probably avoid deviating from the loan’s term.
How to keep your interest rates low
The simplest way to guarantee that you’ll get low interest rates is to maintain a high personal FICO credit score, the upper 700s being the ideal. Putting in a larger down payment will also help keep interest rates manageable, as will opting for longer repayment schedules when you can. Thinking long term, working with the same lender over multiple deals can establish a relationship and confidence that will lead to more lenient commercial mortgage rates in the future.
Commercial loan pros and cons
There are over a dozen types of commercial real estate loans, ranging from general to niche functionality. Here are three of the most commonly used commercial mortgage loans.
Traditional bank loans
Nearly 75% of commercial mortgage loans are procured through traditional banks and credit unions, and they typically require a personal FICO credit score of at least 700. Most standard-lender loans come with terms of 5 to 10 years, and some also require at least one year in business and 51% owner-occupancy of the commercial property.
- Wide availability
- Competitive rates
- High credit score requirements
- Prepayment penalties
SBA loans are backed by the U.S. Small Business Administration and awarded through SBA-approved lenders. The SBA doesn’t make loans directly, and you have to be turned down by traditional commercial real estate financing before applying. These loans have long terms and low interest rates but come with stiff requirements.
- Low interest rates
- Long repayment terms
- Extensive paperwork
- Lengthy waiting process
Hard money loans
Hard money payouts are fast, short-term loans given by private investors who take the risk based on the value of the commercial property, not the borrower’s credit rating. They’re good for “fix and flip” investments but also come with high interest rates (up to 18%) and extra up-front fees.
- Fast cash turnaround
- Minimal credit qualifications
- High interest rates
- Additional fees
When it comes to a commercial real estate loan, don’t be afraid to take your time and shop around–for both loans and investment properties. The climate for commercial mortgage rates is the best it’s been in years, and there are plenty of lenders who are ready to make a deal. Whether you’re buying, refinancing, expanding, or upgrading (we’re absolutely going to consider the neon waffle an “upgrade,” but that’s just us), it’s currently a borrower’s market.