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Debt / Loans
Bank loans come in a variety of types and form the backbone of debt financing for commercial real estate (CRE) projects. Each type of loan has a specific purpose and structure in terms of: use of the funds, interest rate, maturity, and collateral that is required by the bank.
These loans are used by investors, developers, and business owners to acquire, develop, or refinance commercial properties. The major types of bank loans which are commonly used in commercial real estate:
- Acquisition Loans: Investors use acquisition loans to purchase commercial properties. These loans provide the necessary capital to buy properties, and the property itself often serves as collateral for the loan. The loan terms, interest rates, and down payment requirements can vary based on factors such as the borrower's creditworthiness, the property's type and location, and market conditions.
- Construction Loans: Developers use construction loans to finance the development or construction of new commercial properties. These loans are disbursed in stages as the construction progresses, helping cover expenses like land acquisition, design, permits, construction labor, and materials. The interest rates on construction loans are typically higher than those on traditional commercial mortgages due to the higher risk associated with the development phase.
- Bridge Loans: Bridge loans are short-term loans that "bridge the gap" between financing needs. They are often used to cover expenses while waiting for a property's sale, refinance, or other long-term financing options. Bridge loans are especially helpful in situations where a borrower needs to act quickly, such as acquiring a new property before selling an existing one.
- Permanent Loans: These are long-term loans used to finance stabilized properties, i.e., properties with a history of stable occupancy and income. Permanent loans are often used to replace short-term financing, such as construction or bridge loans. They offer more extended repayment periods and lower interest rates, making them suitable for long-term property ownership.
- Refinance Loans: Refinancing involves replacing an existing loan with a new one that usually has better terms, such as lower interest rates or longer repayment periods. Commercial property owners may refinance to reduce their monthly payments, cash out equity, or take advantage of favorable market conditions.
- Owner-Occupied Loans: These loans are tailored for businesses that occupy a significant portion of the property they own. They can be used for purchasing or refinancing commercial properties used for business operations, such as office buildings, retail spaces, and industrial facilities.
Each of these loan types has a place in a commercial real estate project and although different loan types can be used on the same project, each type is generally used at specific stages in a project’s lifecycle. For instance:
| BEGINNING | MIDDLE | END |
|---|---|---|
| Acquisition Loans | Bridge Loans | Permanent Loans |
| Construction Loans | Refinance Loans |
The lifecycle of a project is a prime determinant of the risk to the bank (risk that the bank will loose funds invested in the project) and a good indicator whether they are interesting in investing.
Different banks (and their cousins in the financial services industry who finance commercial real estate – insurance companies and pension funds) have different interests and appetites as to the types of projects they will invest in. These appetites can change depending on a variety of factors such as the business cycle and how much (or how little) a bank has to lend.
Equitie Capital Management has relationships with dozens of banks and other financial institutions – each with its own unique loan interests and criteria. Let us help you analyze your project, prepare your loan package, and submit your package to the right lender.