Best Commercial Real Estate Loans

Commercial real estate loans work similarly to personal mortgages. They are structured as term loans to be repaid over a set period of time, with interest, and are usually secured by the property being financed.

Balloon mortgages are real estate loans where the amortization term, the period of time it would take to fully pay off the loan amount plus interest, is longer than the repayment term. They are more commonly found in commercial real estate loans than consumer mortgages. Balloon loans essentially limit the amount of cash you need upfront to purchase a property, and lower your monthly payments; however, at the end of the loan term, the remaining balance of the loan, or the “balloon” payment, is due.

Repayment terms on commercial property loans generally range anywhere from five to 25 years, depending on the type of property, your lender’s business loan requirements and other factors. And unlike residential mortgage loans, commercial mortgages often have an amortization period that’s longer than the life of the loan.

For instance, a lender may offer a commercial property loan with a term of five years, but an amortization period of 10 years. In that case, you would make payments on the loan for five years, but the amount of each payment would be based on the loan being paid off over 10 years. At the end of the five-year period, you’d pay one final balloon payment to satisfy the remaining balance.

In other words, if you received a $500,000 loan with an interest rate of 5%, you would make monthly payments of $5,303.28 for five years, followed by a final balloon payment of $281,024.31 to pay off the debt.

Some small-business lenders, on the other hand, offer full amortization — which means the amortization period is the same length as the loan. At the end of the term, the loan is paid in full and there is no remaining balance that needs to be paid off in a balloon payment. The same $500,000 loan fully amortized over 10 years would require monthly payments of $5,303.28 over the 10-year term.

Interest rates on commercial mortgage loans can also vary based on the lender, the type of loan, the value of the property you’re financing, and your business’s qualifications.

Anecdotally, interest rates range from 5% to 15%, though it’s challenging to find recent reports that confirm the average interest rate on commercial property loans. However, as a traditional lender, Bank of America’s starting rate of 5.50% may at least be a good indicator of the lowest rate you could expect with excellent credit and strong business financials.

Commercial mortgages tend to have more fees than other types of business loans. Commercial real estate lenders may charge origination fees, loan application fees, property appraisal fees, legal fees and other closing costs.