A commercial real estate loan allows a business to purchase real property including open land or buildings for use or development. The business owner may obtain the loan in their personal name. A business with a tax identity can obtain a business loan as well.

Commercial real estate financing requires the same qualifications as private loans. The business should have a good credit history and the means to make payments on the loan. Meet the following commercial real estate loans basics to qualify:

1. Provide a good credit score showing good past credit use, secured and unsecured, in business identity or personal owner identity to lenders of commercial real estate.

2. Show proof of income for the business for consideration of commercial real estate funding.

3. Meet the loan-to-value ratio required by the commercial real estate lender with a 20% down payment.

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Find commercial real estate lenders

Commercial real estate lending provides businesses with the funds they need to purchase real estate. There are several types of lenders available. Most private banks offer funding for these real estate purchases. Hard money lenders may also be available to fund real estate purchases.

I recommend: Seek out several types of lenders. Lenders for commercial real estate purchases include commercial banks like Wells Fargo. They provide businesses with mortgages for the purchase of property under a number of loan programs. Private lenders, or hard money lenders, provide loans for businesses that may not meet specific requirements of traditional lenders. Avatar Financial Group connects hard money lenders with businesses.

Compare commercial real estate loan rates and terms

Commercial building loans are not all created equally. Compare interest rates and terms to find the most affordable loans that meet the business's needs. Consider fixed rate and adjustable rates.

I recommend: Choose loans for commercial real estate with a low interest rate. Many lenders place interest rates and terms on their websites, such as Steelhead Capital. Compare loans from several lenders by using Bankrate. Also use the mortgage calculator offered on the company's website.

Know the types of funding for commercial real estate available

Commercial real estate funding can be government backed or conventional. Those businesses unable to qualify for conventional loans may wish to seek out government-backed loans. These federally backed loans require less strict criteria.

I recommend: Contact the Small Business Association (SBA) for loan information if your small business is new or otherwise may not qualify for a standard loan. The SBA offers several types of loans including the 7(a) loan for real estate purchases. Conventional loans are available through commercial lenders. BusinessFinance provides a list of available commercial real estate loan providers.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Take the time to compare each type of loan and several commercial real estate lenders to determine the best loan for your purchase. For new businesses, the business owner may need to use his personal credit history to qualify for a loan. Compare loans several ways to find the most affordable option.

The LTV is very important in determining the amount of capital that can be obtained to finance a given property. LTV relates the principle portion of a mortgage to the appraised value of a property. This LTV is very similar to collateral discounting as it serves to protect the lender's debt stake in the property.

LTV = Amount of Loan / Value of Property

The lender will determine an LTV value based on factors such a financial history of the business, credit scores, length of loan, etc. After which, the lender will multiply the LTV by the appraised property value to determine the maximum loan amount that can be given to a borrower.

Amount of Loan = Value of Property * LTV

Clearly, without other considerations the borrower benefits from a higher LTV ratio.

The DSCR approaches the mortgage picture from an entirely different angle than the LTV. Where the LTV determines the loan amount based on the value of the property, the DSCR bases upon the cash flow of the property and/or borrower.

DSCR = Debt Service / Cash flow

The debt service is usually taken as an annual figure that includes both repayment of principle and interest payments for a given year. Cash flow is calculated by taking adding noncash expenses back to net income such as depreciation.

Once again, the lender will use factors such as business credit, industry risk, etc. to call a figure for DSCR. Usually this will be around 1.20. After which, the total debt service is calculated and a total loan amount derived from it.

Debt Service = Cash Flow * DSCR

Without other considerations the borrower can benefit from a lower DSCR ratio, but remember a borrower will usually feel the pain of an under calculated DSCR (Not being able to pay the monthly mortgage!) before that of an LTV.

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Apply for commercial mortgage financing

There are many places now online to apply for commercial mortgages. Some lenders have accept a broad range of proposals while others are niche focused.

I recommend:

If you know right away that you know exactly what type of financing proposal you require and you don't need a professional to prepare your proposal for you, then go right away to a large financier like GE Capital or Merdian Capital.

If you aren't sure what type of financing to pursue or you want access to more than one commercial lender, then try a financing consultancy like Broadgate Business Financial LLC.

Learn more about commercial mortgage financing

You might decide that you need to learn more about commercial financing and lending before you make a decision.

I recommend: Look at the SBA for more business financing information or read Broadgate Business Financial's Q&A on Commercial Property Financing.

Commercial real estate loans provide property investors or business owners with an opportunity to own highly valuable property. The value of commercial property is very flexible, often based on current market trends. An investor knows it is important to keep track of changes in the industry so that investments profitable and viable.

Commercial real estate financing is followed by a variety of news sources, websites and blogs. Investors and property owners may monitor these services to ensure they have the most current information available. This can help make decisions in buying or selling property. When using these sources, consider the following:

1. Ensure that commercial real estate funding sources of information are accurate, fact-based organizations.

2. Gather information about changes in commercial real estate lenders including current trends in loan availability or rate changes.

3. Follow commercial real estate lending blogs and websites for investment advice in various market conditions.

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Track trends from news sources on funding for commercial real estate

Loans for commercial real estate are available from various lenders. Prior to investing in them, use news sources to gauge the current market. Investors that spend time following quality news sources can ensure that they are getting the best deal possible and they know when to invest in the market.

I recommend: Seek news sources that track commercial real estate loan providers, investor movement and market trends. Commercial Property News, published by Nielsen Business Media, tracks trends at the national level on commercial real estate loans, transactions and investors. MarketWatch is one of the most trusted industry wide news sources in the commercial sector. Use it to track buying and selling trends in the industry.

Use websites to monitor commercial real estate loan rates

Investing in commercial building loans may be a good idea. Find out the cost of such loans by monitoring changes in rates. Interest rates for commercial loans fluctuate often and each lender may offer its own rate. Gather this information before making an investment.

I recommend: Learn about rates from top lenders for commercial real estate before investing. Some lenders provide interest rate information on their websites. Capital Funding of America provides this information on its website. Steelhead Capital is a lending leader that tracks interest rates available for commercial investments of all types. C-Loans provides current rate information from several lenders.

Choose a commercial real estate lender after assessing value

Lenders of commercial real estate may base the value of the loan on the property value. Trends and changes in commercial real estate value is essential to monitor as an investor. Purchasing property when property values are low may mean building equity faster.

I recommend: Purchase lending for commercial real estate after ensuring the value of the property is acceptable. Organizations such as Commercial Property Appraisers monitor the value of properties throughout the country. LoopNet provides a range of tools for monitoring the real estate market in the commercial sector, including property listings, property value changes and lender options.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Prior to investing in a commercial real estate loan, investors should be current on trends and changes within the industry even prior to contacting a lender. This allows investors to be informed of true market trends, costs and future changes that affect their decision.

Commercial real estate loans aid investors in purchasing properties including hotels, retail establishments, industrial facilities and multifamily units. Those who are looking for this type of loan will need to understand all of their lending options. Varieties of commercial loans are available, dependent on the type of property being purchased. Business acquisition loans, conduit loans and bridge loans are just a few examples of terms that can overwhelm a first-time investor.

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Government guaranteed loans

Government guaranteed loans are those guaranteed to lenders by the United States Small Business Administration. These aid businesses that may not be otherwise qualified for a loan and offer more affordable financing and easier qualification standards.

I recommend: Visit FirstBank to learn more about government guaranteed loans.

Conduit loans

Conduit loans are commercial real estate loans used to acquire or refinance properties such as industrial, hotel, offices, self-storage and other similar types of properties. They offer a low, permanent fixed rate.

I recommend: Visit CommericalBanc to learn more about conduit loans.

Business acquisition loans

Business acquisition loans are those designed to aid a business in taking over or merging with another business. They may include real estate. Those with real estate included have a loan up to 25 years.

I recommend: Visit iBank to find out more about business acquisition loans and to see the various options available.

Income property loans

There is a wide range of income property loans available. These loans are specifically designed to handle commercial real estate purchases in which the loan sizes range from $2 million up to $100 million. As the name implies, these types of properties generate income for the buyer. Property types often determine the type of loan obtained.

I recommend: Visit The Grace Capital Group to learn more about income property loans.

Bridge loan

A bridge loan is a type of loan obtained by a business to keep up with funding needs until a more permanent loan can be found. These are short-term loans, often based on the equity in real estate the business has, or from some other form of collateral. These loans remove the existing obligation from the property.

I recommend: Learn more about bridge loans and their place in commercial real estate by visiting Investopedia.

Commercial construction loans

Commercial construction loans provide businesses with the funds needed to build property such as office buildings, retail centers or industrial facilities. These loans are approved through a special process often requiring an in-depth understanding of the surroundings and profit potential.

I recommend: Visit CLoans to learn about the process of obtaining commercial construction loans.