Making Sense of Commercial Property Estimates

Current real estate rates.

As of August 2024, we see rates ranging from about 5% to 15%, depending on the type of property and specific loan conditions.

Key components of real estate appraisals.

Mortgage rates are determined based on a combination of market factors, property-specific factors, borrower and lender status, and loan structure.

Market conditions

All market conditions play a role in determining real estate prices.

Economic factors

The quality of loans is influenced by broader economic conditions, such as inflation, economic growth, and overall economic health.

Interest rates

The general level of interest rates in the economy—usually indicated by reference rates such as the prime rate, LIBOR (London Interbank Offered Rate), or the US Treasury yield—can affect the rates offered by lenders.

It is important that borrowers carefully consider these factors and work with lenders to secure the most favorable terms, based on their financial situation and the specifics of the commercial property activity.

Area-specific features

The type of building and location will also affect your final estimate.

Type of structure

Different types of commercial properties may have different risk profiles, which affect interest rates. For example, prices for office spaces may differ from those for industrial buildings.

Location

The location of the property can affect the prices. Properties in high demand or economically prosperous areas may have lower rates compared to those in less desirable areas.

Eligibility of borrower

Your creditworthiness and your general financial situation will affect your rating.

Credit score

Eligibility of the borrower is an important factor. Lenders evaluate the borrower's credit history, financial stability, and credit-to-income ratio to determine the risk associated with the loan.

Business finance

Lenders may also assess the financial health and performance of the business occupying the commercial property.

Loan-to-value (LTV) ratio.

The loan-to-value (LTV) ratio is the percentage of the property's value that you are looking to finance with the loan.

If you want a higher LTV ratio, it means you want to borrow a larger portion of the property's value, which may bring more risk to the lender. Because of this increased risk, you may find that higher LTV ratios often correspond to higher commercial loan rates.

Loan period and repayment period

Rates will also vary depending on the length of the loan and the payment plan.

The term of the loan

The length of the loan term can influence the interest rate. Short-term loans may have lower rates but higher monthly payments, while longer-term loans may have slightly higher rates but lower monthly payments.

Time to pay the bill

The length of time it takes to repay the loan (ie the amortization period) may affect the interest rate. A longer amortization period may result in higher interest charges.

Policies and competition of lenders

All lenders' ratings are affected by investment portfolios and competition.

Lenders' policies

Each lender may have their own terms and policies, which affect the rates they offer. Some lenders may specialize in certain types of properties or industries.

Competition

The competitive environment among lenders can affect rates. Borrowers can get favorable rates if lenders compete for their business.

Adjusted rates compared

Loan rates can be fixed (i.e. fixed during the term of the loan) or variable (i.e. fluctuating based on market conditions). Fixed rates offer stability, while variable rates may provide initial cost savings but involve more risk. Borrowers should choose the type of rate that matches their financial goals and risk tolerance.

SBA 504 Loan Ratings: A Closer Look.

For entrepreneurs looking to finance capital assets such as real estate or equipment, the Small Business Administration's (SBA) 504 loan can be a good option. SBA 504 loans are known for their competitive and predictable rates, making them a popular choice among borrowers.

Fixed-rate loans under this program are tied to US Treasury bonds, which typically carry some of the best rates in the market. SBA 504 loan rates are set when the SBA sells a bond to finance the loan. This means borrowers can lock in a low, long-term fixed rate, protecting their business from future interest rate increases. The 10-year Treasury rate as of August 2024 is estimated at 4%.

It is also important to understand that SBA 504 loan amounts include two separate loans—one from a Certified Development Company (CDC) and one from a bank or other financial institution. CDC loans, covering up to 40% of total project costs, have a fixed interest rate. In contrast, bank loans, which cover 50 percent or more of the total cost of the project, can have a variable or fixed amount, depending on the specifics of the agreement.

Remember, apart from these attractive rates, it is important to consider all aspects of your financial situation and business goals before deciding on a loan product. Consult a financial professional to make sure you are making the best choice for your business.

Wrapping up

By familiarizing yourself with the main factors that influence these prices, and looking at current market conditions, you are already on the right track.

Whether you're considering a commercial loan or exploring options like an SBA 504 loan, remember that the best choice will depend on your unique financial situation and business goals.

_{The information provided on this blog is for educational purposes only, and is not intended to be business, legal, tax, or accounting advice. The views and opinions expressed in this blog are those of the authors and do not reflect the official policy or position of Lendio. Although Lendio strives to keep its content up to date, it is only accurate as of the date posted. Offers or trends may be out of date, or may no longer be relevant.}