SBA 7(a) loans can be used for long-term working capital, short-term working capital, purchasing equipment, acquisitions, and — most important to real estate businesses — constructing or renovating buildings. With regard to buildings, any business-owned buildings are eligible. These loans can provide financing for office buildings, shopping centers, hotels, and mixed-use projects where the owner occupies more than 51% of the property.

Additionally, SBA 7(a) commercial real estate loans may be used to finance distressed properties. Because the loans are guaranteed by the Small Business Administration, lenders may be more willing to underwrite one for a property that’s not really suitable collateral.

The advantage of 7(a) program over the 504 is when a sale of a business is combined with a sale of commercial property and working capital is needed. As SBA forbids financing a business purchases or working capital under the 504 guidelines.

The most common SBA Standard 7(a) Loan provides eligible businesses with substantial access to funding. These loans can be underwritten for up to $5 million and have maximum maturities of 25 years. The SBA sets maximum interest rates, but borrowers and lenders are allowed to negotiate lower rates. The SBA will guarantee up to 85 percent of the loan’s value for loans as high as $150,000, and 75 percent for loans over $150,000.

SBA Express Loans act as lines of credit, which can be helpful when completing a building or renovation project. These are available for up to $350,000, of which the SBA will guarantee as much as 50%. The loan duration can be up to 7 years. A notable benefit, the SBA will respond to applications for this type of loan within 36 hours.

CAPLines also function as lines of credit, and there are four types of CAPLines available. The most relevant to real estate is the Contract CAPLines and Builders CAPLines, although both are normally purchased by contractors rather than investors. These lines of credit last for up to 10 years or 5 years (for Builders CAPLines).

The SBA’s Veteran’s Advantage doesn’t offer a specific loan type but is rather a fee-reducing benefit that can be applied to any other SBA loan program. The majority of veteran-owned businesses can apply for this after applying to their desired loan program.

SBA Guaranty: The main feature that all SBA 7(a) loans come with is a guarantee from the Small Business Administration. The guarantee ensures that lenders will recoup some of the loan amounts if a borrower defaults, and that will make lenders more willing to approve loans. In order to obtain a loan, businesses must work with an SBA-approved lender.

Maximum Interest Rate: Since the SBA sets maximum interest rates for each of these loan programs, businesses know that their loans will come with fair rates. These loans are intended for situations where businesses can’t secure affordable and reasonable financing without assistance, and many businesses that are in such situations would otherwise pay extremely high-interest rates.

Prepayment Penalty: Businesses should be aware that all SBA 7(a) loans come with prepayment penalties. The penalty time frame, amount, and structure vary among individual Section 7(a) programs.

Loan Assumption: SBA 7(a) loans are assumable, so long as the purchasing business meets the SBA’s eligibility requirements. Transferring one of these loans to a purchasing business requires going through an approval process with the SBA.

Personal Guaranty: Although the SBA guarantees these loans, all Section 7(a) loans require a personal guaranty by anyone who owns 20% or more in the business.

Businesses must be for-profit entities and must be the correct size according to the SBA.

Businesses with a tangible net worth of over $15 million are not eligible. An average net income at or below $5 million after federal income taxes is also required. Businesses must have this average net income for the two years just before application. Nonprofit organizations and businesses engaged in passive or speculative activities do not qualify for the 504 loans. CDCs can help businesses in their geographic region determine whether they qualify.

For a $1,000,000 activity, 504 project costs may be used for the following activities:

• Buying land
• Purchase of a building
• Renovation of an existing building
• Purchase of furniture and equipment
• Soft costs

Proceeds from 504 loans must be used for fixed assets and some soft costs.

• Land improvements (such as grading, utilities, street improvements, landscaping and parking lots)
• New building construction
• Long-term machinery
• Modernization of an existing building
• Conversion of an existing building
• Debt refinancing in connection with business expansion through construction of new facilities, purchasing of new equipment, or renovation of existing facilities

It’s important to note that the SBA 504 program cannot be used for purposes relating to inventory or working capital, consolidation of debt, or repayment of the debt, except for projects as described above.

No, you can’t refinance an SBA 504 loan. However, there is a 504 refinancing program offered by the SBA, which allows business owners to refinance an existing commercial loan. The loan being refinanced cannot be any type of SBA loan.

85% of the original business loan should match the qualifications for an SBA 504 loan, and the remaining 15% of the loan must have been used to benefit the company. The original loan must be no less than two years old. To refinance, borrowers must make a 15% down payment, and eligible assets must be used as collateral.

Businesses less than two years old are not eligible to refinance. Businesses cannot refinance to expand their business, although they muse a standard 504 loan to promote their own business growth. Getting a 504 refinancing loan is a very similar process to getting a 504 loan. To start, the business must work with a CDC and private lender to obtain the loan.

Despite their conventional nature, conventional commercial real estate loans are quite flexible and can be used to finance many different property types. Owners of multi-family, single-family rental portfolios, retail, office, hotels, and industrial properties may use these loans. Moreover, the loans are well-suited for inexperienced borrowers because they’re fairly simple and straightforward.

In some cases, conventional loans are also used to finance distressed commercial properties. This is possible because the loans often have a personal guaranty (see Features section).

Although conventional commercial real estate bank loans are fairly straightforward, their terms can vary since no government agency oversees these loans. Terms may vary depending on property type and the lending institution. The following generally holds true for these loans.

Most conventional loans come with loan-to-value ratios up to 75 to 80 percent.

While the official duration of these loans is often 5 to 10 years, property owners commonly refinance before a loan fully matures. The interest rate is frequently only fixed for a few years, after which a balloon payment or variable rate might kick in. It’s when the fixed rate expires that property owners commonly refinance.

The amount borrowed through conventional loans encompasses a wide range. In particular, these loans can be underwritten for smaller loan amounts than what other loan options offer.

Conventional commercial loans come with many features, but there are three prominent ones that borrowers should be aware of:

Personal Guaranty: The vast majority of conventional loans require a personal guaranty, and borrowers must have the net worth and creditworthiness to qualify for a loan. The personal net worth of a borrower frequently (but not always) should be at least equal to the borrowed amount. Depending on the exact nature of the personal guarantee required, these loans may be either full-recourse, partial recourse, or non-recourse. (A personal guaranty might not be required in select situations, in which case the loan would be non-recourse.)

Prepayment Penalty: Most conventional loans come with a prepayment penalty, which may be structured as a flat rate, or step-down (declining) penalty. Step-down penalties are most common on shorter loans. Longer-term conventional loans are more likely to have a step-down or flat-rate penalty.

Loan Assumption: Many conventional loans are usually assumable for a fee, which most often comes into play when a financed property is sold. Assumption allows a buyer to replace the seller as the guarantor of the original loan when purchasing a financed property. It can help eliminate prepayment penalties, and may also give a buyer access to a more favorable loan than would otherwise be available at the time of purchase.

CMBS loans are secured by a first-position mortgage. A first-position mortgage counts as the first lien, or first in line to have their debts paid. These types of loans are created in a group format that is essentially packaged and sold as a secured series of bonds. Each series bond is organized as a tranche, or, a bundle of “similar risks and rewards.”

For those who are issued lowest-risk CMBS, principal and interest payments are received first. The higher-risk CMBS are the ones who end up at a loss if their borrower defaults on payments. The risk rating issued is up to the lender’s discretion, taking into account the investment base, potential for earning, and risk capacity of the borrower in question.

CMBS loans are typically originated at a fixed interest rates, which may (or may not) include an introductory interest-only payment period. The interest rates are typically based on the treasury swap rate plus a spread (lender’s profit). See today’s commercial mortgage rates for up-to-date information.

The amortization schedule for CMBS loans usually spans from 25 to 30 years, with a balloon payment towards the end of the loan. These loans are specifically meant for commercial real estate. Of course, unlike their correlating residential loans (RMBS loans), CMBS loans contain more risk because of the operating businesses located with each property.

Commercial Mortgage-Backed Securities are highly structured to ensure the certainty of cash flows passed through to the bondholders. Despite the fact that CMBS loans are not standardized like RMBS loans, having fixed terms reduces prepayment and default risks.

As mentioned above, Commercial Mortgage-Backed Securities are classified by their tranche. Tranches are organized by level of credit risk, which ranges from the lowest to the highest risk.

• The lower-risk CMBS tranches are classified as “Senior,” which designates a higher quality credit rating.
• The higher risk tranches, which are of the lowest payment, are referred to as “Junior” bonds.

The Senior tranches receive principal and interest payments first, whereas the Junior tranches pay higher coupons in exchange for being the last to receive payments and first to absorb losses. Additionally, the tranches that absorb more risk also absorb more of the potential losses that may occur.

Organizing a CMBS capital structure into these classifications allows for a securitization process. Having this kind of structure is important for CMBS lenders and investors because it allows investors access to higher yields in commercial real estate investment compared to traditional government bonds. It also allows banks to recycle capital while generating a profit through arbitrage.

To describe the characteristics and risks of Commercial-Backed Mortgage Securities, it is best to break down loan features and requirements. Here is what is involved in structuring a CMBS loan:

Amortization and Term Length

A typical amortization schedule ranges from 25 to 30 years. Term lengths depend on many factors including cash flow analysis, credit risk profiles, risk profiles, and the lender’s discretion. Term lengths end with a balloon payment at maturity which is typically paid by either refinancing the existing loan or with the proceeds from selling the property.

Non Recourse

CMBS loans are non-recourse loans, which generally means that borrowers aren’t personally liable for repayment of the loan. Only cash flows from the financed property and its value can be seized in the event of default or foreclosure.

In a few exceptions, CMBS loan terms do allow lenders and investors to hold borrowers personally liable if the borrowers act in a way that harms the property or investment. For example, borrowers may be personally liable if they commit loan fraud or take collusive action which results in bankruptcy. These exceptions are colloquially called “bad-boy carve outs.”

Prepayment Penalties

CMBS loans include one to three different prepayment penalties—defeasance, yield maintenance, or a step-down/fixed schedule. Prepayment penalties exist to incentivize the borrower to stay with the loan for the entire term so the bondholders can receive their principal and interest payments as scheduled. CMBS loans can differ from other types of loans because they carry prepayment penalties for almost the entire term.

Defeasance

Defeasance occurs when a commercial real estate mortgage is removed from the CMBS trust and replaced with government bonds that produce identical cash flows. This provides bondholders with a stronger risk-adjusted investment profile.

Yield Maintenance

Yield maintenance is when CMBS loan principal and interest is repaid in a lump sum, which is good for both parties. The bondholder will receive the same yield as if the borrower had made all of the scheduled loan payments.

Step Down

A Step-Down prepayment penalty, also known as being on a declining or fixed schedule, is a predetermined sliding scale or fixed percentage which corresponds to the amount of time since the loan was originated.

Loan Assumption

A loan assumption occurs when a property owner sells a commercial real estate asset, with the secured CMBS loan attached. The buyer will then assume and continue making payments on this loan. The new borrower will be bound by the same loan documents, which allows the previous to avoid prepayment penalties.

Despite the fact that loan assumptions require fees, it affords the new property owner a more efficient financing process as opposed to procuring a new mortgage. Most CMBS loans are considered to be assumable, which provides options for borrowers and less prepayment risk to be absorbed by bondholders.

Commercial Mortgage-Backed Securities(CMBS loans) are primarily available for any commercial property type which produces stabilized cash flows. The types of properties that would include are:

• Multi-family properties (apartment buildings, duplexes, gated communities, etc.)
• Storage facilities
• Hotels and hospitality spaces
• Industrial buildings
• Retail spaces (malls, shopping centers, outlets, etc.)
• Office buildings
• Warehouses

Loan minimums usually begin at one dollar. Maximum loan amounts are concluded based on perceived credit risk and are at the lender’s discretion.

Because CMBS loans aren’t regulated by a federal or state agency, the loans offer flexible terms that can be adjusted to suit many different commercial properties. Most of these loans are written for 5, 7, 10 years, and based on 25- or 30-year amortization schedules. Loan-to-value (LTV) ratios of up to 75 percent are permitted, and some may allow even higher LTV ratios if a CMBS loan is combined with mezzanine debt. Most loans have fixed rates, although variable rate conduit loans can be found.

With regard to the amount borrowed, CMBS loans most often have balances starting at $3 million. Loans for as little as $1 million are offered in some cases, though. On the other end of the spectrum, these loans can be written for $1 billion or more.

Once a CMBS loan has been sold into a CMBS trust, the borrower will work with a servicer otherwise known as a master servicer, rather than the original lender. The master servicer is responsible for handling the administrative aspects of the loan, which includes collecting payments from the borrower and managing escrow accounts.

If the borrower defaults on their loan, the loan in question is transferred to a more management-intensive servicer referred to as a special servicer. The CMBS special servicer is responsible for potentially modifying the borrower’s loan terms and helping the property return to achieving a stabilized level of operating performance. All modifications must be made while taking into account the bondholder’s best interests.

Several rating agencies provide credit ratings for CMBS loans. The majority of ratings run from AAA through BBB-, along with an unrated class that’s the lowest. Major CMBS rating agencies within the United States include S&P Global, KBRA, Fitch and Moody’s.

Commercial real estate bridge loans are available for virtually any type of property, and their features make these loans well-suited for several different situations:

• Flipping Properties: Property flippers frequently finance properties with unamortized commercial bridge loans, which are paid back in one lump sum. A loan provides capital for purchasing and remodeling a property, and the loan can be paid off when the property is sold.
• Investing in Properties: Property investors may initially finance the purchase of a high-demand property and later transfer the financing to a traditional mortgage. Underwriting for these loans usually takes less time than getting a traditional mortgage does, allowing investors to close on a property more quickly.
• Moving a Business: Businesses that are relocating may use a commercial bridge loan so that they can purchase a new property before selling their current one. This eliminates the risk of having a purchase fall through after a sale has been executed, which can leave a business without facilities.
• Financing With Poor Credit: Businesses that have poor credit may be able to qualify for a commercial bridge loan even if they can’t get a traditional long-term commercial real estate loan.

Commercial real estate bridge loans aren’t regulated by a state or federal agency in the same way that standard mortgages are, and they offer flexible terms as a result. Most of these loans are written for 6 months to 3 years, and they may be amortized (paid in monthly installments) or amortized (paid in a single lump sum). Interest-only monthly payments are widely available, and interest rates can be variable or fixed.

Loan-to-value (LTV) ratios range between 65 and 80 percent, with the higher maximums usually reserved for properties that are being improved. The borrowed amount can be tens of millions of dollars, or it can be less than 100,000. The duration and amount borrowed may also affect the maximum LTV allowed.

As noted, the two primary features of commercial real estate bridge loans are their:

• Short Duration: The short duration of these loans makes them ideal for covering gaps between other purchasing or financing solutions. They can be used to finance a property that’s only held for a few years or few months, or they can serve as interim financing until a long-term mortgage is secured.
• Property Basis: The value of the financed property serves as the primary basis for underwriting. This both simplifies the underwriting process and gives businesses that otherwise might not be able to secure financing access to a loan option.

Along with these, commercial bridge loans are often non-recourse loans and can be set up so that monthly payments are for only the interest incurred. Non-recourse loans prevent borrowers from being held personally liable in the event that the loan isn’t repaid. Interest-only loans are commonly used for short-term purchases of property.