Any income producing property used mainly for business-related purposes is commercial real estate. Some examples of commercial real estate include retail malls, shopping centers, office buildings, hotels, etc. These properties are generally acquired with the help of commercial real estate loans. There are lot of financial institutions other than banks that provides commercial loans. The San Diego hard money lenders are considered to be one of the most reliable ones. In this article, we are focusing on how commercial real estate loans are different from residential loans.
Individuals vs. Entities
Commercial real estate loans are made for business entities such as corporations, developers, partnerships, trusts, etc. But residential mortgages are made to individuals. For the purpose of acquiring loan for commercial purpose entities are formed and these entities, and if they do not carry a proper financial track record or have a good credit ranking, they require the owners of the entity to guarantee the loan. This provides the financial institution with individuals who have the credit history and from whom they can recover in case of any defaults. If this kind of recovery is not required the property can be sold by the financial institution to get recovery in any case of defaults, this is called the no-recourse loan.
Loan Repayment Schedules
A residential mortgage is the type of loan where the debt is repaid in regular installments over a period of time. Unlike residential loans, the term for commercial loans will range from 5 years to 20 years. Here the investor would be made a fixed amount of payments for a period of the fixed years and then finally will pay a balloon payment for the remaining balance. The length of the loan term affects the lender charges and this mainly depends on the investors’ credit score.
Loan to value ratios
Loan to value ratios is a figure which helps in measuring the value of the loan against the property. This is calculated by the lender by dividing the amount of loan by the property’s purchase value. For commercial loans, lower LTVs are more favored that higher LTVs as they have more stake in the property with less risk for the lender.
Debt service coverage ratio
Debt service coverage ratio is the process where the moneylender compares the property’s annual income to its mortgage debt service where the properties ability to pay back the debt is measured.
It is generally calculated by dividing the net operating income by annual debt service; lower DSCR is acceptable for loans which have shorter loan periods with stable cash flow.
Interest rates and fees
Interest loans on commercial properties are getting higher due to the loans involving fees which add to the cost of the loan. This includes an appraisal, loan applications, loan origination, or survey fees. Some of these cost needs to be paid upfront and some annually.