Commercial real estate (CRE) is income-producing property with just business (rather than residential) purposes. Examples include retail malls, professional offices such as for dentists, office buildings, and complexes. Financing, including the acquisition, development, and construction of these properties, often comes from commercial real estate loans. These are mortgages secured by liens on the commercial property. It works as a commercial loan for real estate financing.

In the U.S., 79% of companies use financing to obtain equipment, according to the Equipment Leasing & Finance Foundation. The foundation estimated that organizations would spend $1.8 trillion in 2019 to acquire software and equipment.

Commercial real estate loans are often made to business entities. 

These business entities include developers, corporations, limited partnerships, and funds and trusts. The entities are often formed for the specific purpose of owning commercial real estate.

If such a business entity does not have a financial track record or any credit rating, then the lender may require the principals or owners of the entity to guarantee the loan. 

Hence a person (or group of people) puts their property on the line. In case of loan default, the lender can recover from them.

If the lender does not require this type of guarantee, and the property is the only means of recovery in the event of loan default, this debt is a non-recourse loan. It means the lender has no recourse against anyone or anything other than the property.

LTV is a calculation measuring the value of a loan against the value of the property. A lender calculates LTV by dividing the amount of the loan by the lesser of the property’s appraised value, or its purchase price. For example, the LTV for a $80,000 loan on a $100,000 property would be 80% ($80,000 ÷ $100,000 = 0.8, or 80%).

Borrowers with lower LTVs will qualify for more favorable financing rates than those with higher LTVs. This is because they have more equity (i.e., a stake) in the property. It works out to be less risky from the lender’s perspective.

Commercial loan LTVs tend to fall into the 65% to 80% range. While some loans may be made at higher LTVs, they are less common. The specific LTV will often depend upon the loan category.

You can keep your normal cash flow, and leave your money in the bank. So, you can avoid major out of pocket expenses incurred by buying the equipment up front. And you can benefit from multiple tax advantages.

Equipment leasing is one of the most common types of business funding available today.

When leasing machinery, you will find most leasing options offer you fixed-rate funding.  This means your interest rate and payments will stay the same from month to month during the term of your lease.

SCR compares a property’s annual net operating income (NOI), to its annual mortgage debt service. This includes principal and interest. It measures the property’s ability to service its debt. You calculate it by dividing the NOI by the annual debt service.

For example, a property with $150,000 in NOI and $100,000 in annual mortgage debt service, would have a DSCR of 1.5 ($150,000 ÷ $100,000 = 1.5). The ratio helps lenders determine maximum loan size. That has a basis in the cash flow generated by the property.

A DSCR of less than 1 means a negative cash flow. For example, a DSCR of .93, means there is only enough NOI to cover 93% of annual debt service. In general, commercial lenders look for DSCRs of at least 1.25. This is to ensure adequate cash flow.

A lower DSCR may be okay for loans with shorter amortization periods, and/or properties with stable cash flows. Higher ratios may be required for properties with volatile cash flows. These include, for example, hotels. This is because hotels do not have long-term (i.e., more predictable) tenant leases, which other types of commercial real estate have.

Interest rates on commercial loans tend to be higher than on residential loans. Commercial real estate loans also often involve fees adding to the overall cost of the loan. These can include appraisal, legal, loan application, loan origination, and/or survey fees.

Some costs must be paid up front before loan approval or rejection. Others apply annually. A commercial real estate loan may have restrictions on prepayment. The intention is to preserve the lender’s anticipated yield on a loan.

If investors settle the debt before the loan’s maturity date, they may have to pay prepayment penalties

You can invest in real estate with an SBA 7(a) loan, or an SBA 504 loan. Conventional bank loans are another option, as are hard money loans. Joint venture loans allow parties to share the risk and returns from commercial property investment, without having to formally enter into a real estate partnership.

However, SBA Loans are harder to qualify for, and generally won’t be available for anyone with bad credit.

You can get a commercial mortgage from Freddie Mac, or Fannie Mae. Or try credit unions, or even life insurance companies. Another option is HUD.

However, qualifying for Fannie Mae or Freddie Mac does require higher credit scores. If you have bad personal credit, then this is not a viable option.

With an online marketplace loan, AKA a soft money loan, interest rates will be higher than conventional bank loans. But at least they are lower than loans from hard money lenders. For the most part, online marketplaces match borrowers with shorter-term loans. Terms run from six months to a few years.

If you want longer terms, an online marketplace loan is not a good alternative.

With equity crowdfunding, a property is listed on an equity crowdfunding site.

Most of the companies that list on real estate crowdfunding sites are commercial real estate businesses seeking funding for their endeavors. Regular Joe’s can invest in a commercial real estate portfolio. This is similar to investing in a stock market portfolio. Then they can enjoy the returns without actually buying an entire piece of commercial property.

In this way, commercial real estate investors can raise equity and avoid a loan. At the same time, individuals can enjoy the benefits of commercial real estate investing for as little as $500.

If you want to retain all your equity, then equity crowdfunding is not a good alternative to commercial real estate financing.