Commercial Real Estate Finance. Here’s What You Should Know

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Commercial Real Estate Finance. Here’s What You Should Know

A commercial real estate loan can be secured for multiple reasons. A company may want to acquire an additional office, a manufacturing plant or a warehouse to operate its own business. An investor may also seek financing to purchase a rental commercial property to improve their cash flow. Alternatively, development companies may require construction financing to fund a mixed-use construction project.

The commercial real estate landscape and its funding sources are constantly changing while responding to various trends and shifts in the overall market. For anyone interested in investing in commercial real estate, it is imperative to stay informed of these changes. Learn more about market trends and whatcommercial real estate capital solutions are available in the current market before choosing one option over the other.

There are five broad categories of commercial real estate capital solutions.

Equity investors:an equity investor will provide a percentage of the required loan of a commercial real estate transaction for a percentage share of the project’s ownership. Choosing to go with an equity investor is a choice you make to enter into a business partnership with the investor. Quite different to borrowing money that you will pay back over time with no interference with the operations of the project. Unlike debt instruments, equity investor returns correlate to your revenue generation. If you feel your project revenue is going to be uncertain in the short to medium term, reaching out to an equity investor can be a good decision. 

Banks: banks are generally the go-to for smaller commercial real estate financing. You can also consider larger banks for your multifamily or investment property loan. Every CRE loan will have different terms and conditions and these may differ from bank to bank, so take time to research your options before deciding on a lender. Banks will offer long-term lending from 10-25 years and fixed or floating interest rates. Chat to an investment advisor to understand what your best options might be given your circumstances.

Opportunistic lenders: these lenders are known to provide funds to cover a large portion of the total requirement and for projects that have higher investment risk. Opportunistic lenders will grant a loan based on their reading of the project – if they see the same potential as you in the property, they will be willing to take the risk in the hope of generating big returns. Opportunistic lenders will typically work with investors who require a large investment into a project before it can start generating returns, like a mixed-use commercial property for example.

Conduit lenders:these lenders provide commercial mortgage-backed security loans (CMBS loans). The lender pools your loan together with other commercial mortgage loans to create a conduit trust for investors. They are known for their relaxed credit requirement and lower interest rates compared to other CRE funding options, but are restricted to income-generating projects. These loans can be transferred to a buyer if you decide to sell the property. Theywill charge a penalty should you decide to pay off the loan early.