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The Best Commercial Real Estate Loan Rates for 2020

Editor's note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone.

Commercial Real Estate Loan Rates: An Overview

A commercial real estate loan is a financing product (often referred to as a business mortgage loan) designed specifically for the purposes of purchasing new or existing commercial properties or renovating commercial space.

Average commercial real estate loan rates range anywhere between 3.5% to 20% depending on the property being financed, your creditworthiness, and the type of lender you are working with. Banks and SBA lenders charge the least for these types of business loans, and hard money lenders charge the most.

Average Commercial Real Estate Loan Rates 2020

Type of Commercial Real Estate LoanLoan Amounts and TermsInterest Rates
SBA 504 Loan$50,000 – $20 million+
20 or 25 years
Approx. 3.5% – 6%
SBA 7(a) Loan$5,000 – $5 million
25 years
Approx. 7% – 9.5%
Bank Loan$25,000+
10 – 15 years
Starts at 3.75%
Hard Money Loan 1 – 5 years Approx. 10% – 20%
Soft Money Loan 1 – 8 years Approx. 6% – 18%
Commercial Bridge Loan$1 million+
6 – 12 months
3% – 20%
USDA Business and Industry Loan$200,000 – $5 million
7 – 30 years
5% – 8%
Construction Loan

 

$1 million+
6 – 12 months (length of the construction)
5.75 % – 9%
CMBS Loan$1 million+
5 – 10 years
3% – 5%
Life Insurance LoanUp to 90% of the cash value
1 – 30 years
5% – 8%
FHA/HUD Hospital LoanNo limit 
Up to 25 years
3 – 3.5%
Fannie Mae Apartment Loan$750,000+
5 – 30 years
3.5% – 4.6%
Freddie Mac Apartment Loan$750,000 – $7.5 million
5 – 10 years
3.4% – 3.75%
Construction Mezzanine$1 million – $100 million
10 years
12% – 20%
 Traditional Commercial MortgageUsually no limit
5 – 10 years
 5% – 7%
 Fix-n-Flip Loan$50,000 – $2 million
12 – 18 months
7.5%
 Warehouse Loan$1 million+
1 – 30 years
2.5% – 12%
 Land Loan$1 million+
10 – 30 years
4% – 5%

Since the 2008 recession, the cost of commercial real estate has steadily increased and now stands at nearly 50% higher than the pre-recession peak. Given the increase in prices, it’s more important than ever for small business owners to understand their options for commercial real estate financing. Here, we’ll break down commercial real estate loan rates for different types of loans, how these interest rates work, and fees to watch out for.

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Average Rates for Different Types of Commercial Real Estate Loans

A wide variety of lenders provide business loans for 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 commercial mortgage rates for some of the most common types of commercial real estate loans:

SBA 504 Commercial Real Estate Loan Rates

Interest Rates: 3.5% – 6% (on CDC portion of loan)

SBA 504 loans are the most affordable commercial real estate loans, with rates as low as 3.5%. Commercial mortgage rates for this product are favorable because the U.S. Small Business Administration (SBA), working through local intermediaries called certified development companies (CDCs), extends a portion of the loan. With SBA 504 loans, borrowers can finance the purchase, improvement, or renovation of real estate.

A 504 loan can range from $50,000 to $20 million or more and actually comprises three different parts: An SBA-approved CDC extends 40% of the loan, a bank or private lender extends 50%, and the remaining 10% of the loan comes from the borrower as a down payment.

The biggest benefits of SBA 504 loans are the long terms, fixed interest rates, and low down payment. 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. At 10%, the down payment is also very low compared to the equity you’ll need to provide for other types of commercial real estate loans.

While the CDC portion of the loan has rates as low as 3.5%, the bank portion of the loan might have slightly higher rates. The catch is that it’s difficult to qualify for an SBA 504 loan: You must have good credit and your business should be profitable and at least two years old. Any property that’s financed with the loan must also be at least 51% owner-occupied.

SBA 7(a) Commercial Real Estate Loan Rates

Interest Rates: 7% – 9.5%

The most popular of the SBA loan programs, SBA 7(a) loans go up to $5 million and can be used toward 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 as 504 loans. Commercial real estate loan interest rates on 7(a) loans are currently between 7% and 9.5%%, 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 can take for a lender to process and approve your loan—several weeks, even months. If you intend to capitalize on low SBA loan rates, try to apply when you can afford to wait a while. This is probably not the best option for business owners who want to move quickly on a commercial property.

As with SBA 504 loans, you can qualify for an SBA 7(a) loan if you have strong credit and a profitable business that’s been operating for at least a couple of years. The property that’s financed must be at least 51% owner-occupied.

Bank Commercial Real Estate Loan Rates

Interest Rates: Start at 3.75%

Bank loans are another option for business owners in need of affordable commercial real estate loan rates. SBA loans are great, but there are a lot of rules and regulations that banks have to follow before they can approve and fund this type of financing. Smaller community banks, in particular, may not be familiar with the process, but they may be willing to give you a traditional commercial real estate loan instead.

The rates on these traditional bank loans are similar to SBA loan rates, but there are a few differences. It’s harder to get small loans (under $250,000) from a bank because it’s not profitable for them to spend the time to process these loans. In addition, 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. Finally, the repayment terms on bank loans are typically shorter than with SBA loans.

As with SBA loans, you’ll need good credit and strong business credentials to get approved. Large banks, like Wells Fargo and Bank of America, provide commercial real estate loans, as do smaller regional banks.

Hard Money Commercial Real Estate Loan Rates

Interest Rates: 10% – 20%

Hard money loans are commercial real estate loans from non-bank private lenders. Hard money lenders may be individuals, online lenders, or other private lenders. Small business owners who want to purchase or renovate real estate but can’t qualify for bank loans or SBA loans often turn to hard money loans.

Not only do hard money lenders have lower qualification requirements, but they also work more quickly than banks. The timeline for receiving your funds is usually one to two weeks, versus several months with a bank. However, the tradeoff is higher interest rates, which can range from 10% to 20%.

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 one- to five-year terms, so 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.

One type of hard money loan is a commercial bridge loan. Hard money bridge lenders provide loans with terms of six months to a year during which you make interest-only payments. At the end of this term, you either have to pay the entire balance at once (known as a balloon payment) or refinance it with a longer-term loan. These loans are good for capitalizing on investment opportunities.

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How Commercial Real Estate Loan Rates Work

Commercial real estate loans can help you finance the purchase, improvement, or upgrade of almost any type of commercial property—from a retail shop to an office to a warehouse and everything in between. There are a few things that you should be aware of about commercial mortgage rates to make sure you’re getting the best deal. Here’s what you need to know.

Fixed vs. Variable 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. A variable interest rate might also 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. SBA 7(a) loan rates, for instance, are variable, whereas SBA 504 loan rates are fixed.

Loan-to-Value Ratio

Loan-to-value (LTV) is a ratio that 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 property that’s valued at $100,000. You have to bring the remaining $20,000 to the table on your own as a down payment.

It’s common for lenders to offer anywhere from 50% to 90% LTV. Hard money lenders tend to require the largest down payments, and SBA lenders require the least money down.

After-Repair Value

Lenders mainly use after-repair value (ARV) when extending fix and flip loans or financing 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 amount will be $140,000. You have to bring the rest in the form of a down payment. It’s common for the LTV ratio to be higher than the ARV ratio.

Structure of the Loan

Another factor that can affect your commercial real estate loan rate is the structure of the loan. Your loan might be fully amortizing for the entire term, which means that you’ll make a series of payments to pay off your loan, with a decreasing amount of your payment going to interest over time.

In contrast, some lenders structure commercial real estate loans with a balloon payment. In this case, you might make lower monthly payments for 10 years, at the end of which you will owe the remaining balance in one lump sum. At that point, if you can’t afford the balloon payment, you’ll need to renegotiate with the lender or refinance your loan.


Factors That Can Affect Commercial Real Estate Loan Rates

Just like business loan interest rates on other types 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:

Personal and Business Credit Score

Like almost all other types of small business financing, the creditworthiness of the borrower and their 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 of its bills.

Type of Property

How you intend to use your commercial real estate 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 an 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 another factor.

Loan Amount and Term Length

The loan amount and term will also have an effect on your commercial real estate loan rates. In most cases, short-term hard money loans will have higher interest rates because these lenders work with riskier borrowers. However, you’ll pay more in total interest on a long-term loan, even if your interest rate is lower.

Fees

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 itself. That’s because the lender might have assessed fees on your 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. Fees are typically conveyed as “points,” with one point referring to 1% of the loan amount.

Also, be aware of any prepayment penalties that a lender may charge if you choose to pay your loan off early.


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

Commercial mortgage loan underwriting can be a long and complicated process. To make things go quicker, you’ll need to take some 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 three to five years of financial documents—asset statements (for collateral purposes), tax returns, accounting reports, profit and 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 provide a favorable commercial real estate loan rate.


The Bottom Line

Buying commercial real estate is one of the largest financial transactions you’ll probably undertake as an entrepreneur. And scoring a low commercial mortgage rate can help you save thousands of dollars over the life of your loan.

If you take away one lesson from this guide, 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 rates available.

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