There are many types of commercial real estate mortgages that are available. Deciding on the type of financing you need or want depends on many factors. One of the most deciding factors is your exit strategy. If you plan to buy and keep a retail center for a long time, you would consider a long term permanent loan with a fixed interest rate. If you want to buy an apartment building and your strategy is to flip it pretty quickly, you want to consider a loan that has a low upfront cost and low interest rate. Here are the most common types of mortgages and how they are best utilized:
Long Term Loans – These loans are up to 10 years in length, are fixed rate loans, usually have a prepayment penalty and are typically amortized over 30 years.
Short Term Loans – These loans are typically up to 3 years in length, have lower interest rates than long term loans and are typically amortized for less than 30 years. These commercial real estate mortgages may suit you if you plan on selling the property within a short period of time and overall would cost you less because it doesn’t have a prepayment penalty.
Conduit Loans – These mortgages usually have low interest rates, with long amortization periods and can be nonrecourse loans. Nonrecourse means that you are not personally liable for the loan. These are good for properties that are stable with credit tenants.
Small Business Administration (SBA) Loans – These loans are insured by the SBA, given through SBA approved lenders and they have some of the most favorable terms such as low down payments, lengthier loan terms, as much as 40 year amortizations and low interest rates. Most of these loans are given to owners who occupy at least 51% of the property and can be used as a construction loan if you occupy at least 60% of the building.
Construction Loans – This type of financing is taken out to fund the construction of a project to completion or leasing to a certain percentage. These commercial real estate mortgages are usually done on a draw basis where the lender funds as the project is being built, have interest only payments and are usually for one to three years in length. Usually, they require a take-out loan commitment at the end of the term.
Mezzanine Loans – Most of these loans go with a permanent or construction loan, as lenders won’t exceed 80 percent loan-to-value. These loans stack on top of the other loan to get you up to a 90 percent loan-to-value. These are usually done on larger projects and they are typically not secured by a mortgage or deed of trust, but they are secured by a security agreement against the ownership’s stock in the LLC.
Bridge Loans – This type of financing is short term financing used to bridge the gap between finding a permanent loan and closing the permanent financing. They help to fund deals quickly.
Stated Income/No Documentation Loans – This type of loan doesn’t require borrowers to show proof of monthly income or income tax returns. This typically requires that you have good credit, the property must have solid cash flow and the property must be in excellent shape.
Hard Money Loans – These loans typically require a large down payment, have high interest rates and require you to pay three to ten points for the loan. These loans can usually close quickly and don’t require good credit. You might use this loan if you have found a really good deal and need money quickly.
As you can see there are many types of commercial real estate mortgages. It is important that you match the loan to your plan for the property. Using leverage or borrowing money on the property can be a good thing if used in the proper manner and matched to your goals. The wrong loan for the property can be a disaster waiting to happen.