What is the best way to finance a Commercial Property?
Conventional Loan:
A mortgage given by a bank, credit union, or other traditional financial institution that is backed by the first lien position on the asset being funded. Any sort of commercial real estate may be used as collateral, and prior experience is not always necessary. The most typical financing option when buying a stabilized investment property is a standard mortgage. In average, lenders will lend up to 75% of the property’s buying price, however some can go as high as 80%. Competitive fixed-rate loans are available with durations of 5, 7, or 10 years and an amortization period of 20, 25, or 30 years. If the property is sold or refinanced before the loan term is over, some type of step-down prepay schedule may be included in these loans. A term sheet is often issued, then a traditional loan closes 60 to 90 days later.
Bridge Loan:
Hard money loans, also known as bridge loans, are quick-term funding options that are frequently funded by private lenders as opposed to big national banks. These loans are employed as a temporary source of funding for the purchase of real estate in circumstances like on-stabilized properties, properties that need renovation, and Real estate that needs to be closed quickly.
Bridge loans offer a quicker closing process and larger leverage of between 75% and 90% of the purchase price of a property. Bridge loans are interest-only loans, meaning that the loan amount will never be paid down and will have to be paid off at maturity. The interest rate is often between 8 to 12%, which is substantially more than a traditional loan.
CMBS Loan:
A commercial mortgage-backed securities (CMBS) loan is a fixed-rate investment product. This loan type always entails the execution of a “bad boy guaranty” or recourse carve out guaranty, which is non-recourse in nature. This provision establishes the borrower’s personal culpability for certain unlawful conduct, such as fraud or the misappropriation of funds. All CMBS loans are combined and sold to investors after being securitized. This loan is serviced just like any other commercial real estate loan. They frequently provide the option to be fully or partially interest-only, which might improve your cash flow. Additionally, it should be emphasized that, as opposed to treasury rates, CMBS loans are typically priced above the SWAP rate. Last but not least, compared to other loan kinds, these loans are known to have more flexible financial requirements for sponsorship and are typically more asset-based, making them available to a far larger range of applicants.
Agency Loan:
Fannie Mae and Freddie Mac are two government-sponsored agency lenders that are excellent choices for people wishing to buy multifamily, inexpensive, student, or healthcare properties. Agency lenders are non-recourse, have extremely low rates, and allow for leverage up to 80% LTV. These loans all have terms of 5, 7, 10, or 12 years, and they are all amortized over 30 years. The fundamental distinction between agency loans and conventional CRE loans is that an agency loan’s prepayment penalty is yield maintenance. A type of prepayment known as “yield maintenance” enables the lender to achieve the same yield as if the borrower made all of the required interest payments on time.
