What Are Commercial Real Estate Loan Rates?
The interest rate on a commercial real estate loan is an important factor that determines whether or not a particular investment will be profitable. Before making a commitment, it’s important to understand what types of loans are available, their rates, and how you can determine which one is best for you.
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What Are Commercial Real Estate Loan Rates?
Before taking out a commercial real estate loan, you have to understand the parameters lenders use to set loan rates. These parameters are dependent upon a number of factors, with several complicated variables within those factors.
The Economy Drives the Rates
The most important part of the loan rate process is the economy. Lenders look at what the economy is doing both regionally and nationally before determining what range they will set their specific loan rates. The process by which these rates are derived are as follows:
- Most banks use prime rates x 1.5 (this means current prime rate, or the best rate available commercially times 1.5% above that rate) as a baseline for loans they will issue
- These banks set their rates based upon the rates set by 30 banks compiled by The Wall Street Journal
- These 30 banks in turn set their rates based upon those established by the Federal Reserve Board
- The Federal Reserve Board sets their rates at such a level as to control inflation
Understand Your Bank’s Loan Variables
Before a final rate is proposed for your commercial loan, they look at the following before they make a loan offer:
- Current Prime lending rates
- Your personal and business credit rating
- Loan terms
- Size of any down payment and fixed or variable interest rates
There is no one-size-fits-all approach for either setting a loan’s rate or even with the type of lender you may choose. Let’s look at some of the rates for different types of commercial loans and a brief overview of which type of lender you might select to service your loan.
Loan Rates for Different Types of Commercial Loan
Just as there are different types of commercial loans available, so are their rates. Commercial loans are typically lent by banks but guaranteed by the Small Business Administration (SBA). Institutional loans usually are issued by larger insurance firms and non-traditional lenders. Here is a brief overview for each provider and the types of loans they service.
Small Business Loans
Established in 1953, the SBA is best known to back commercial loans to small businesses and entrepreneurs. Rates are competitive and offer comprehensive support and collateral resources for the small business owner.
- SBA 504 current rate is 4.65 – 4.94%, adjusted to current market values at time of loan
- 10 Year Fixed Loan currently 4.49%
- 20 Year Fixed Loan currently 4.53 %
- Percentages are fixed, but reset every 5 years based on principal
- With a credit score of 680 or higher, you just have to have a 10 – 20 % down payment and don’t need to be fully collateralized
- Loans can be amortized for up to 25 years
- If you own 20 % or more of your business, you will have to sign a personal loan guarantee statement
- With a less than stellar credit history, a standard 504 loan must be fully collateralized, have a minimum 10% down payment, 40 % SBA financed, 50 % bank financed
Institutional Loans from Insurance Firms
One of the largest non-typical lenders of commercial real estate loans have been corporate insurance giants such as AIG, Met-Life, Northwest Financial. These companies offer institutional loans to borrowers with larger real estate holdings such as industrial complexes, High-rise offices or multi-family dwellings.
- Rates for AAA credit worthiness are low and have been offered as low as 3.23 %
- Float rates are 3-7 years
- Fixed rates are 7-30 years
- Low, fixed rates offered to borrowers with exemplary credit
- Loans to 75% of fixed value
- Will lend on a wide range of collateral
- Typically non-recourse loan providers (they can collect on collateral only – no personally guarantee
- Fixed rates for shorter loan terms
- Often have a significant balloon rate at the maturity of the loan
- Many have long term exit fee
This area is often thought of as the ‘Wild West’ of the lending arena. With less government oversight, companies are presenting themselves as viable options to the more traditional bank or insurance lenders. These alternative funding sources may include avenues such as peer lending, crowdfunding or cryptocurrencies. This market may prove to be a viable funding source for the more adventurous borrower.
Because this is such a non-regulated field, rates and terms for real estate loans are usually a higher percentage rate with shorter terms.
- 9 %-12 % (based on an average quote from a Crowd Funding source)
- 7 %-39% (based on a peer-to-peer lender quote as of Dec. 2019)
- Can connect borrowers with investors interested in a solid deal
- Flexible underwriting
- Availability of non-recourse loans
- Quick approval process with less required documentation
- Interest rates are often double the current lending prime
- Potential loss of more equity, depending on company and number of investors
Before you finalize a commercial real estate loan, make sure you do your research. Know and understand the lender’s rates/terms and capabilities of fulfilling those terms. Weigh the pros and cons of each lending source and choose the one with the least risk you or your company is willing to absorb. Your bank account will thank you for it.