Loan Type

Definition of Loan Type

In the context of commercial mortgages, the Loan Type refers to the specific classification and structural framework of a debt instrument used to finance income-producing real estate. Unlike residential mortgages, which are relatively standardized, commercial loan types are defined by their repayment structures, underlying collateral, duration, and the specific intent of the borrower (such as acquisition, development, or stabilization).

Detailed Description of Common Commercial Loan Types

The choice of loan type significantly impacts the interest rate, the level of personal liability for the borrower, and the overall flexibility of the investment. Below are the primary categories found in the commercial marketplace:

• Permanent Loans: These are long-term mortgage loans (typically 5 to 20 years) on stabilized properties. They usually feature fixed interest rates and follow an amortization schedule of 25 to 30 years, often concluding with a balloon payment.
• Bridge Loans: These are short-term financing solutions (usually 6 months to 3 years) used to "bridge" the gap until a borrower can secure permanent financing or sell the property. They are typically interest-only and carry higher interest rates.
• Construction Loans: These loans are used to fund the building of a new structure from the ground up. The funds are typically disbursed in "draws" as construction milestones are met. These are almost always variable-rate and require a transition to a permanent "take-out" loan upon completion.
• SBA Loans: Backed by the Small Business Administration, these loans (specifically the 7(a) and 504 programs) are designed for owner-occupied businesses. They offer lower down payments and longer terms but require the business to occupy at least 51% of the property.
• CMBS Loans (Conduit Loans): These are commercial mortgage-backed securities. The loan is pooled with others, securitized, and sold to investors on the secondary market. They are often non-recourse and offer competitive fixed rates, though they have very rigid prepayment penalties like defeasance.
• Mezzanine Financing: This is a hybrid of debt and equity. It is a subordinate loan that sits behind the primary mortgage. In the event of default, the mezzanine lender can take an equity interest in the property.

Structural Characteristics

When evaluating a loan type, lenders and borrowers must also consider the following structural variables:

• Recourse vs. Non-Recourse: Recourse loans allow the lender to pursue the borrower's personal assets if the collateral is insufficient to cover the debt. Non-Recourse loans generally limit the lender's recovery to the property itself, subject to certain "bad boy" carve-outs.
• Amortization vs. Interest-Only: Some loan types require the borrower to pay both principal and interest, while others allow for interest-only periods, which maximize cash flow but do not reduce the loan balance.
• Floating vs. Fixed Rates: Commercial loans may have a fixed interest rate for the duration of the term or a floating rate that fluctuates based on an index such as SOFR (Secured Overnight Financing Rate).