Commercial real estate investment is always profitable, but buying commercial real estate properties without taking out loans is next to impossible given their total value. Since commercial real estate investments have high demand, so do commercial real estate loans.

As with every aspect of the industry, it is vital to understand the dynamics of commercial real estate loans to become more familiar.

Significance of Commercial Real Estate Loan Terms

As mentioned above, taking out commercial real estate loans is unavoidable if you are making a commercial real estate investment. These loans are sizeable, and staying on top of them is important to ensure you understand the net costs, total liabilities, and repayment timelines.

Top Commercial Real Estate Loan Terms to Know About

Although the list of critical commercial real estate loan terminology is extensive, the following are some of the most significant ones you need to consider.

1. Prepayment

Prepayment refers to the payment of a loan before the maturity date. While the concept theoretically has obvious benefits for the borrower who can afford it, it is not always practically viable. Debt-related products and services are designed to maximize the lender’s yield against the loan.

The calculation includes the total interest the loan will accumulate if the borrower follows a payment schedule, finalizing payment on the maturity date. Therefore, prepayment will deprive the lender of earning the remainder interest, and most parties keep prepayment penalties for making up for the lost income if a borrower decides to prepay.

2. Commercial Bridge Loans

Commercial real estate loans are a short-term financing solution for borrowers nearing the loan maturity date but do not have the funds to make the payment.

Bridge loans, therefore, act as a temporary mortgage for the borrower who needs more time to find a sustainable permanent refinancing solution for their debt.

3. Commercial Hard Money Loan

Hard money loan refers to the traditional form of short-term lending, often used by borrowers as a final resort for debt repayment. They are a refinancing solution that keeps the commercial real estate property as collateral for nonpayment.

While they need shorter processing times, hard money loans are unregulated. They can easily use predatory interest payment terms, thereby trapping the borrower into paying far more interest than they would have paid if they used a regulated refinancing solution.

4. Loan-to-Value Ratios

The loan-to-value ratio determines the value of the loan as a percentage of the property’s value. Lenders calculate it by dividing the loan amount by either the property’s appraised value or the purchase price (they choose the lower amount) and prioritize lending to the borrowers with lower LTVs.

Wrapping Up

Overall, knowing the key commercial real estate loan terms about lending strategies, refinancing options, and valuations will give you a deeper understanding of commercial real estate loans and enable you to make informed choices.

We hope you found this blog informative and enjoyable to read. If you want to make a commercial real estate investment in Rio Grande Valley, please don’t hesitate to contact us. CHRE has years of experience working in the region, and our teams will ensure you find the most favorable deals.