Where to Get the Best Commercial Real Estate Loan Rates in 2019

Commercial real estate loan rates range from 4% to 30%—where could your rate fall?
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What are Current Commercial Real Estate Loan Rates?

The current commercial real estate loan rates range anywhere between 5% and 30%, but range between 10% and 20% for the typical borrower. The rate you get on the loan depends on the type of commercial real estate loan you apply for. SBA 7(a) loans rates range from 7.75% to 10.25% (variable) as of January 2019. If you can qualify for a traditional bank loan, rates will range between 5% and 7%.

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The Best Commercial Real Estate Loan Rates in 2019

Over the last several years, commercial real estate prices have steadily increased and now stand at nearly 30% higher than their peak before the 2008 recession.

Given the increase in prices, it’s more important than ever for small business owners to have access to commercial real estate loan rates that they can afford. There are a number of options for commercial real estate financing, both through the traditional bank route and alternative means. Find out current commercial real estate interest rates, how these interest rates work, fees to watch out for, and how to apply.

Commercial Real Estate Loan Basics

Commercial real estate refers to any property that’s used for business purposes. This includes retail centers, offices, hotels, and apartments. If you can’t afford to purchase, construct, or renovate commercial real estate all on your own, that’s where commercial real estate loans—also called a commercial business mortgage loan—come in.

Banks, online lenders, insurance companies, pension funds, and private investors are the main sources business owners tend to look to for commercial real estate loans.

Only the most creditworthy borrowers with established businesses are usually able to obtain bank loans (including SBA-guaranteed loans). Less creditworthy borrowers opt for hard money loans, which is a commercial real estate loan from a private lender.

Regardless of who your lender is, the property that you’re purchasing, building, or renovating will serve as collateral for the commercial real estate loan.

Since the real estate itself secures the loan, the details of the property will have a big impact on your eligibility for the loan and, most importantly,  the commercial real estate rates you’re able to qualify for. That’s where this guide comes in—we run through the ranges of commercial real estate interest rates attached to the most popular forms of commercial mortgages.


Commercial Real Estate Loan Rates, Broken Down by Type

A wide variety of lenders provide commercial real estate financing. While SBA loans and bank loans are generally reserved for the most qualified borrowers, hard money loans and bridge loans are more widely available.

Here’s a summary of each of the main types of commercial real estate financing and their cost:

SBA CDC/504 Commercial Real Estate Loan Rates

Interest Rates: 4.5% – 6.5% on CDC portion

LTV Ratios: 85% – 90%

SBA CDC/504 loans are the most affordable commercial real estate loans, with rates as low as 4%. Commercial mortgage loan interest rates for this product will be favorable because the Small Business Administration (SBA) guarantees a portion of the loan, which will in turn fund the purchase or renovation of real estate, equipment, machinery, or other capital intensive assets.

A CDC/504 loan can range from $200,000 to $5.5 million and is actually comprises two loans: An SBA-approved Certified Development Company (CDC) covers 40% of the project’s cost, and bank or private lender covers 50% of the project’s cost. The remaining 10% of the loan must come from the borrower’s down payment.

The biggest benefits of SBA 504 loans are the long terms and low, fixed interest rates. These commercial real estate loan terms go up to 25 years, so you can enjoy low monthly payments, and the commercial real estate interest rates here are fixed, so you can lock in a good rate without worrying about future increases.

While the CDC portion of the loan has rates as low as 4.5%, the bank portion of the loan might have slightly higher rates, but they’ll still remain in the single digits. Not only do these loans have the best commercial real estate loan rates, but they also have the highest LTV ratio—90% of the purchase price in most cases.

The catch is that it’s difficult to qualify for an SBA CDC/504 loan: You must have excellent credit (above 650), and your business should be profitable and at least two years old.

SBA 7(a) Loan Rates

Interest Rates: 7.75% – 10.25%

LTV Ratios: 80% – 90%

SBA 7(a) loans are another SBA loan program, the most popular in fact. SBA 7(a) loans, which go up to $5 million, can go towards almost any business purpose, including the purchase or renovation of commercial property.

These have low interest rates too, but the terms aren’t quite as favorable, because 7(a) loans are general purpose loans that aren’t not designed specifically for commercial real estate funding, like 504 loans are.

Commercial real estate loan interest rates on 7(a) loans are currently between 7.75% and 10.25%%, and they can be fixed rate or variable (and if they are variable, your monthly payments can increase over time. SBA 7(a) lenders will usually require a down payment of 20%, and terms go up to 25 years.

One of the downsides to SBA loans is the time it takes for a lender to process and approve your loan—it can take several weeks, even months. Fortunately, companies like SmartBiz have sped up the SBA loan process, streamlining the application and shortening the timeline to under one month in many cases.

Regular Bank Loan Rates

Interest Rates: 5% – 7%

LTV Ratios: 75% – 80%

Regular bank loans are another option for business owners in need of affordable commercial real estate loan rates. The SBA guarantee is great, but there are a lot of rules and regulations the bank has to follow before it can approve and fund an SBA loan. Smaller community banks in particular may not be familiar with the process, but they may be willing to give you a traditional commercial loan.

The rates on these loans are very similar to SBA loan rates, with two exceptions. It’s harder to get small loans (under $250K) from a bank because it’s not profitable for them to spend a lot of time processing smaller loans. And you might have to put up a slightly larger down payment for a traditional loan because the bank won’t have the assurance of the SBA guarantee.

Commercial Bridge Loan Rates

Interest Rates: 5% – 30%

LTV Ratios: 50% – 90%

Commercial bridge loans provide short-term commercial real estate financing when you need to act quickly on a real estate opportunity. Bridge lenders provide loans with terms of six months to a year during which you make interest-only payments. At the end, you either have to pay the entire balance of the loan or refinance with a long-term loan.

For example, say you have a restaurant and are looking to expand. You might learn that the shop next door is going out of business and want to quickly move on the opportunity to buy the neighboring shop to build out your restaurant. A bridge lender can finance the purchase within a few days. Once the term is over, you either have to pay the full balance of the loan or (more realistically) refinance with a conventional loan or other long-term product.

A variety of lenders provide bridge loans, including banks, credit unions, private lenders, and online lenders. The commercial real estate loan interest rates for this product will vary based on who the lender is, but getting your bridge loan and your later long-term loan from the same lender often results in the best deal. Be wary of origination fees, application fees, and other fees that can jack up the total cost of your short-term loan.

Hard Money Loan Rates

Interest Rates: 10% – 30%

LTV Ratios: 50% – 75%

Hard money loans are commercial loans from non-bank lenders. Hard money lenders may be individuals, online lenders, or other private lenders. These loans are very popular among small business owners who want to purchase or renovate real estate but can’t qualify for bank loans or SBA loans.

Not only do hard money lenders have lower qualification requirements, but they also work much more quickly than banks. The timeline for receiving your funds is usually 1 to 2 weeks, versus several months with a bank. Rates can range anywhere from 5% to 30%, but are in the neighborhood of 10% to 20% for the typical borrower.

Aside from higher commercial real estate loan rates, the other downside to hard money loans is that they are short-term loans. Most hard money loans have 1- to 5-year terms, so, similar to bridge loans, they are best for buying investment properties or financing other short-term deals. If you have a more conventional transaction, such as buying office space for your business, you’re better off with a longer-term loan.

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How Commercial Real Estate Loan Rates Work

Commercial real estate loan rates can vary somewhere between 4% and 30%. If you own a home, you might be wondering how residential mortgage rates compare with commercial loan rates. Commercial real estate loan rates are typically higher than residential loan rates, about 0.5% to 1% higher on any given loan.

This is because commercial real estate loans typically last over a shorter term than residential mortgages do. The typical home loan is a 30-year loan, but commercial real estate loans can range anywhere from a 5 to 25-year term. And the shorter the term of the loan, the higher the interest rate.

There are a few things that you should be aware of about commercial mortgage rates: fixed vs variable rates,  loan to value (LTV) ratios, and after repair value (ARV) ratio.

Fixed vs. Floating Commercial Real Estate Loan Rates

Commercial real estate loan rates can be fixed for the life of the loan or variable. Variable rates change based on market rates (the current market rates are listed here). A variable interest rate might reset periodically (e.g. every three or five years or even every month) according to a schedule that the lender will provide in your loan agreement.

Fixed rates give you more peace of mind, but if you’re a less qualified borrower, the lender may only offer you a variable rate. It also depends on the lender and the specifics of your loan. For instance, if you’re working with an insurance company, for instance, you’ll probably have a fixed interest rate over a 5- to 10-year term. Banks, on the other hand, could offer a fixed interest rate for the first five years of the loan and recalculate the rate after that based on the current prime rate.

LTV Ratio

LTV is “loan-to-value” and is a ratio the compares the size of the loan to the value of the property. For instance, if a lender offers up to 80% LTV, that means they will loan a maximum of $80,000 on a $100,000 loan. You have to bring the remaining $20,000 to the table on your own.

 

It’s common for lenders to offer anywhere from 50% to 90% LTV. If you have a high LTV ratio, you’re likely to have a higher commercial real estate loan rate. That’s because you’ve put less money towards a down payment, and the lender has more skin in the game. If you were to default on your commercial real estate loan, they have much more to lose.

ARV Ratio

ARV is after-repair value, and lenders mainly use it when financing rehab properties or properties in need of renovation. It refers to the value of the property after the renovation is over. Some lenders will lend up to 70% of ARV. For example, if a property will be worth $200,000 after renovation, the maximum loan is $140,000. You have to bring the rest with a down payment. It’s common for the LTV ratio to be higher than the ARV ratio.

Factors That Can Affect Commercial Real Estate Loan Rates

Just like business loan interest rates on any type of financing, commercial real estate loan rates fluctuate according to multiple factors.

In general, commercial real estate loan interest rates are lower than interest rates on unsecured business loans because the real estate serves as collateral for the loan. However, there’s still a big variance in the rates that borrowers pay.

These are the main factors that affect commercial real estate loan rates:

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Your Personal and Business Credit Score

Like almost all other types of small business financing, the creditworthiness of the borrower and the business has a big impact on your commercial real estate loan rates. As you might expect, the higher your credit score the lower your commercial loan rates will be.

Commercial real estate loans typically involve a lot of money, so lenders have a high bar. They’ll want to see that you’ve been responsible with your personal and business finances in the past. To qualify for a bank or SBA loan, your credit score should ideally be above 700. Hard money lenders are able to work with borrowers who have lower credit scores. If your credit isn’t where you’d like it to be, taking steps to improve your credit score can pay off in just a few months.

Business credit scores follow a different range than personal credit. Your business’s credit rating is based on how long you’ve been in business and how well your business has paid all its bills.

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Your Intended Use of the Commercial Real Estate Loan

How you intend to use your commercial real loan can also have a large impact on what commercial loan rates you qualify for. Using a real estate loan to build property from the ground up is riskier than using a commercial real estate loan to buy or renovate existing property.

Even the location in which you’re building or purchasing commercial property will affect your commercial real estate loan interest rates. The condition of the property is yet another factor.

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Your Commercial Real Estate Loan Amount and Term Length

The loan amount and term will have an effect on your commercial real estate loan rates.

In most cases, short-term loans have higher interest rates because the short-term lenders work with riskier borrowers. However, you’ll pay more in total interest on a long-term loan, even if your rate is lower.

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The Current Market Rate

The interest rates on SBA CDC/504 loans are fixed rates, but most other commercial real estate loans have variable rates. The lender adjusts the rate periodically based on the prevailing market rate.

When the economy is in a time of growth, market rates go up. When there’s an economic downturn, market rates go down.

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The Fees Attached to Your Commercial Real Estate Loan

When you convert your commercial loan interest rate to an Annual Percentage Rate (APR), you might notice that the APR is higher than the interest rate makes it look. That’s because the lender might have assessed fees on commercial real estate loan that add to the total cost. The APR gives you the annual cost of the loan, including all fees.

Most commercial real estate lenders charge fees. Sometimes, these might be bundled into the cost of the loan—covering property appraisal, loan application fees, legal costs, loan origination fees, and survey fees. Other lenders will require you to pay these fees upfront, before the loan is fully disbursed.

Also, be aware of any prepayment fees that the lender will charge if you choose to pay your loan off early.


The Documents You’ll Need to Access Affordable Commercial Real Estate Loan Rates

Commercial mortgage loan underwriting can be long and complicated. To make things go quicker, you’ll need to take time to put together a complete commercial loan application. Commercial mortgage underwriters will scrutinize the financials of your business, your personal financials, and the specs of the property.

Be prepared to submit 3 to 5 years of financial documents—asset statements (for collateral purposes), tax returns, accounting reports, profit & loss statements, and any other relevant information on the application. You’ll also have to supply the lender with the following information about your property:

  • Exact address of the property
  • Type of commercial property (e.g. shopping center, office space, etc.)
  • Percentage of owner-occupancy (some lenders require the property to be at least 50% owner-occupied)
  • Square footage of property
  • Condition of property and needed repairs
  • Estimated value of the property (this relates to the size of your loan request; most loans require a professional appraisal)

Providing a complete application for a commercial mortgage will help the lender review your deal and hopefully approve it more quickly. The more responsive you can be to requests for information, the more likely the lender is to approve your loan and charge you a lower commercial real estate loan rate.


The Bottom Line on Commercial Real Estate Loan Rates

Buying commercial real estate is one of the largest financial transactions you’ll probably undertake in your career. And scoring a low commercial mortgage interest rate can help you save thousands of dollars.

If you take away one lesson from this guide to affordable commercial real estate loan rates, let it be this: Take your time to shop around. Only after considering and comparing multiple commercial real estate loan options will you know for sure that you’re getting the most affordable real estate loan rates possible.

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