How are Commercial Mortgage Rates used?

Commercial banks charge higher commercial mortgage rates and fees than they do for residential properties because there's more inherent risk involved when it comes down to lending out large sums of money for investment purposes. The greater loan amount at stake in proportion to the property value, measured by the Loan-to-Value ratio ("LTV") may also require additional security measures from borrowers who need these loans, resulting in a more complex loan structure and potentially recourse against the borrower’s personal assets along with the property.

There are 8 major types of commercial loan programs and each has a different range of rates. Commercial real estate investors use current commercial mortgage rates to determine their cost of capital for a particular investment in order to see if it's even worth investing in at all.

Commercial loan rates are determined by the current market conditions but there is a lot of back and forth with lenders to negotiate terms.

Commercial mortgages can be hard to obtain, especially for borrowers who don't have perfect credit, a high net worth, or a long, successful track record in real estate investment, so sometimes it's helpful to work with an experienced Capital Advisory team like StackSource to help with the process.

Commercial mortgage rates change all the time because they're affected by several factors such as:

• The current economic outlook, which affects consumer confidence (how much people plan to spend and invest). This also determines if banks need more liquidity.
• Federal interest rate changes often affect commercial mortgage rates closely after rising or falling since commercial loans can impact businesses' ability to participate in the local economy and create jobs at home.
• Increases or decreases in inflation since property investments are typically long term assets.

Commercial Property Interest Rates

The average interest rate for commercial properties fluctuate based on current economic factors. The rates will also vary between various commercial property types, locations, and risk profiles.  A few examples of commercial property types include:

Loans for property types with strong economic tailwinds will typically command more favorable financing rates and terms. Multi-family and industrial properties are currently in high demand on the capital markets, and will see some of the lowest interest rates. Office buildings (with the exception of Medical Office), and certain retail properties may be seen by lenders as more risky financial bets, so financing rates and terms may be less favorable.

Top 11 Questions About Commercial Real Estate Loans

Here are some of the most frequently asked questions we typically see investors ask at StackSource.

What qualifies as Commercial Real Estate?

Commercial real estate is defined as any property where the majority of its use (generally at least 50%) falls under commercial or business usage. Commercial properties include: office buildings, strip malls, hotels/motels, shopping centers, warehouses, and more. Commercial mortgages are available for all types of commercial properties.

Commercial mortgages also apply to Multifamily properties (apartments, mobile home parks, student housing, and senior housing) if the property comprises of five or more residential units.

Why use a commercial real estate loan?

Commercial real estate loans can be used to acquire, develop, or refinance a commercial or multifamily property, and are typically larger than residential mortgages. Much like buying a home with a consumer mortgage, a commercial mortgage allows the property owner to own and invest in the property with less cash than the total value of the property. Using a commercial mortgage with a low interest rate to purchase a property can also boost an investor’s financial returns.

What is an ARM Commercial Loan?

ARM stands for an adjustable-rate mortgage, also known as a Variable Rate or Floating Rate. ARMs are often used when borrowers desire lower monthly payments in the short term, but are willing to accept the risk of a higher interest rate. Commercial ARMs can be helpful for borrowers looking at several years of low commercial mortgage rates without taking on additional costs or restrictions of a fixed rate loan, like a prepayment penalty.

Who controls Commercial Interest Rates?

Commercial loan interest rates are highly influenced by The Federal Reserve and its members (or the central banks of various countries outside the US), but ultimately are driven by the total supply and demand in the capital markets. Therefore no one entity controls commercial mortgage rates.

How do Commercial Loan Rates Affect Investors?

The rates you receive directly impact how much it will cost you to buy a given property, and therefore impacts the key financial metrics such as your Cash on Cash Return, Equity Multiple, and IRR.

How can you find the best commercial real estate rates?

There are thousands of commercial mortgage lenders in the United States. The most commonly known commercial lenders are banks and private lending companies. However, there are several other categories of lenders that may be able to provide the most suitable commercial mortgage depending on the property type, size, location, and borrower business plan.

Other types of commercial mortgage lenders include credit unions, life insurance companies, debt funds, government agencies (like Fannie Mae and Freddie Mac), and commercial mortgage backed securities (“CMBS”).

Soliciting quotes from multiple lenders that are interested in the particular commercial real estate asset is the most reliable way to find the best commercial mortgage rate.

How much is the typical down payment for a commercial mortgage?

Down payments for commercial real estate loans are typically between 20% and 50%, and will vary based on the loan scenario. Down payments, also known as an investment’s Equity Requirement, will be determined by location, type of asset, experience of the borrower, and risk profile of the investment.

What's the typical minimum down payment for a commercial mortgage?

The minimum down payment for commercial real estate loans is usually around 20-30% of the purchase price if the property is cash-flowing and the borrower has a clean financial profile, but this varies widely based on the type of property, the business plan, and the borrower's track record.

What are closing costs in commercial real-estate?

Commercial real estate loans always have closing costs, some of which are regulated by law.

Closing costs can include appraisal fees, credit reports, real estate attorney fees, title insurance, and recording charges. Commercial mortgage borrowers are usually also billed for the lender’s real estate attorney, so be cognizant of negotiating small items in the loan documents that may not be worth revising.

What are typical fees for a commercial mortgage?

Fees related to originating a commercial mortgage may also be assessed at closing, and be added to the list of closing costs above. Some loans will also require payment of an application fee, an extension fee, or even an exit fee. The loan’s Term Sheet will outline a full schedule and explanation of fees before committing to take out the loan.

Commercial property investors may also be responsible to pay additional settlement agent or broker's commissions in addition to lender origination points (in other words - an up charge added onto their interest rate).

What is Commercial Mortgage Debt Service Coverage Ratio?

The debt service coverage ratio (“DSCR”) determines how much net income commercial real estate properties generate compared with their loan payment. Commercial mortgage debt service coverage ratios vary depending on property use, location and other factors, but most lenders want at least a minimum of 1.2 times monthly loan payments from total income.

This means that if your property generates income of $120,000 per month, net of expenses, then a lender may provide a loan that costs up to $100,000 per month in principal and interest payments.