Commercial Real Estate Loan Rates 2021
|Loan Type||Average Rates||Terms|
|SBA 504||4.38-4.49%||Avg $1 million, up to 25 years|
|SBA 7(a)||5.25%–9.25%||Avg $350,000 up to 25 years|
|Traditional Bank Loans||From 5.00%||Starting at $25,000|
The decision to purchase a commercial real estate property, as opposed to leasing one, can come with numerous advantages. The right investment can be financially beneficial, especially since buying property typically allows you to build equity and take advantage of additional tax benefits.
And, since some commercial real estate loan rates are as low as 2.231%, purchasing property can lead to long-term savings.
Choosing the right commercial real estate loan
If you’re thinking about purchasing or renovating an income-earning property or one to run your business from, one of the first steps you’ll need to take is to determine which lending option is best suited for your needs.
For many, this decision comes down to traditional small business loans from financial institutions such as a bank or credit union (a.k.a. commercial mortgages) vs. SBA-specific loans. There are, however, other commercial real estate loan options that you may want to consider, including commercial bridge loans, hard money loans, and construction loans.
Today, we’ll take a quick look at some of the most popular commercial lending options, starting with one of the most popular and often most affordable commercial real estate loans – the SBA 504 loan.
SBA 504 loans
SBA 504 loans are potentially the most sought-after commercial real estate loans, though they are also considered the most difficult to obtain.
Designed to spur economic development, SBA 504 loans are long-term financing options (10- or 20-year) for fixed assets that can be used to acquire, modernize, or expand a business, as well as to refinance costs associated with such expansion. These loans are also frequently referred to as CDC loans, a nod to the Certified Development Companies (CDCs) that make them available.
SBA 504 loans can fund project costs from $5 to $5.5 million and can cover up to 90% of the total costs. Unlike traditional loans, which are backed solely by the commercial mortgage lender, 504 loans are back by both SBA (40%) and the participating lender (50%). The borrower must cover the remaining 10%.
The 504 commercial real estate loan rates are based on the 5- and 10-year Treasury rates, plus fees, and typically carry the lowest interest rates among commercial real estate lending options. For instance, at the time of posting, 504 loan rates were as low as 2.231%.
In addition, down payments are also lower, as borrowers are required to put up only 10% of the loan total as opposed to 25-30% often required of other loans.
Despite obvious benefits, 504 loans do come with a few cons. For instance, 504 loan funds are limited in use and therefore not ideal for those seeking flexible funding. If you’re considering this loan, keep in mind that funds must only be used for the following approved project costs:
- Purchase existing commercial real estate such as office buildings
- Purchase or improve land
- Construct a new commercial property
- Renovate, convert, or modernize an existing property
- Purchase long-term machinery or equipment.
- Refinance debt associated with growth and development as it related to the previous items
SBA 7(a) loans are another popular lending option for small business owners who want to finance construction, renovations, modernizations, or long-term equipment purchases.
SBA 7(a) funds, however, can also be used to manage costs associated with the purchase of equipment, inventory, and fixtures, as well as for working capital needs, debt refinancing, and start-up costs. As such, this loan is considered more flexible than the SBA 504 loan.
Rates are typically lower than those associated with traditional bank loans but slightly higher than those as they relate to 504 loans. However, the SBA places limits on interest rates based on the loan size and chosen term. For instance, as of March 2, 2021, SBA 7(a) rates cannot exceed 5.50%-9.75%.
SBA loan terms can range from 5 to 10 years, though term loans used for the purchase of real estate can carry terms of 25 years. In addition, unlike SBA 504 loans, SBA 7(a) loans are only guaranteed up to 85% of the loan value, though loans above $150,000 will be limited to a 75% guarantee.
SBA 7(a) loans, though still driven by strict requirements, are often more accessible to small business owners, particularly for those with strong credit.
Conventional Bank Loan
The SBA is not the only organization that backs or provides commercial real estate loans. Instead, many commercial lenders, including JPMorgan Chase and Bank of America, offer commercial loans to qualified borrowers.
Loan requirements, restrictions, and commercial real estate loan rates often vary based on the lender, and therefore it’s best to refer directly to a prospective lender for loan specifics.
Typically, borrowers can expect loan rates similar to those of an SBA 7(a) loan, with variable rates typically falling between 3% and 6.25% at the time of publication. However, it should be noted that average or below-average credit can increase commercial loan interest rates, and conventional bank loans are not held to the same limits set by the SBA.
Average Commercial Loan Rates
Commercial real estate loan rates are complex and depend on numerous factors. Average commercial loan rates, therefore, can fluctuate, so check for the most up-to-date numbers. The following are updated as of March 2021.
A recent initiative by the Small Business Association lowered rates for 504 loans in an effort to help the economy recover from COVID-19:
- 10-year: 2.231%
- 20-year: 2.364%
- 25-year: 2.399%
SBA 7(a) loan rates are currently as follows:
- Variable: 5.50% to 8%
- Fixed: 9.25% to 11.25%
And, as mentioned above, conventional bank loans currently carry rates between 3% and 6.25%, though these rates are not capped and therefore some borrowers will receive commercial real estate loan rates that exceed these numbers, based on their qualifications.
Understanding Loan-to-Value Ratio
In addition to other applicant qualifications, many lenders also rely heavily on the loan-to-value ratio (LTV) to set rates. LTV is used to determine the risk of a loan not being paid in full by the borrower and ultimately decides whether or not a loan will be approved. The lower the LTV, the lower the risk. Therefore, lower LTVs typically lead to lower interest rates.
To determine the LTV, lenders divide the requested loan amount by either the property’s purchase price or the appraised value, whichever is lower.
For instance, if you requested a loan for $350,000 for a $500,000 property, the LTV would be 70%.
Lenders use LTVs when underwriting both commercial and residential loans, but there is a notable difference. Residential mortgages can be approved with up to 100% LTV. Commercial loans, on the other hand, are lower, with the National Realtors Association reporting commercial LTVs hovering between 75% to 80%, particularly for industrial properties, multi-family properties, and suburban offices.
Debt-Service Coverage Ratio
The debt-service coverage ratio (DSCR) is designed to help lenders determine risk, particularly whether or not the borrower can successfully make monthly payments.
To determine this ratio, the lender will compare the borrower’s annual net operating income (NOI) to the annual loan payment, including interest and principal, also referred to as the mortgage debt service.
To determine your NOI, you can subtract the annual operating expenses from the business’s annual revenue.
To calculate the DSCR, the lender will divide the NOI by the annual debt service. For instance, if your NOI is $210,000 and your annual loan payments are $130,000, you would have a 1.6 DSCR.
In general, your DSCR should not dip below 1, as this indicates negative cash flow and therefore an inability to repay the debt.
Fees and Other Costs
While commercial mortgage interest rates often play a primary factor in determining the affordability of any loan product, fees and additional costs can also have a significant impact on your total costs.
Before taking out a commercial real estate loan, be sure to take note of additional fees, with the following being the most common:
- Appraisal fees
- Origination fees
- Survey fees
- Legal fees
- Loan application fee
It’s also important to determine if there is a prepayment penalty, the likes of which will limit your ability to pay your loan off ahead of time. If your loan does carry a prepayment penalty, understanding what type and duration can help you make educated decisions about your repayment efforts.
SBA 504 loans have a penalty that will decrease incrementally over time, while other loans may carry a single prepayment penalty that limits your ability to pay off the loan within a set amount of years.
Determining Affordability: Using a Commercial Mortgage Rate Calculator
Before you commit to a loan, it’s helpful to look at a variety of scenarios based on loan amounts, repayment terms, interest rates, and fees as they relate to each potential lending product.
By doing so, you can compare all lending options to determine which is most affordable on a monthly basis as well as over the life of the loan.
To help business owners make the best decision, many lenders and online resources have designed commercial mortgage loan rate calculators. To use these calculators, you’ll typically need to know the approximate loan amount, interest rate, and repayment terms.
However, some calculators also will allow you to add other factors, like balloon payments. We suggest checking out this commercial loan calculator or, if you’re considering investment property, this Financial Mentor calculator.
Now let’s address questions you may still have about commercial real estate loan rates.
What is the Current Interest Rate for Commercial Mortgages?
Commercial mortgage rates vary based on a variety of factors, including those listed above; however, borrowers can typically expect commercial mortgage rates with banks between 3% and 6.25%, though they can certainly exceed this range. SBA loan rates range from 2.231% to 11.25%, depending on the program and length of loan.
For borrowers who choose alternative lending options, like hard money loans, expect higher interest rates, which can reach or exceed 18%.
How Do You Qualify for a Commercial Real Estate Loan?
Much like any other type of lending product, commercial real estate loans are only made available to borrowers who meet lender qualifications.
Much like rates, terms, and fees, these can vary from lender to lender; however, if you’re considering a commercial real estate loan, the lender will likely base their decision on the following:
- Business finances: As indicated by the DSCR, your ability to repay debt is a primary factor when determining loan eligibility. Therefore, a lender will likely look at your revenue, outstanding debt, and business credit scores before making a decision. To determine the financial health of your business, the lender may ask for up to five years of tax records, access to your financial documents, a business plan, proof of business structure (e.g., LLC, S-Corp, C-Corp), and projected cash flow.
- Personal finances: Even though you’re taking out a loan explicitly designed to further establish or grow your business, your personal credit scores will likely come into play. High credit scores, or a credit profile that is free of bankruptcies, liens, etc., will be favorable. If you have low personal credit scores, then you may want to take the necessary steps to improve them before applying for a commercial real estate loan. Doing so can help you improve the odds of loan approval and secure lower rates.
- Property value: Since you’ll be using the investment property as collateral, the lender will also evaluate it to determine eligibility and rates. One way they do this is by looking at the LTV, which will help them determine how your requested loan amount relates to the perceived value of the investment property.
Though these factors are typically reviewed, it’s important to work directly with your potential lender to determine what, if any, additional qualifications you may need to meet. This is particularly true for SBA loans, as many of them require applicants meet a strict set of qualifications, including years in business, company size, and annual revenue.
It can be a hard pill to swallow, but with less-than-stellar information, you may be cornered into a higher rate than you want. There’s always a possibility to refinance in the future, but keep an eye on your credit information to put yourself in the best spot.
What is the Average Down Payment on Commercial Property?
The majority of commercial property loans will require a down payment, but how much that down payment amounts to will vary. Generally, conventional commercial loans and SBA 7(a) loans will require borrowers to make a down payment of 15% to 25%. In this case, a $200,000 commercial real estate loan will require a down payment between $30,000 and $50,000.
However, in some lending options, specifically SBA 504 loans, borrowers can take advantage of a 10% down payment requirement. In this case, that same $200,000 loan would only require a down payment of $20,000.
How Long Can You Finance Commercial Real Estate?
The amount of time you have to finance a commercial real estate purchase depends on the loan you choose. However, many of the most popular commercial real estate loans allow for 10 to 20 years of financing, with some even extending terms as long as 25 years.
In other cases, particularly when it comes to bridging loans or hard money loans, financing terms or the amortization period may be limited to a few months or 3 to 5 years.
How are Commercial Real Estate Loans Determined?
To understand rate variations, it’s important to understand what factors go into loan decisions. Though each lender is different, the following typically play a role in the loan rate you’ll receive:
- Loan type: As indicated above, each loan type comes with a different “average commercial loan rate.” Some, like SBA 7(a) loans, have limits, while others do not.
- Borrower’s credit history: Most lenders rely heavily on the borrower’s credit profile as well as the credit scores of the business.
- Loan size and term: Generally speaking, the longer you take out a loan, the higher the interest rate will be. Similarly, many lenders, including the SBA, also base rates on the loan size.
In addition to those factors, commercial real estate lenders also rely heavily on two important metrics: the loan-to-value ratio and the debt-service coverage ratio.
How Do You Finance a Commercial Real Estate Purchase?
There are many ways to finance a commercial real estate purchase, and the best one for your business depends on your business finances and creditworthiness, type of property, available funds for a deposit, and how the loan will be used.
Nav’s Verdict: Commercial Real Estate Loan Rates
Keep in mind that loan rates are based on market rates, and therefore they can change frequently, though commercial real estate rates typically don’t fluctuate dramatically. In addition, the loan rate you receive will also depend on your business finances, personal creditworthiness, and the property for which they will be used.
If you are an investor looking for a commercial mortgage for a residential property or a commercial construction loan, or you are a business owner looking to purchase property to build equity, spend time finding the best loan option to ensure you save as much as possible in interest.