Are you on the hunt for a new home for your business? If so, a commercial real estate loan from Lake Region Bank may be the financing option you’re looking for. Here’s what you need to know about commercial real estate loans so you can decide if one is a good option for you and your business.
Commercial Real Estate Loan Basics
You can use a commercial real estate loan to purchase a new building or location or to pay for expansion or build-out of your current space. Typically, a commercial loan is made to a business entity rather than a business owner or other individual. Commercial loans tend to have shorter terms than home loans do. And while it is possible to finance up to 100 percent of a home, most commercial real estate loans finance 75 to 80 percent of the cost of a new commercial property. Generally, a commercial lender cannot rely on government guarantees or mortgage insurance to cover a loan default. Instead, they rely on the value of the property as collateral.
Repayment of a Commercial Real Estate Loan
With a home loan, borrowers agree to making regular payments over a period of time, usually amortized over 15 or 30 years. The longer the term, the lower the monthly payment.
But commercial loans often have shorter terms. Commercial real estate loan terms can be as short as 5 years or as long as 25 years. However, some of these loans may have amortization periods that are much longer than the term of the loan. For borrowers, this means they can enjoy lower payments for the term of the loan, then make a final balloon payment at the end of the term for the balance of the loan. Confusing? It can be. The Lake Region Bank commercial lending team is here to help you make sense of it all.
Loan-to-Value Ratio for a Commercial Real Estate Loan
Your property’s loan-to-value ratio measures the value of the loan against the value of the property. Imagine you purchase a property for $100,000 and put 25 percent down. You use a loan to cover the remaining $75,000. To calculate your loan-to-value ratio, your lender will divide the loan value by the purchase price. In this case, the loan-to-value ratio would be 75 percent.
It’s common for the loan-to-value ratio for residential properties to be as high as 90 percent or even 100 percent with some loan products. This is not the case with a commercial real estate loan. Instead, most commercial loan loan-to-value ratios fall between 65 and 80 percent. Some types of purchases, such as raw land, are limited to 65 percent.
Before deciding to lend to you, a commercial lender will take a look at your debt-service coverage ratio. This is the ratio between your annual net operating income and your annual debt. If your cash flow is not able to cover your current and new debt, lenders are less likely to write the loan. Another factor to pay attention to is your interest rate. Interest rates on commercial real estate loans are generally higher than rates for residential mortgages. You may also encounter restrictions on your ability to prepay your commercial loan. Although, most Lake Region Bank loans do not include a prepayment penalty. As you can see, financing a commercial property is less straightforward than the home loan process. That’s why it makes sense to work with an experienced, knowledgeable team. Reach out to Lake Region Bank today to learn about your commercial loan options.