March 10, 2020 By SmartBiz Team

Purchasing or refinancing a commercial real estate (CRE) property can help a business owner build personal net worth and strengthen their business. Here’s basic information about commercial real estate along with a breakdown of funding options. Low rates, long terms, and avoiding a balloon payment should be your goal when looking for a CRE loan.

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Introduction to commercial real estate

Commercial real estate loans let business owners purchase, renovate, or refinance commercial real estate. Here are types of commercial real estate.

Apartment buildings, townhomes and condominiums
To be classified as commercial real estate, five or more living units are required. Residential properties of four or fewer units are not considered commercial and can be purchased with a personal loan.

Office buildings

Pricing for office buildings varies depending on numerous factors. Generally, office buildings in urban business districts are the most expensive. Prices tend to come down the further away an office building is from a commercial business district.

Retail buildings

Stand-alone shops qualify as a retail building. Strip malls and large regional malls also fit into this category.

Medical facilities

Medical facilities are classified as hospitals, surgical centers, urgent care clinics, and nursing homes.

Warehouses and industrial spaces

These facilities are usually located outside of cities with easy access to product and material transportation and can be used for a variety of manufacturing, assembly, and storage.

Hotels and resorts

This broad category involves extensive paperwork and regulation. Real estate can include hotels, motels, extended-stay facilities, casinos, corporate and independent inns.

Generally, buildings with 51% owner occupancy qualify for loans more quickly and easily, as lenders see that the business is more invested. Often, owner occupancy is a requirement to qualify for a CRE loan.

If you’re considering purchasing a property where you can run your business from, here are types of commercial real estate loans to explore.

1. Conventional mortgage loans

You can go straight to a bank for a commercial real estate (CRE) loan. Traditional commercial mortgages take between 30-45 days for approval and funding and are issued by traditional banks and lending institutions. This type of commercial loan is secured by the property being purchased and terms vary depending on the lender. Some banks will make fully amortized loans with long terms while other banks may have interest-only loans with terms of just 10 years. It’s generally harder to qualify for this type of mortgage than other types because strong credit scores and a low debt service coverage ratio are required.


There is no maximum loan amount with a traditional commercial mortgage. This is because these mortgages aren’t backed by the federal government and overall loan amounts are up to individual lenders.


The qualifications for a traditional commercial mortgage are a little tougher than with a government-backed alternative. This is because the lender assumes the full risk. Another downside is that, unlike residential loans, the terms of commercial loans typically range from five years (or less) to 20 years. This means payments are large and can cut into cash flow. Commercial mortgages may also have a balloon payment, common in commercial real estate loans. This is a mortgage which does not fully amortize over the term of the loan, leaving a large balance due at maturity.

2. Hard money loans

Hard money loans, also referred to as bridge loans, are short-term lending instruments that real estate investors can use to finance an investment project. According to Investopedia, this type of loan is often a tool for house flippers or real estate developers whose goal is to renovate or develop a property, then sell it for a profit.


The process for these types of loans are fairly quick since you are working with one lender or a small group. Hard money lenders are not interested in your credit score or debt load. Lenders look at the asset backing the loan – the property. Taking out a hard-money loan and paying it back responsibly can help you establish a relationship with the lender, who may be more likely to work with you in the future.


Hard money loans have a much higher interest rate and processing fees than other commercial property loans. Another con are the short loan terms. Hard money loans are often just a few months or a few years while typical mortgages are 15 or 30 years.

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3. SBA 7(a) loans

SBA 7(a) loans are the most popular loan program offered by the Small Business Administration. These loans are available up to $5 million and can be used to purchase, refinance, or renovate commercial property. Note that at least 51% of the property's square footage must be occupied by, and used by, your business. For detailed information about SBA 7(a) loans for commercial real estate purchase or refinance, visit the SmartBiz Loans website.


SBA loans are generally known as the “gold standard” because of low rates and long terms. Business owners who want to purchase or refinance probably won’t be able to find a better deal.


Because SBA loans are backed by the federal government, they assume some of the risk. SBA lenders want to make sure business owners can make the payments for the life of the loan so additional paperwork may be required. This can make the time to funding longer than other options.

4. SBA 504 loans

The SBA’s 504 Loan program is an economic development loan program created for expansion or modernization. 504 loans are made available through Certified Development Companies (CDC). CDCs are certified and regulated by the SBA, and work with SBA and participating lenders (typically banks) to provide financing to small businesses, which in turn, accomplishes the goal of community economic development.

504 Loans are typically structured with SBA providing 40% of the total project costs, a participating lender covering up to 50% of the total project costs, and the borrower contributing10% of the project costs. Under certain circumstances, a borrower may be required to contribute up to 20% of the total project costs. Learn more about SBA 504 loans on the SBA website here.


The pros of 504 loans include large loan amounts available, affordable interest rates. Through their tips and resources, the SBA tries to make it as easy as possible for small business owners to navigate the application process.


First, the small business must create one job, or retain an existing job, for every $65,000 they receive through the SBA 504 Loan. Additionally, there are usage restrictions. The loan cannot be used as working capital, only for specific purchases outlined by the SBA. Finally, a percentage of the loan must be covered by the applicant. That percentage is relatively low, but can be a large sum, depending on the total project cost.

6. Conduit loans

Conduit loans, also known as commercial mortgage backed securities (CMBS), are commercial real estate loans secured by a first-position mortgage on a commercial property. Traditionally offered to borrowers through commercial banks, conduit loans offer borrowers a fixed-interest rate over the course of about 25-30 years. Conduit loans require a balloon payment at the end of the term.


Conduit loans are flexible, allowing many commercial real estate investors to qualify for a loan that they typically wouldn’t.


Getting out of a CMBS loan can be difficult. In order to pay down your loan principal early, you must use a process called Defeasance, which can be involved and costly. If you need to sell or refinance your property before the end of the loan, CMBS would probably not be the right fit.

SBA CRE Loan Examples

The SmartBiz Loans team helps facilitate SBA 7(a) commercial real estate loans from banks in their network. Here are two CRE success stories from the SmartBiz Loans Small Business Blog.

Office building purchase

Business owner Joel Sandoval was facing an issue many entrepreneurs dream of. The revenues and profits of his CPA firm had doubled over its three years in operation. But he had a problem. He was running out of space. Sandoval and his 2 assistants were working out of a 350 square foot office and needed much more room, especially during the busy tax season. Sandoval considered simply renting a larger office but determined that a commercial real estate purchase could solve his space issues and help build equity in his business. Learn more about his company, his successful SBA commercial real estate loan experience, and plans for future growth: Sandoval Tax Business Story.

Garage facility refinance

Pro-Glo Auto Finish and Glass Inc. is a family owned and operated auto body repair shop in South Carolina. William and Kitty Caples founded the small business in 1981 and now service from twenty to over seventy vehicles each week. The SmartBiz team helped the Caples take their maturing 5-year commercial real estate loan and turn it into an affordable 25-year fully amortizing solution, avoiding an upcoming balloon payment. Along with the refinance of the property, the SBA loan proceeds were used to refinance existing small business debt. Learn how this strategy helped cash flow and put the owners in a much stronger financial position: Pro-Glo Auto Finish and Glass Business Story.

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