Structure of Commercial Real Estate Loans

There are a few different structures that are available when you are seeking a commercial loan. Understanding the structure of commercial real estate loans will help you to select the loan that best meets your needs.

As you begin to familiarize yourself with the terms and processes of commercial real estate loans, you will find that there are three main structures that you can select from when requesting a loan. Each different type of structure will have its own benefits and drawbacks. You need to carefully examine the differences of each type of structure to determine which one will best meet your current and future needs for a loan.

Fully amortized loans are the structure that almost every consumer is familiar with from their home mortgage and one that is offered as well for commercial real estate loans. In this scenario you are paying off the entire principal and interest on the loan during the loan term. An SBA 504 is a good example of this structure in the area of commercial real estate loans. It offers a fully amortized twenty year loan for commercial purchases. This structure is very common to residential mortgages as well as many other types of loans such as vehicle loans or personal loans.

Balloon loans are actually the most common type of structure for commercial loan from a bank. The only exception would be SBA loans as they do not permit balloon payments. In this case, the amortization is actually longer than the term of the loan which leaves a single large payment due at the end of the term. That is the balloon payment. It is common for the borrower to refinance the amount needed to make the balloon payment as it can be difficult to have access to that large sum of money. But the benefit is that the monthly payments are more manageable during the term of the loan.

Variable Options

The last structure is the variable rate loan which has an interest rate reset. These loans offer the borrower a specified interest rate for a period of time which is normally 1 to 5 years. Then the interest rate changes based on the current market rate. The borrower then pays the new interest rate for the remainder of the loan or until the next reset date.

Think Long Term

Once you have a complete understanding of the different types of loan structures, you will begin to see the advantages and disadvantages that each type offers. This is when you will need to take some time to determine what your short and long term needs and goals are for your commercial real estate purchase. With that information you can decide which type of loan will best meet all of your needs. Knowing that you will have limited cash early in the loan term could make a balloon loan a great choice. Or you might be more comfortable with a loan payment that you know will remain constant for less difficulty when creating a budget. The most important part is knowing your options and making a well informed choice.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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