There are quite a few different types of commercial real estate loans. Below is a partial list. I predict that several of them will be unfamiliar to you:
- Permanent Loans - A permanent loan is a garden variety first mortgage on a commercial property. To qualify as a permanent loan, the loan must have some amortization and a term of at least five years.
- Bridge Loans - A bridge loan is a short-term, first mortgage loan on commercial property. The term could be from 6 months to three years. The interest rate on bridge loans is typically much higher than on permanent loans.
- Mini-Perms - A mini-perm is a first mortgage on a commercial property with a term of two to three years. A mini-perm can either be an interest-only loan or amortized over 25 years. Most mini-perms are made by banks, and they are used to give the property owner time to solve some problem, most often leasing out the property. Many mini-perms are written by banks, in connection with their own construction loans, to serve as standby takeout loans, just in case the developer cannot qualify for a normal takeout loan, perhaps because the building is not yet sufficiently leased. These are known as construction / mini-perm combo's. The banks typically charge an extra point for the mini-perm commitment letter and another one point if the mini-perm actually funds.
- Commercial Construction Loans - A loan of one to two years used to build a commercial property. The loan proceeds are controlled by the lender in order to make sure they are only used in the construction of the new building.
- Takeout Loans - A takeout loan is a garden variety permanent loan where the proceeds of the loan are used to pay off a construction loan.
- Forward Takeout Commitment - A forward takeout commitment is a letter from a bankable lender promising to deliver a takeout loan in the future. Most, but not all, forward takeout commitments are issued by life insurance companies on large construction projects. The letters usually cost between one and two points, plus many lenders often charge an additional fee of 1/2 point to one point if the loan actually funds.
- Standby Takeout Commitment - A standby takeout commitment is defined as a letter from a bankable lender promising to deliver an undesirable takeout loan in the future. No one ever expects a standby loan to fund. The reason why is because the actual loan terms of most standby takeout loans are pretty ghastly - a very high interest rate and an additional one to two points if the loan actually funds. The purpose of a standby takeout commitment is merely to satisfy some construction lender that he has a guaranteed way to get paid off. Standby takeout commitments cost two to three points, just for the letter. The standby takeout commitment business is really out of favor right now because too many standby lenders over the years have used legal loopholes to weasel out of their commitments to pay off the construction lenders.
- Uncovered Construction Loan - An Open-Ended Construction Loan or an Uncovered Construction Loan is defined as one with no forward takeout commitment in place. This has become quite common today as banks develop confidence in the constant availability of commercial takeout loans.
- Covered Construction Loan - A Close-Ended Construction Loan or a Covered Construction Loan is defined as one with a forward takeout commitment firmly in place. For the past 20 years commercial mortgage money has been abundantly available. As a result, most construction lenders are quite comfortable making Uncovered Construction Loans. Those commercial construction lenders demanding a forward takeout commitment are finding that they are not closing many deals.
- Conduit Loans - A conduit loan is a large permanent loan on a fairly standard type of commercial property, which is written underwritten to secondary market guidelines and which has an enormous prepayment penalty. Such loans enjoy very low interest rates. Conduit loans are later assigned to pools and securitized to become commercial mortgage-backed securities.
- SBA Loans - Loans to users of commercial real estate which are written by private companies, such as banks and specialty finance companies, but which are largely guaranteed by the Small Business Administration. SBA loan guarantees were created by Congress to encourage the formation and growth of small businesses.
- SBA 7(a) Loans - The SBA 7(a) program is a 25-year, fully-amortized, first mortgage loan program with a floating rate, tied to the Prime Rate.
- SBA 504 Loans - The SBA 504 loan program starts with a conventional, fixed-rate, first mortgage and then adds a 20-year fully-amortized, SBA-guaranteed, second mortgage behind it. It is the most common way to get a fixed rate SBA loan.
- SBA Construction Loans - Many SBA lenders will write conventional construction loans that convert automatically to 25-year SBA loans upon completion.
- USDA B&I Loans - The Department of Agriculture’s Business and Industry loan program is very similar to the SBA loan program, where a conventional lender makes the loan but the USDA guarantees most of it. USDA Business and Industry loans were created to help create jobs in rural areas.
- Hypothecations - A hypothecation is actually a personal property loan secured by a note and mortgage owned by the borrower. The borrower’s note and mortgage are often created when the borrower sells a piece of real estate and carries back the financing. Later the borrower might need cash and pledges his mortgage receivable as collateral. My own private money commercial mortgage company, Blackburne & Sons, will make these rare kind of commercial loans.
- Fix and Flip Loans - Fix and flip loans are renovation loans that are similar to construction loans. Typically the loan is used to acquire property with enough additional proceeds to renovate the property for a quick sale.
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If you need a commercial loan right now, and you are through with messing with fickle lenders.
This is the most profitable time in history to become a commercial mortgage broker because of the hundreds of billions of dollars worth of balloon payments coming due soon on commercial property.
Found a banker who makes commercial loans? Want 2,000 more?
