Today, commercial real estate loan rates are low compared to previous eras. Depending on your creditworthiness and type of loan, 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. In this guide, we’ll review how the financing type, amount, repayment length and utilization combine with your credit score and other factors so you can estimate the commercial property loan rates and terms a lender could offer you.
Factors Affecting Your Commercial Real Estate Loan Rates
Like a residential mortgage, 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 take a look at what lenders want and how it applies to your situation to help you obtain optimal financing terms.
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. Banks and government-backed financing programs require strong credit scores (660 and above). It’s possible for other lenders to work with you if you have a lower 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.
The initial principal amount and length of your repayment term are key to determining your commercial real estate loan interest rate. In general, longer-term commercial loans will have lower interest rates. A short-term loan can carry rates starting at 10% — as they do at Fast Capital 360 — or higher, in some cases. 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 will 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.
The loan-to-value ratio (LTV) reflects the amount of the loan compared to the value of the commercial property.
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 cover $300,000. You’d have to put down $100,000 as a down payment to match the purchase price.
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 (ARV) is what the perceived value of the commercial property will be after renovations. The ARV ratio comes into play when a developer looks to rehabilitate a property or a business owner plans to renovate an office building. 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, leaving you with a $200,000 down payment. It’s recommended a buyer or investor not offer more than 70% of the ARV when purchasing a property to rehabilitate.
Current Market Rates
Current commercial real estate mortgage rates are based on prime lending rates. These figures are tied to the economy and were lowered in March 2020, when the U.S. began grappling with the COVID-19 pandemic. The lower rate is helpful to borrowers because lenders use the most current data to determine commercial real estate loan rates and terms.
Small Business Tip:
Although they’re low today — 3.25% — prime rates fluctuate with the stock market and are subject to change. Be sure to check the latest rate before applying for a commercial property loan. 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
There are more ways than ever to finance a commercial building loan and find manageable rates for your small business.
Traditional Bank Loans
Banks are the gold standard of commercial real estate lending. They offer low commercial mortgage rates and high borrowing amounts, helping you cover the purchase of expensive property. If you need a smaller amount — under $250,000 — it might be harder to find a bank to work with you. Banks aren’t usually interested in these opportunities, as there isn’t as much of a monetary benefit with lower principals.
Banks typically offer up to 80% LTV for qualified borrowers, meaning you’d have to come up with a 20% down payment.
It’s common for banks to require that potential commercial borrowers have a credit score above 700, multiple years in business and large annual revenues if they want to apply for bank financing.
Generally, banks offer the most competitive commercial real estate loan rate — starting at an average of 5%.
Most bank loans will come with variable rates, resetting at intervals of between 1 to 5 years.
The SBA offers multiple programs that help people finance commercial property. These programs open access to funding for small businesses that don’t qualify with banks. 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 own conditions and rates.
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. Guarantees on these funding options can be up to 90% based on the type, size and use of funds.
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 higher as your principal amount rises. This makes them an attractive option for those who need smaller commercial real estate loans, but it gets more expensive if you need to borrow more than $1 million.
In general, you could expect to pay between 6%–8% 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 real estate’s total cost while a bank covers 50% or more. A 10% down payment is required by the borrower; although some may have to put down up to 15% or 20%. This means that 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 at a slight increase over the current Treasury rate. For the bank’s contribution, however, there is no set cap and you’ll have to negotiate the rates and fees independent of the CDC. In general, you’ll receive commercial mortgage interest rates comparable to other mortgage financing packages. CDC/504 loans are a great option for those in the market for commercial real estate with 7-figure price tags.
Online Marketplace Loans
If your small business is unable to meet the strict criteria for bank and SBA loans, 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, compared to getting funding from 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 generally come with an interest rate starting at 8%.
With these, you’ll have an abbreviated term length, sometimes as short as 6 months. No matter the length you’re offered, private lenders usually charge higher up-front fees and rates. You could pay more than 10% in commercial real estate interest rates when working with these lenders.
Many types of short-term loans don’t offer high enough principal amounts for commercial real estate purchases; they’re often better for commercial truck financing or other vehicle and equipment funding.
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, due to the fact that the lenders are incurring a greater amount of risk. You could pay 10% to 20% in interest if you turn to a private lender.
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.
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, but many borrowers will not qualify for a fixed interest rate, and not all financing products will have that option.
Variable — sometimes referred to as floating or, in this case, 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 in general, it will be reset every 1 to 5 years. Be wary of this when agreeing to a contract, because changes in the economy can either increase or lower your monthly payment going forward.
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 consist of less of the principal amount at 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 that decrease over time, protecting them from missing out on too much of the profit.
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 in advance 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 or 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 huge lump sum.
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Documents You’ll Need to Get 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 documents:
Property info (building type, appraised value, location, square footage, etc.)
Personal and business tax returns
Income statements and balance sheets
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.
Commercial Real Estate Interest Rates Summarized
So, what is the current interest rate for commercial mortgages? While it’s possible to estimate what the current commercial real estate mortgage rate is in relation to your potential loan, every case is unique. The average rates can range from 4.38-4.49% for an SBA 504 loan to 5.00% for a traditional bank loan. If you’re unable to qualify for these lending programs or at these institutions, there are alternative options — at an additional cost. To avoid paying more now, some business owners prefer renting office space until their credit profile has improved. Make sure to do your research to find out what rates you’ll qualify for, and if it would be better to wait before trying to buy commercial property.