Multiple options exist for obtaining commercial real estate financing

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July 7, 2017 | Updated September 7, 2017


Key Points

Commercial real estate financing

  • Banks loans are the gold standard, but hard to get.
  • Borrowers often land short-term, pricey loans that they plan to refinance.
  • Internet-based crowdfunding is a relatively new source of funds.
  • A variety of federal and quasi-federal agencies support commercial mortgage lending.
  • Your lender can sometimes become your business partner.

There are a variety of mortgages available to fund purchases of commercial property. Some are defined by the source of the money, others by the structure of the mortgage.

Following is a rundown of 10 of the most common types of commercial mortgage financing.

Bank loan

This garden-variety loan from your local financial institution is the one that most resembles a typical residential mortgage. Bank loans come with a fixed term, and a fixed or variable interest rate, which is usually lower than interest payments available from other sources. But these most attractive loans are the least likely to be available, especially to those without significant holdings. Banks have pulled back from commercial mortgage lending since the recession, although they are still significant sources of government-backed loans.

Bridge loan

Part of the universe of short-term, nonbank loans, this financing is used as a bridge to a longer-term mortgage. By short term, lenders mean from six months to three years. Interest rates are very high, and often bridge loans involve interest-only payments until maturity. When the term of the bridge loan expires, borrowers expect to refinance into a more economical and longer-term mortgage.

Construction loan

These short-term loans are used to fund the construction of a commercial property. Like bridge-loan borrowers, developers with construction loans intend to replace the financing with longer-term, less-expensive money once the property is built and leased up. Banks typically release some of the proceeds of construction loans as soon as the funding is approved and the rest periodically (once a month or so) while construction is underway.


A new entry in the commercial real estate mix, crowdfunding uses the internet to reach an audience of potential investors and match them with potential borrowers. The federal JOBS Act of 2012 made it easier to market crowdfunding opportunities to accredited investors. Crowdfunding lenders evaluate potential investments and price their loans based on risk. Crowdfunding is used to raise money for a variety commercial endeavors, including real estate projects.

EB-5 loans

The U.S. government's EB-5 immigrant investor program promises permanent residency to foreign nationals who invest at least $500,000 in any enterprise that creates 10 or more jobs. EB-5 money has been used for some giant projects, including a portion of the $20 billion Hudson Yards mixed-use development in New York City. The jobs requirement makes EB-5 money useful for financing projects that involve relatively labor-intensive properties like hotels. EB-5 investors and project owners seeking capital can come together through regional centers — entities sponsored by U.S. Citizenship and Immigration Services that facilitate financing for EB-5-qualified projects.

Equity financing

In this arrangement, an owner gives up equity in a project in return for money to help finance it. An equity transaction can make a deal more economical than a loan with interest payments. Owners also are handing off some of the profits, however, and possibly a level of control of the project. Some nonbank lenders offer hybrids of debt and equity funding, including mezzanine financing, in which the lender provides debt capital, but has the right to convert it to an ownership stake in the project if the money is not paid back on time and in full.

GSE loans

Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac occupy a major role in funding multifamily housing. In 2015, they helped to finance $90 billion in multifamily projects. The GSEs do not loan money directly, but rather buy loans from banks — giving lenders an incentive to make apartment loans they may otherwise judge to be too risky. The loans acquired by the GSEs are then packaged and securitized for sale in the secondary market. Fannie and Freddie also promote construction of low-income housing by purchasing and securitizing loans for affordable-housing projects that are exempt from a congressionally imposed annual limit on the GSE’s overall loan-purchase business.

SBA 7(a) loans

The U.S. Small Business Administration's (SBA) most popular commercial financing vehicle, 7(a) loans can be used to fund the purchase, renovation and construction of commercial real estate — among many other small-business uses. More than $20 billion is loaned annually through the 7(a) program, and lending amounts have been growing at a 25 percent annual rate. The SBA doesn't loan the money directly, but it guarantees a large portion of individual loans from authorized banks, making the lenders less skittish about doing business with small-balance commercial borrowers.

SBA 504 loans

An SBA offering used to fund investments in land, buildings and other fixed assets, 504 loans allow borrowers to make down payments of as little as 10 percent, depending on the track record of the business. The loans are provided through a partnership between the federal agency and SBA-approved nonprofit corporations known as a certified development companies. To qualify for a 504 commercial real estate loan, the property being financed must be at least 51 percent owner-occupied for existing buildings, and 60 percent owner-occupied for new buildings.

USDA B&I Loans

The U.S. Department of Agriculture's (USDA) Business and Industry program provides loan guarantees for commercial mortgages, as well for a host of other business activities. You don't have to be a farmer to qualify. Instead, the primary requirement is that the enterprise funded must create jobs and be carried out in a rural area, defined as locality with a population of fewer than 50,000 people that is not part of an "adjacent urbanized area." The USDA has a search tool on its website that you can use to find out whether a piece of property is within a qualifying area. The B&I program is similar to SBA’s 7(a) loan program in that banks make the loans, and a portion of each individual loan is guaranteed by the USDA.

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