Commercial real estate lending refers to the process through which commercial buyers obtain mortgages or other financing. Commercial real estate (CRE) refers to any income-producing real estate that is used for business purposes; for example, offices, retail, hotels, and apartments. Commercial real estate lending is typically used to fund major capital expenditures and/or cover operational costs that the company may otherwise be unable to afford. Expensive upfront costs and regulatory hurdles often prevent small businesses from having direct access to bond and equity markets for financing. This means that smaller businesses must rely on other lending products, such as lines of credit, unsecured loans or term loans.
How Commercial Real Estate Lending Works
Commercial real estate lending loans are granted to a variety of businesses, usually to assist with short-term funding needs for operational costs or for the purchase of equipment to facilitate the operating process. In some instances, the loan may be extended to help the business meet more basic operational needs, such as funding for payroll or to purchase supplies used in the production and manufacturing process.
These loans often require that a business posts collateral, usually in the form of property, plant or equipment that the bank can confiscate from the borrower in the event of default or bankruptcy. Sometimes cash flows generated from future accounts receivable are used as a loan’s collateral. Mortgages issued to commercial real estate are one form of commercial loan.
As with residential property, banks, independent lenders, pension funds, insurance companies, private investors, and other capital sources, such as the U.S. Small Business Administration’s 504 Loan Programs are actively involved in providing commercial real estate lending loans. Like residential lenders, commercial lenders assume different levels of risk and have different terms they are willing to offer to borrowers.
The most popular residential loan is the 30-year fixed-rate mortgage, commercial real estate lending loans are typically shorter. The terms range from five years (or less) to 20 years, and the amortization period is often longer than the loan term.