The term "commercial loan" is rather vague. Though often associated with a large commercial purchase, such as an office building, it could also mean a land purchase or even equipment financing. Let's take a closer look at the types of commercial real estate loans as well as types of properties.
Simply put, a commercial real estate loan is a transaction between a lender and a company. These loans come in many shapes and sizes including:
A conventional commercial real estate loan is a loan with a fixed rate mortgage, typically originated by a large bank.
A commercial bridge loan is a short-term loan that can be used as a "bridge" until an investor secures permanent financing or is able to pay off the loan in full.
Hard money loans are short-term loans usually originated by private companies. These loans have higher interest rates than traditional loans, yet a simpler application process.
SBA loans are government-backed loans used to support small business entities. They offer low interest rates and long terms, yet they have stringent requirements.
SBC Loans are commercial property loans designed for smaller commercial real estate transactions. Compared to traditional mortgage loans, these loans offer flexible terms and simpler underwriting requirements. They come in many shapes and sizes, but typically you will see Bank Statement, Light Documentation, and Full Documentation loan programs.
A non-QM mortgage is a mortgage that fits outside the rules of a qualifying mortgage. This covers many buckets, but in this case we are referring to an investor loan such as Visio’s Rental360 Loan Program. Essentially, these loans are commercial loans for residential properties.
The commercial property examples outlined below would be financed by an SBC Loan.
At its core, an SFR loan is an investor loan secured by a residential asset. Similarly, an SBC loan is an investment property loan secured by a commercial asset. Let's take a look at some other similarities and differences.
Private lenders typically look primarily at the cash flow for both residential and commercial mortgages. While good credit is highly important, the key factor is having a Debt-Service Coverage Ratio (DSCR) that demonstrates the borrower's ability to repay the loan. Commercial real estate loans simply have more complexity than residential mortgages. For example, for commercial properties the underwriter will be looking at several leases, instead of one. It is very hard to gauge the financial track record of commercial tenants, so lenders will review the lease history instead.
When working with traditional lenders instead of private lenders, commercial real estate loans become even more nuanced. Banks require far higher reserves and far more documentation.
Both types of properties require basic loan documents including a personal guaranty, lease documentation, and entity documents. A commercial loan will require further documentation, depending on the type of property. Examples include tenant estoppels, non-disturbance agreements, or lock box agreements.