Overview of Commercial Real Estate Financing

Commercial properties are more complex than residential properties, and commercial mortgages are consequently also far more complex than their residential counterparts. One can generally describe a home pretty well by giving just its square footage, room distribution, location, land area and condition. But when we describe a commercial property we have to take into consideration a whole set of additional features, not least the property type/use, property income figures and ownership history.

Also, because these properties are part of a business, the needs of the borrower are different and generally more complex than those of a residential borrower. To meet these needs, a number of different types of lenders have developed a number of different types of loans. Below are some brief bullet points. For more details, follow the links.

Types of Commerical Mortgages

• Term loans - The term loan is the closest commercial equivalent to a conventional residential mortgage. Meant for carry the property through an established and long ownership, these loans have long terms (10-20 years). These loans are typically offered by conduit lenders and banks.
• Bridge Loans - As one can guess from its name, the primary purpose of this type of commercial mortgage is to act as a financing bridge between acquisition or development of a property and a permanent, conventional term loan. "Hard", or "Private", money is generally the source for these bridge loans.
• Mezzanine Loans - Mezzanine loans have become a common alternative to conventional subordinate financing where the terms of a superior (first position) loan prohibit the placement of junior liens on the subject property.
• Mini-perm Loans - A mini-perm loan is a type of conventional loan typically used for acquisition or construction of a property and establishment of an operating history, in preparation for obtaining a term loan.
• Construction Loans - Obviously, a construction loan is a loan that allows the borrower to build, expand, rehabilitate, or reposition a property. For modest projects, local banks are usually a good source for commercial construction loans. More ambitious projects may need the assistance of larger portfolio lenders such as investment firms.
• SBA, FHA/HUD, Fannie Mae and Freddie Mac Commercial Loans - A variety of agencies participate in lending on commercial properties by insuring loans originated and (sometimes) serviced by approved lenders. Some of these agencies are managed by the government, while others merely enjoy certain governmental assistance such as tax deferment or exemption.

Types of Commercial Mortgage Lenders

• Portfolio Lenders - So-called "portfolio" lenders make commercial mortgages with the intention of retaining the generated asset as part of the company's portfolio.
• CMBS Conduit Lenders - Commercial mortgage-backed securities (CMBS) arose in the late '80s following the savings and loans crash as a way of enabling investors to participate in commercial mortgage lending within a managed context.
• Sub prime Lenders - Sub prime Lenders may be owned by banks, and the notes they generate may sometimes also be securitized...
• Private Investors and Funds - A more diverse and fluid category of commercial mortgage lenders includes so-called "Private" or "Hard Money" lenders.

Read more about the different types of commercial lenders.

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