Commercial Real Estate Loans Guide

Investing in commercial real estate can be a great way to generate income and create wealth and our commercial real estate loans guide will help you better understand how to secure a commercial real estate loan. Savvy investors know that the way they finance their investments can have a material impact on their investment returns.

We also recommend downloading our eBook for additional information and an overview of options to consider.

What Do I Need to Apply for a Loan?

If you are looking for a loan to acquire a new property, click here to view a list of the required information and documentation you’ll need.

If you are refinancing an existing property, click here to view a list of the information you’ll need.

How Much Should I Borrow?

Lenders make loans expecting to be repaid, with interest. Their willingness to extend credit depends on several factors, most importantly the reliability of the net income generated by the property.

Different types of lenders set different loan limits, typically expressed as a percent of the purchase price or the appraised value of the property, whichever is lower.  This ratio is known as loan-to-value or “LTV.” For example, banks and insurance companies tend to be the most conservative lenders, so they may only lend up to 70% LTV. Other lending sources may lend up to 75% – 80% LTV. Your experience as a real estate owner/operator will also affect lenders’ willingness to extend more leverage, as will the property type, location, and tenant mix.

This post on the Modern Funding Blog provides more information about how much you’ll need for a down payment.

How Do I Know What a Commercial Property is Worth?

With all real estate, “the market” determines what investment property is worth. Certified appraisers will use any of these three established valuation methods: replacement cost, sales comparison, and income capitalization. The income capitalization method is a popular method among investors. It is derived by dividing the annual net operating income by the cap rate.

Net Operating Income (NOI) is the annual property revenue (rental receipts and any other income including laundry, parking, etc.) minus expenses. Expenses do not include depreciation or major “capital” expenditures (like a new roof for example) or mortgage payments.

Investors should get annual NOI from the seller or listing agent and should review it for reasonableness.

Capitalization Rate (Cap Rate) is the ratio between the net operating income produced by an asset and its value (the acquisition price or its current market value). Current cap rates are available from brokers or lenders who are familiar with recent sales transactions.

Should I Refinance?

Even the most experienced property owners may wonder when the time is right to refinance commercial property. While the benefits are clear – lower interest rate, lower payments, and cash-out – refinancing may mean considering a new lender.

You may encounter a few headaches associated with that process. However, since you already own the property, it’s often easier to refinance than it was to obtain the original acquisition loan. For more on this topic, read this article in the Modern Funding Resource Center.

See today’s commercial real estate lending rates to get a sense of how your interest rate compares to current market rates.

What Loan Term Can I Expect for a Commercial Property Loan?

Well occupied, stabilized properties can be financed with traditional lenders for up to 10 years – sometimes longer for multifamily properties. Properties that are in transition or need significant capital investment to attract new tenants are typically financed for 12 to 36 months on an interest only basis (there is no amortization). These loans have higher interest rates and are typically paid off with a longer term “permanent” mortgage loan at maturity.

Loan term should not be confused with amortization term, which is the length of time needed to pay off the loan amount.

Amortization term can be different from the loan term. When the amortization term is longer than the loan term, the monthly payment is reduced because less principal is being repaid each month; however, this results in a “balloon” payment due at maturity. Borrowers can make the balloon payment in cash, with the proceeds from a new loan, or with proceeds from the sale of the property.

What Else Do I Need to Know?

There are other costs associated with securing a commercial real estate loan. Make sure all fees are disclosed by your lender before you accept any commitment to lend.

Typical fees will include:
• Appraisal
• Application/Underwriting
• Origination
• Survey
• Title Search
• Legal
• Environmental (if applicable)
• Flood Certification (if applicable)

How to Find the Right Loan.

Feel free to talk to the Modern Funding team of experts for guidance at any time. We can assist you in getting the best type of loan, the best terms and rates for your deal, and access to multiple lenders in our network.

Simply call 617-695-4777 or email to be connected with one of our loan specialists.

We also recommend you to talk to people you know in the business and consult your attorney or accountant for recommendations.

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We hope you found this Commercial Real Estate Loans Guide helpful.  Stay updated on rates and the latest trends in commercial real estate lending when you join our mailing list.