Types of CRE Financing
Commercial real estate financing encompasses several distinct products: Conventional bank loans offer the best rates but strictest requirements. SBA 504 loans provide government-backed terms with as little as 10% down. CMBS (Commercial Mortgage-Backed Securities) loans offer competitive rates for larger properties. Bridge loans provide short-term financing for acquisitions or renovations. Hard money loans offer fast capital for time-sensitive deals. Each serves a different purpose in the commercial real estate lifecycle.
SBA 504 for Commercial Real Estate
The SBA 504 program is specifically designed for commercial real estate and major equipment purchases. The structure is unique: a bank provides 50% of the financing, a Certified Development Company (CDC) provides 40%, and you provide 10% down. The CDC portion offers a below-market fixed rate for up to 25 years. This makes 504 one of the most affordable ways to purchase owner-occupied commercial property. Requirements include occupying 51%+ of the property for existing buildings.
Understanding Cap Rates and NOI
Cap rate (capitalization rate) is the ratio of a property's Net Operating Income (NOI) to its purchase price. A property generating $100,000 NOI purchased for $1,000,000 has a 10% cap rate. Lenders use these metrics to assess whether the property's income can support the loan payments. The Debt Service Coverage Ratio (DSCR), NOI divided by annual loan payments, must typically be 1.25 or higher for most lenders.
Owner-Occupied vs. Investment Properties
Financing terms differ significantly based on whether you'll occupy the property. Owner-occupied properties qualify for SBA programs, lower down payments (10-15%), and better rates. Investment properties typically require 25-30% down, have higher rates, and don't qualify for SBA financing. If your business will occupy the property, always explore owner-occupied programs first, the savings can be substantial.