CRE Loans

A commercial real estate loan is designed for businesses to invest in income-earning properties and owner operated facilities. These loans can cover the cost of acquiring an existing property or building from the ground up. Income-earning properties are buildings intended to bring in consistent revenue through tenants and guests while owner operated properties provide funds to purchase or build retail, office, restaurant or manufacturing facilities.

Property Management and CRE Investment

Some businesses specialize in in commercial property management or use real estate to expand their portfolios while hiring a company to run day to day operations. Even when these businesses have cash on hand, it can be a better financial move to finance acquisitions, even if the corporation can pay for the property outright. Tax incentives, increased credit ratings and protection of working capital are some of the benefits of CRE loans.

Owner Operated Properties

Small and medium sized businesses gain several benefits from acquiring commercial real estate. Like property investors, owner operators improve their business credit score as they repay their CRE loan. Owners may customize the space to their own way of working and to represent their brand. They can also sublet space to other businesses in many instances.

Terms and Conditions

One important figure to know when applying for a commercial real estate loan is DSCR, or Debt-Service Coverage Ratio. Lenders look for a DSCR of 1.25 or higher when deciding to approve a loan. This figure is calculated by determining how much potential income the new property will earn and dividing that number by the amount needed to payback the loan. If a hotel is expected to earn $100,000 in one year and the cost of the loan (plus interest) is $125,000, then the DSCR is 1.25.

Another key number is the loan-to-value ratio. Most lenders don’t fund 100% of the cost of the property. The average percentage for these loans is 65% to 80%. That’s the amount the lender will loan divided by the total cost of the new real estate. The remainder comes from the corporation purchasing the property as an out-of-pocket cost, or via another financing source.

Amortization periods on commercial loans differ from residential loans. A residential loan may mature at 30 years and have an amortization period that’s also 30 years. Early in the loan, most of the payments are applied to interest. Later on, payments cover more of the principal. Under a commercial loan, the amortization period can exceed the maturity of the loan. When the loan matures, the remaining balance is due in a lump sum.

Loan Highlights

  • Corporations use commercial real estate loans to buy income-generating property. 
  • The Debt-Service Coverage Ratio is the property income divided by the loan payment. 
  • Most loan-to-value ratios are between 65% and 80%. 
  • Amortization periods can extend past the maturity of the loan. 

Benefits

  • Loan payments may have tax advantages for the corporation. 
  • Most loans are secured on the new property, but offering additional collateral can improve the chances of approval.  
  • It’s not always necessary to have a high credit score to qualify. 
  • CRE loans are available from many sources, including banks, private lenders and the SBA.

Challenges

  • CRE Loan applications require significant documentation. 
  • With short term financing or bridge loans, the borrower must plan for the end-of-term balloon payment. 
  • Loans rarely cover 100% of the purchase of new real estate. 
  • If the property fails to earn sufficient income, the loan must still be repaid.