How Your Business Can Use a Commercial Real Estate Loan
A commercial real estate loan provides business owners with benefits at all stages of business: If you're renting space, it can help you purchase your own property. If you own commercial property, it can help you expand or renovate. In addition to these upfront benefits, a commercial real estate loan can empower your business with an appreciating asset, possible tax benefits and income-generating potential—all for greater financial flexibility.
We'll explain what a commercial real estate (CRE) loan is, the types of CRE loans available, and the requirements lenders consider when reviewing applications.
What is a commercial real estate (CRE) Loan?
Commercial real estate or commercial property is real estate that's zoned exclusively for business. Examples of commercial real estate include shopping malls, retail shops, office space and industrial properties. A commercial real estate (CRE) loan is a type of financing made to organizations that own and operate these types of commercial properties.
Types of CRE Loans
CRE loans are available for several different goals, from financing and renovating existing commercial properties to developing land and new commercial construction projects. Finding the right loan for your commercial real estate venture can reduce costs, decrease payback periods, and provide financial flexibility in the future.
We'll review the most common types of CRE loans.
A commercial mortgage allows a business owner to purchase, renovate or refinance existing commercial properties. Like residential mortgages, there are many kinds of commercial mortgages with varying repayment terms, amortization rates and interest rates.
Owner-occupied commercial real estate loans
Most business owners are familiar with the traditional model of leasing business space and making monthly payments to a landlord. But if you're an expanding business or feel constrained by your rental agreement, using an owner-occupied commercial real estate (OOCRE) loan to buy a property can be a smart move for your business and an investment in future growth.
OOCRE loans allow businesses to eliminate the uncertainties of leases and own their own business space—offering them an appreciating business asset. Your business must occupy 51% or more of the property to qualify for this financing. You can lease out the remaining unoccupied space to generate additional revenue. In addition to the benefits of becoming your own landlord, you may be able to deduct interest from taxes and write off building-related expenses.
Land development loans
If you're looking to finance the purchase of raw land for residential, commercial or mixed-use real estate, a land development loan can help. As the name implies, these loans are designed to develop the land so that it can become a future construction site. Real estate developers use the funding from these loans to establish critical infrastructures like sewage, water, electricity and other utilities.
Construction financing or commercial construction loans provide funding to build residential, commercial and investment properties, including multifamily homes, apartments, hotels, shopping centers and office buildings. The money from these loans can cover the costs of labor, materials and land to build. They can also help with the construction expenses from renovations and expansions.
Requirements for a Commercial Real Estate Loan
Lenders consider many factors when evaluating CRE loan applications. We'll review some CRE loan requirements to help you prepare.
Debt-service coverage ratio
A business' debt-service coverage ratio (DSCR) shows whether a company has enough income to pay its debt—making it a key consideration for commercial real estate lending decisions.
To calculate DSCR, lenders divide the property's annual net operating income (NOI) by its annual CRE loan payments. A ratio below 1.0 represents a negative cash flow and indicates that the property's generated income won't be enough to cover the yearly costs of the loan. For this reason, CRE lenders generally require a DSCR of 1.25 or better.
Like residential mortgages, commercial real estate loans require an in-depth look at the borrower's credit history. Lenders will review your business and personal credit history to determine your reliability as a borrower. The better your credit history, the better the terms of your loan.
Loan-to-value ratio (LTV)
A commercial property's loan-to-value ratio (LTV) is calculated the same way as a residential loan: Divide the loan's value against the property's value. For example, a $250,000 loan on a property worth $500,000 would have an LTV of 50%.
Commercial lenders generally look for an LTV between 65 and 80%. The lower your LTV, the more favorable your financing terms.
Where to find Commercial Real Estate Loans
You can find commercial real estate loans at a variety of financial institutions. Look for one with a business lending team that has experience financing commercial real estate. Their knowledge can help you navigate the process and capitalize on any available opportunities.
At FirstCapital Bank of Texas, our dedicated commercial real estate lenders bring extensive firsthand experience to offer intelligent solutions that can help your business grow. We offer a complete portfolio of CRE Loans, including commercial mortgages, owner-occupied commercial real estate, land development loans and construction financing—so we can finance your business' real estate needs from the ground up.