In a previous entry, we examined the best practices to consider when applying for a commercial real estate loan. Understanding the commercial real estate process can give an applicant a huge advantage when seeking financing for a commercial property.
It is important to know commercial real estate loans have a different set of requirements than other loans. In contrast to residential mortgages, commercial real estate loans are required for properties that are considered income-producing real estate. These include apartment buildings, multifamily housing, self-storage facilities, and others that involve a business renting or leasing space to those that operate or live on the property.
Since commercial mortgages are viewed as commercial transactions, they are therefore regulated differently than residential mortgage loans. Valuation is also much more complex because it takes other important factors into account. Most notably, the fundamental aspects of the property, competitors, and market dynamics are elements examined. Below we explore a few of the most popular types of commercial real estate investment properties.
Land that is vacant is considered commercial real estate property. Whether the goal is to develop the land through a construction project, or to re-sell it as vacant land, both situations require a commercial real estate loan.
An individual office building, or a complex containing multiple structures are considered a commercial office property, with medical and dental offices being subsets of this class. Longer leases are often associated with a stream of income from professional firms like: accounting firms, law firms, small businesses, and a variety of other tenants. Office buildings often closely reflect the overall economy as far as performance, as prosperous times lead to higher rents and increased demand.
When the purpose of the building, mall, or center is to accommodate stores, this is considered a retail property. Tenants might include popular anchor chain stores, independently owned shops, and restaurants. These businesses tend to relocate less than office tenants and therefore tend to commit to longer leases.
As with office buildings, retail properties are tied closely to overall economic performance as well. Locations that are highly visible and accessible generally perform better.
Apartments and Multifamily Housing
Duplex homes and other housing that is designed for multiple family groups are considered multifamily housing. This category generally excludes condominiums, which may be constructed as a group but are purchased and sold as single-family housing units. With shorter lease terms than retail and office tenants, commercial apartment buildings and multifamily housing can involve more intensive management and marketing.
Additional Property Types
Other types of properties that require commercial real estate loans include industrial facilities, manufactured housing, senior housing, and affordable multifamily housing. The main distinction from residential properties is that they are income-producing investments.
When selecting a commercial real estate loan for any asset type, keep in mind that it is important to identify the best loan rates and terms in addition to understanding the drivers that will affect investment performance. The commercial real estate lending marketplace is complex, and it requires knowledge and expertise to navigate.
Since commercial mortgages differ from their residential counterparts in length, amortization period, and prepayment restrictions, many investors seek an experienced commercial real estate lender to explain these differences. Specialists in commercial property types can work to secure the best financing solution that suits the needs of the property and the investment goals.