Find the best business loan rates (2021)

How to Get the Best Commercial Real Estate Loan Rates

By Elise Moores Managing Editor at Fast Capital 360 Reviewed By Mike Lucas

Today, commercial real estate loan rates are low compared to previous eras. Depending on your creditworthiness and the type of loan you’re applying for, real estate loan rates and commercial mortgage rates range anywhere from less than 3% to about 15%. The difference could mean hundreds of thousands of dollars added to your bottom line, so it’s important to know what goes into calculating commercial real estate loan rates.

If you’re wondering, ‘What is the current interest rate for commercial mortgages?’ this guide will tell you all you need to know.  We’ll review how the financing type, amount, repayment length and credit utilization combine with your credit score and other factors so you can estimate the commercial mortgage rates and terms a lender could offer you.

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    Small Business Tip:

    Although prime lending rates are low today — 3.25% — prime rates fluctuate based on the economy’s condition. 

    Most lenders use prime rates to set commercial real estate interest rates. Any additional interest charges above prime will be in accordance with your creditworthiness and the lender’s financing terms.


Commercial Real Estate Loan Types and Interest Rates

Commercial Real Estate Loans depicting different types of loans, including SBA 7a and 504.

There are more ways than ever to finance a commercial building loan and find manageable rates for your small business. So, what are the current commercial mortgage rates? While it’s possible to get an idea of averages, every case is unique.

Average Commercial Real Estate Mortgage Rates 

Rates by Loan Type

Financing Type* Average Rates Common Loan-to-Value Ratio Maximum Term Lengths
Bank Financing 5%-7% 80% 10 years
SBA 7(a) Loans 5.5%-11.25% 85% 25 years
SBA CDC/504 Loans 2.231%-2.399% 90% 25 years
Construction Loan 4.75%-9.75% 80% 1-3 years
Commercial Bridge Financing 4.2%-13.2% 80% 3 years
Hard-Money Loan 10%-18% 60%-80% 1 year

*Averages from Valuepenguin

Rates by Property Type 

Building Type** Average Rates
Retail space 2.18%-13.18%
Apartment complex 2.18%-9.75% 
Office building 2.18%-13.18%
Industrial building 2.18%-13.18%
Hotel 2.18%-13.18%
Hospital 2.18%-6.48%

**Averages from Commercial Loan Direct

Conventional Bank Loans

Banks are the gold standard of commercial real estate lending. They offer affordable commercial mortgage rates and high borrowing amounts, helping you cover expensive property purchases. 

Banks typically offer up to an 80% loan-to-value ratio (LTV, the amount of the loan compared to the commercial property value) for qualified borrowers, meaning you’d have to come up with a 20% down payment.

It’s not uncommon for some banks to require potential commercial borrowers to have a credit score above 700, multiple years in business and significant annual revenue to be eligible to apply for bank financing.

Generally, banks offer the most competitive commercial real estate loan rates — starting at an average of 5%.

Bank loans can come with fixed or variable rates, which would reset at periodic intervals noted in your loan agreement, for example, every year or every 5 years.

SBA Loans

The SBA offers multiple programs that help people finance a commercial property. These programs open access to funding for small businesses that don’t qualify for conventional loans. What the SBA does is guarantee a portion of a loan, which mitigates the lender’s risk and helps you get funding.

This doesn’t mean SBA-backed loans are easy to obtain, however. To be considered, you’ll need a minimum credit score of 650 and must have a positive and lengthy business history as well as a strong business plan.

If you don’t have much to put up for a down payment, SBA loans can be great options for you. The LTV ratio that the SBA offers can be as high as 90% for qualified projects under the 504 Loan Refinancing Program.

When it comes to commercial real estate loans, there are 2 options: 7(a) and CDC/504. Each program has its conditions and rates.

Related: SBA Loan Requirements: Is Your Business Eligible?

SBA 7(a) Loans

The 7(a) program is the most popular of all SBA initiatives. There are many types of funding options under the 7(a) umbrella, each encompassing a variety of business uses, including commercial real estate. The typical LTV ratio for this financing can be about 80%.

The SBA sets interest for 7(a) funding to the current prime rate. Commercial property loan rates can be fixed or variable, depending on your qualifications and will get lower as your principal amount rises. This makes them an attractive option for those who need smaller commercial real estate loans. 

In general, you could expect to pay between 5.5%-11.25% in interest when funding through this program.

CDC/504 Loans

SBA 504 loans are put together strictly for fixed assets such as equipment and real estate.

This program is different because it’s fulfilled by 2 separate lenders. A Certified Development Company (CDC) works with the SBA to provide 40% of the loan while a bank covers 50% or more. The borrower is required to put down 10%, although some may have to put down up to 15% or 20%.

The LTV is usually 90%, making it easier for businesses with less cash on hand to obtain the commercial real estate loan they need.

The CDC-backed portions of 504 loans have interest fixed slightly over the current Treasury rate. However, for the bank’s contribution, there is no set cap, and you’ll have to negotiate the rates and fees independent of the CDC. You’ll generally receive commercial mortgage interest rates comparable to other mortgage financing packages.

CDC/504 loans are an excellent option for those in the market for commercial real estate with 7-figure price tags.

Construction Loans 

If your business venture’s physical location is being built, you can apply for a construction loan to cover permits, building materials and labor costs. This type of financing covers construction costs, so terms are shorter — usually the length of the building project. 

Rates can range from 4.75% – 9.75% but could be higher because the shorter terms and the lack of collateral — such as the existing building that secures a mortgage — make lenders see this loan as a more considerable risk. Lenders will also require a down payment on construction loans, with the percentages ranging from 10%-30%.

If you’ll need a mortgage once construction is complete, you can apply for a construction-to-permanent loan, which is financing that converts to a traditional mortgage (e.g., with 15- or 30-year terms) after construction is complete. 

Keep the following points in mind if you want to apply for a construction loan for your commercial real estate project:

  • Have detailed plans ready: Lenders will want to see all aspects of your construction project plans, including floor plans and other blueprints, builder information, schedules and a budget, before approving your application.
  • Funding isn’t released in a lump sum: Unlike other financing options, your approved funding amount isn’t provided upfront. Instead, the lender releases funds in periodic “draws” and after the completion of specific construction steps (e.g., framing). You’ll be responsible for paying interest on the released financing throughout your loan term; the principal must be paid off at the loan term’s end.
  • Not every lender offers construction loans: If you think a construction loan will help you achieve your commercial real estate goals, research (or contact) lenders to ensure they offer this type of financing.

Commercial Bridge Financing

Short-term bridge loans are commonly issued by local banks or online lenders. They’re used to purchase or rehabilitate commercial property, but they are not a long-term financing solution. 

With a commercial bridge loan, you’ll have an abbreviated term length, sometimes as short as 6 months. And no matter the length you’re offered, lenders typically charge higher up-front fees and interest. The average rate for commercial bridge loans ranges from 4.2%-13.2%.  And unlike conventional commercial financing, bridge loans are often based on the loan-to-cost ratio or after-repair value of a property instead of the LTV ratio. 

Hard-Money Loans

Because most borrowers in the real estate market don’t have large amounts of cash immediately on hand, some turn to private companies or investors — instead of banks or other lending institutions — to help finance their new properties.

These commercial real estate loan rates are higher than any other because the lenders are incurring a greater amount of risk. You could pay 10% to 20% in interest if you turn to a hard money lender.

  • Online Marketplace Loans

    If your small business cannot qualify for a conventional commercial mortgage or needs money fast to jump on a hot real estate opportunity,  online lending marketplaces, such as Fast Capital 360, might be your next best option for buying real estate.

    These companies facilitate your application and match you with the right lender inside their network. This simple, streamlined process can potentially get you funding in a shorter amount of time than you could through a bank.

    More importantly, it takes the hassle out of shopping around to find the best rates and terms for your commercial real estate loan. Based on your creditworthiness, these agreements may come with an interest rate starting at 7%.

    [Discover Your Options


How Commercial Real Estate Loan Rates Are Calculated

The way interest accumulates can change what you pay for your total funding. While your lending partner can negotiate unique terms with you, there are a few common ways interest is worked into a contract:

Fixed vs. Variable Rates

Before agreeing to a loan contract, consider if your commercial property interest rates will change over time. Given the typical costs associated with commercial real estate, even a small change can mean tens of thousands of dollars are taken off (or added to) your bottom line.

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Fixed

When your commercial mortgage contract includes a fixed rate, that percentage will yield your interest until the maturity date. No matter what happens inside or outside of your control, your commercial real estate loan’s rate will be locked.

This can help make budgeting and forecasting for the future easier. Still, many borrowers will not qualify for a fixed interest rate, and not all financing products will have that option.

Variable 

Variable — sometimes referred to as a floating mortgage rate or an adjustable-rate mortgage (ARM) — interest changes with the current market rates. These are common with commercial real estate loans. 

You’ll agree upon your rate term with your lender, and the rate will reset periodically according to the terms of your agreement. Be wary of this when agreeing to a contract because changes in the economy can either increase or decrease your monthly payment going forward.

Full Amortization

Most common fixed-rate mortgages are paid off using an amortization schedule. Interest and fees associated with these loans are rolled into the principal amount and paid off in equal payments until the end of the term.

Interest is front-loaded, meaning your payment will go toward mostly interest in the beginning of your repayment term. As the loan matures, the ratio flips and you’ll begin paying down more of the principal balance.

  • Small Business Tip:

    Most amortized loans allow you to make extra, targeted payments on the principal balance. Adding $100 or more a month toward your principal can save you thousands in interest. But beware, some lenders may charge prepayment fees. 

Balloon Payments

Common in commercial lending, the amortization period in a balloon-payments structure is longer than the total repayment term. Doing so leaves a large payment at the end of the term. 

Most borrowers plan to either refinance their mortgage as the final payment nears or sell their property before the loan’s maturity date.

Some lenders offer interest-only loans, also known as bullet loans, which require you to pay only the interest during repayment. This can be attractive to borrowers who need to jump on a property before it’s off the market, need a commercial construction loan to build up value in a tract of land or could use cash to invest in their business. 

However, be aware that the entirety of the original principal is due at loan maturity. If you can’t refinance the loan, you’ll have to pay off a considerable lump sum.

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Factors Affecting Your Commercial Real Estate Loan Rates

Commercial property mortgage rates and terms are based on multiple criteria. Your creditworthiness, the principal size and term, the economic climate and other factors can affect quoted interest rates. Let’s look at what lenders want and how it applies to your situation to help you obtain optimal financing terms.

Credit Score

As with any other commercial business loan, your business and personal credit histories help determine which commercial real estate lenders will work with you — and at what interest rate. Showing an ability to incur and pay off debt is attractive to lenders and can help you qualify for higher funding amounts and lower commercial real estate loan rates.

To consider being approved for a bank or government-backed financing program, you’ll need a convincing credit score. Keep in mind, a “good” credit score is at least 670 on the FICO scale and a “fair” score ranges from 580-669, according to Experian. That said, other lenders can work with you if you have a low score, but the commercial building loan rates will get considerably higher. 

If you’re worried about being denied financing or given high commercial property interest rates, make an effort to raise your credit score before applying for a commercial real estate loan.

Related: Bad Credit Business Loans: These Are Your 5 Best Options

Loan Details

Your repayment term’s initial principal amount and length are key to determining your commercial real estate loan interest rate. In general, longer-term commercial loans will have lower interest rates.

Additionally, the more creditworthy you are as a borrower, the more likely it is to get a longer repayment period. Also, those who qualify for larger principal amounts may be approved for lower interest rates.

Most lower-value, short-term options are offered to less-qualified borrowers. Because the lender is taking on more risk in those situations, they’ll charge higher commercial real estate loan rates. A short-term loan can carry rates starting at 10%, for example — as they do at Fast Capital 360 — or higher, in some cases.

Loan-to-Value Ratio

The following example LTV demonstrates how LTV impacts the overall commercial mortgage rates: 

A lender offering a 75% LTV is willing to finance three-quarters of the total value of the building you’re buying. That means if you want to purchase a $400,000 property, they’ll lend you $300,000. 

LTV is used to determine how risky the investment is for the lender. A higher ratio means the lender has more invested in the property, thus increasing their risk in the case of default. Providing a higher down payment will mitigate this risk and lead to lower commercial real estate loan rates.

Depending on which type of commercial real estate loan you qualify for and the lender’s unique terms, you can expect to receive an LTV of 50%-90%.

After-Repair-Value Ratio

After-repair-value (ARV) is what the perceived value of the commercial property will be after renovations. When a developer looks to rehabilitate a property or a business owner plans to renovate an office building, the ARV ratio comes into play.

Say your lender offers you an ARV of 60%. If the property is valued at $500,000 after repairs, you’d receive $300,000 in financing. 

It’s recommended a buyer or investor not offer more than 70% of the ARV when purchasing a property to rehabilitate.


Documents to Apply for Affordable Commercial Real Estate Loan Rates

During the application and underwriting process, you’ll be asked to provide documentation and other information to help your lender assess the risk in funding your real estate purchase.

To get the best possible commercial property mortgage rates, your documentation should give your lender a clear picture of your business. If the lender has any doubt in your ability to pay off the debt, it can lead them to raise rates or deny you the commercial real estate loan.

Before applying, make sure to have the following:

  • Property info (building type, appraised value, location, square footage, etc.)
  • Bank statements
  • Personal and business tax returns
  • Income statements and balance sheets
  • Profit-and-loss statements
  • Any licenses and permits your business or the property require

When it comes to the financial statements, provide the lender with 3-5 years of documentation where possible. If they request more information, make sure to be punctual and precise in getting information to them.

Related: How to Get a Business Loan


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