Commercial Mortgage : Detailed Guide On Commercial Mortgage
By: Kate Samano December 13, 2021If you own your own business, it's likely at some point you've thought about whether you should buy or rent your commercial property. Many business owners choose to take the leap into commercial property ownership when they expand their current business operations or have big plans for renovations. However, knowing where to start can be confusing when it comes to getting a commercial mortgage.
You might have questions about the current commercial mortgage rates and the different types of commercial mortgages you can choose from. This guide answers those questions and provides you with a solid foundation on everything about commercial mortgages.Â
What Is a Commercial Mortgage?
A commercial mortgage is a loan that helps business owners buy property that can be used for their business. You can also secure a commercial loan to develop on land or expand on an existing property.Â
These loans are very similar to mortgages used to purchase residential homes — money is borrowed and secured against a property. However, failure to make monthly payments can result in foreclosure and retrieval of the property. Â
Commercial mortgages are often taken out to buy properties, such as restaurants, office buildings, retail shopping spaces, hotels, restaurants, apartment building suites and industrial buildings. Â
Some commercial mortgage loans require that at least 51% of the space be occupied and used by the owner. As a result, individuals looking to purchase a commercial property to use as a rental property may find that an investment property loan is better suited for their needs.Â
While commercial mortgage rates can vary depending on a variety of factors (the lender, the applicant’s credit, the size of the down payment, etc.), there are some general consistencies:
- Most commercial mortgage loans are offered for long-term periods (up to 25 years).
- Most commercial mortgage loans only give out 70% of the purchase price, so business owners need to have at least 30% of capital saved up.
Benefits of a Commercial Mortgage
There are many benefits to owning your own commercial property, including:
Security
If the location of your business has a lot to do with its success, renting property can feel risky. At any time, the landlord may decide not to renew your lease. Owning the property gives you the peace of mind that you can stay in your current location for as long as you want.Â
Design Freedom
Many landlords are restrictive in what kind of changes and updates can be made to their properties. Owning the property gives you the freedom to design and renovate the space in ways that best suit your business.Â
Safety From Rental Increases
Everyone has seen news stories about businesses that have been in a location for 15+ years and suddenly have to vacate due to an unaffordable spike in rent. Purchasing your commercial property protects you from the constant rent increases that tend to happen year-over-year.Â
Build Business Equity
Just like owning a home helps build personal equity, so does owning a commercial property. As your business earns this equity, you can eventually tap into it for future business needs, such as expansion, renovations and more.Â
Passive Income
Some business property owners may choose to rent out a portion of their space to other companies. The rental income from this tenant can help offset the costs of the mortgage loan and improve business cash flow.Â
A Smart Investment
While purchasing a commercial property is a substantial cost upfront, the return on investment is usually seen in just a few years as the property’s value goes up.Â
Where to Get a Commercial Mortgage
The most common commercial mortgage lenders are:
- Banks
- Credit unions
- Government-sponsored enterprises
- Hard money lenders
- Life insurance companies
Types of Commercial Mortgages (And Some Alternatives)
There are a few options available to you when it comes to commercial mortgages. You can go the traditional route or opt for an alternative lender.
- Traditional Commercial Mortgage: A conventional commercial mortgage can be acquired through a bank, credit union or other financial institution. This type of loan can be more challenging to get approval for compared to other business loans, such as a business equipment loan, but they come with reasonable interest rates.Â
- SBA 7(a) Loan: The U.S. Small Business Association (SBA) offers the SBA 7(a) loan program, which is meant to help small companies finance a commercial property purchase. The maximum amount you can borrow through an SBA-affiliated lender is $5 million. Loans are only given out to owner-occupied purchases. These loans have a variable rate, and while they technically only require 10% down, most applicants generally need a 20-30% down payment to be approved.
- SBA 504 Loan: Another program offered by the SBA is the SBA 504 loan. This loan offers long-term fixed financing for fixed assets, including the purchase or construction of a property. Applicants need a minimum 10% down payment.Â
- Commercial Bridge Loan: Commercial bridge loans are meant to “bridge the gap” until a borrower secures long-term financing. In a highly competitive market, a borrower might get a bridge loan to secure the property and then look for a commercial mortgage loan as a long-term solution. These bridge loans typically come with slightly higher interest rates and short loan lengths (ranging from six months to three years).Â
Hard Money Loan: Hard money loans are usually exclusively reserved for real estate loans. You borrow from a group of private lenders who pool their investments together to lend out. Hard money loans typically require sizeable down payments, are only available for short periods and have higher than average interest rates.Â
Commercial Mortgage Rates
Commercial mortgage rates, like any mortgage rate, fluctuate all the time depending on the market. Generally speaking, you can expect commercial mortgage rates to be a few points higher than the average residential mortgage rate.Â
A conventional commercial mortgage loan offered by a bank or credit union typically comes with a 5-7% interest rate. The loans are available at fixed or variable rates.Â
In comparison, nonconventional commercial mortgage lenders, such as hard money lenders, typically offer an interest rate of around 10%.Â
Ultimately, the rate you receive depends on several factors, including:
- Amount borrowedÂ
- Business debt-to-service coverage ratio
- Creditworthiness (business and personal)
- Loan termÂ
- Size of down payment
What You’ll Need to Apply
Every commercial mortgage lender has its own unique set of requirements. However, some of the most common items you’ll be asked to provide are:
- An organizational chart of employees and partners of the businessÂ
- Asset and liability statementsÂ
- Bank statements (personal and business)
- A business plan
- Current business revenue and revenue projections for the next three to five years
- Three years of tax returns or account statements (both personal and business)
Some lenders also have requirements on minimum annual revenue, years in business and the size of the down payment.Â
Tips to Know Before You Apply
Before you apply for your commercial mortgage, here are some valuable tips you’ll want to consider:
1. Understand All the Fees
Not only do you have to save up for a down payment, but you should also be prepared to pay all the fees associated with a commercial mortgage. You may have to pay for:
- Mortgage broker fee
- Legal fees
- Valuation fee
- Loan application fee
- Survey fees
2. Understand the Qualifications
We’ve covered that you have options when it comes to commercial mortgage lenders. However, you’ll need to do your research into all the options and understand the requirements. Ultimately, some of your qualifications may prevent you from proceeding with specific lenders. The size of your down payment, the health of your business and your credit score are all highly relevant factors that play a role in which type of lender you can work with.Â
3. Shop Around for Lenders
Even if you’re unsure if you meet a lender’s qualifications, you should always shop around and ask. Your commercial mortgage will probably be one of the biggest loans you’ve ever taken out in your life. You want to ensure you do everything you can to find a suitable lender who can offer excellent terms and a low-interest rate.Â
As you compare lenders, watch out for other important distinctions. For example, some lenders have prepayment fees in their contracts. If you have hopes to pay off your commercial mortgage early, this is something you’ll want to avoid.Â
4. Approval Can Take a While
While a residential mortgage takes anywhere from three weeks to 90 days to close, a commercial mortgage takes much longer. The review and approval process for a commercial mortgage is much more complicated, as both the business and the business owner(s) have to be evaluated. In general, expect a commercial mortgage to take anywhere from 60 days to one year to close.Â
A Good Investment, if It’s the Right Time
A commercial mortgage is a big responsibility, and business owners don’t need to rush this step. Make sure you have enough funds to keep your business afloat after you pay the down payment, commercial mortgage fees and monthly payments.Â
However, if your business is doing well and can afford this step, a commercial mortgage can be a great financial move. You add stability and security to the future of your business while you build up capital and improve your credit score.
Get a Commercial Mortgage With Lendzi
While this guide may have broken down everything you need to know about commercial mortgages, there’s no denying it’s still a complicated process. However, it doesn’t have to be. Lendzi is a one-stop shop that helps business owners reduce the friction in securing capital. You simply submit one application with Lendzi and we review our 60+ lenders and bring you the best commercial mortgage rates available on the market. Make your dream of owning your commercial property a reality with Lendzi. Fill out an application today.Â
About the Author
Kate Samano
Kate Samano is a copywriter and Head of Content at Lendzi. She believes in helping small businesses grow by providing access to viable financial advice.