Various types of commercial real estate loans are available due to the
fact that there are different types of commercial business ventures. In general, the loan or financing method is
for the purchase of property. The funding for purchase can be compared to a
loan for residential real estate where the collateral to secure the loan is the
property itself. After the loan payments
are finished the businessman or entity then becomes the owner and can use the
value of the property as collateral in a future loan.
One type of commercial finance structure is called an owner-user loan.
In this case, the property is used to conduct business, for example, a
physician purchasing a building to run his practice or a cell phone company
purchasing property to house their business and product. Most of the time these loans are for
start-ups, but not always. The bank or lending institution will most likely
want to see the business owner’s personal credit score before qualifying them
for the loan.
Another type of commercial real estate funding may be an investment
property loan. In this case the property itself will be used to make money, for
example, a shopping strip leasing space to tenants or an apartment renting
units. Again, if these businesses are start-ups then personal credit becomes
extremely important for qualifying.
The final type of loan is called a hard money loan that is used for
commercial real estate development projects.
Older buildings purchased for rehab, new construction, or conversion
projects all may fit into this financial mold.
Hard money loans are usually designed to avoid early payoff fees as well
as other fees associated with early payoffs.
Banks set these prepayment fees and enforce them so they do not lose out
on making the interest money after spending their time and money toward due
diligence for the commercial real estate project.
As a businessman you should understand the basic concepts of a loan and the
loan structure. Be prepared to show a
good credit score or construct a joint venture with a strong borrower. Understanding the individual underwriting
criteria for these loans will also help you negotiate terms. You may want to consider a financial consultant
or business professional to help you make the best decision on your commercial
real estate funding options.
