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Insights by Cathay

Your guide to commercial real estate and construction loans

Commercial real estate loans are just as varied as the businesses using them. Commercial real estate, or CRE, refers to an income-generating real estate used for business purposes, such as apartment complexes, residential development projects (such as tract homes, condominiums, or Planned Unit Developments (PUDs)), mixed-use development projects, retail centers, industrial buildings or warehouses, office buildings, hotels, and restaurants. The process for obtaining CRE and construction loans might feel overwhelming at first, but with the right bank, it does not have to be a daunting undertaking. 


How do commercial real estate loans work?

Typically, commercial real estate loan terms and rates vary depending on the lender and property type. Down payments on commercial properties can range from 10% to 50% and have repayment terms from five to 25 years. Interest rates can be fixed or variable. Some loans may have interest-only payments with a final balloon payment, while others are completely amortized.

Construction loans also involve real estate and are similar in functionality to commercial real estate loans. Construction loans are used to finance the development of commercial real estate projects and the completed project is included as part of the collateral for the construction loan.


The nuances of commercial real estate loans

Commercial real estate loans differ from other loan types in several ways. Commercial real estate property can be owner-occupied or non-owner-occupied.

For owner-occupied property, the main source of repayment is business income.  For non-owner-occupied (i.e. income property), repayment is primarily supported by rental income. Primary collateral on CRE financing is typically the identified commercial property while other business loans may be secured by non-real estate business assets.

Finally, unlike a residential dwelling, a commercial real estate loan is a mortgage secured by a lien on commercial property. A lien is basically a claim or legal right against assets that are used as collateral to satisfy a debt.  If a debt is not paid, the lender has the right to seize the property.


Getting a commercial real estate loan

In deciding whether a commercial real estate loan makes sense for your business, you should look into the different types of commercial real estate loans available to you. The maximum loan maturities and amortization schedules vary depending on the use of proceeds, property types, and duration of lease in place.

Interest rate options include adjustable rates and fixed-rate, based on different indexes and margins. Experienced real estate specialists can customize the best loan package to meet your needs, so take the time to explore your options before you decide.


What to expect when you apply

When applying for a commercial real estate loan for your business, start by gathering information about your primary collateral: the commercial real estate property itself. Data on the collateral should, at a minimum, include the location, property type, size, and leasing status.

Then, review your company’s financials and historical cash flow. The more information you can provide, the better. Your company’s financials should include current financial statements with proof of liquidity, as well as past tax returns.

In construction financing, the lender will also look for a feasible development pro forma, as well as your investor’s and general contractor’s experience. All of these are important contributing factors to the lender’s credit decision.

Want more guidance on how to evaluate the commercial real estate loan options available to your business? Reach out to a specialist at Cathay for a free consultation.

This article does not constitute legal, accounting or other professional advice. Although the information contained herein is intended to be accurate, Cathay Bank does not assume liability for loss or damage due to reliance on such information.

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