How to Finance Commercial Real Estate
Financing a commercial real estate purchase in Rochester or Macomb County involves more choices than residential, and picking the right structure has a lasting effect on returns. The financing decision usually comes down to four questions: conventional or SBA, fixed or floating, short term or long term, and recourse or non recourse.
Conventional commercial loans are the default for investment property. Most Macomb and Oakland County community banks and credit unions offer them, typically at 25 to 30 percent down, 5 to 10 year terms with 20 to 25 year amortization, and recourse with personal guarantees. Rates run a point or two above residential. Approval depends on DSCR, LTV, and borrower strength. These loans work for stabilized investment property where the income supports the debt.
SBA loans, specifically the 504 and 7(a) programs, serve owner user buyers who will occupy more than 51 percent of the building. SBA 504 uses a 50/40/10 structure, with a conventional lender covering 50 percent, a certified development company covering 40 percent at a fixed rate for up to 25 years, and the buyer putting 10 percent down. That low down payment preserves working capital, which is why SBA 504 is a go to structure for growing small businesses buying their first building.
Bridge loans fill the gap when a conventional loan is not yet possible. A value add building that needs lease up or capital work before it can support stabilized debt often starts with a bridge loan at higher rates and shorter term, then refinances into permanent financing once the property is stabilized. Bridge loans in the Rochester and Macomb County market usually come from private lenders or specialty commercial lenders, and rates are two to five points above conventional.
Construction loans finance ground up or significant renovation projects. They draw in stages as work progresses and convert to permanent debt at completion. Construction lending requires more documentation, including plans, bids, and contractor agreements, and rates are higher during the construction phase.
Seller financing is an often overlooked option, especially on older buildings where the seller has significant equity and wants to defer taxes or generate income. A seller carrying a second mortgage behind a conventional first can let a buyer get into a building with less cash down, and the seller gets interest income plus the installment sale tax treatment on any gain. In the Rochester and Macomb County market, seller financing pops up most often on older industrial and small mixed use where traditional lenders see higher risk than sellers do.
Choosing the right structure depends on the property, the buyer’s situation, and the market. TDG Commercial, recognized as top commercial agents in Rochester MI, maintains relationships across the lender landscape and walks clients through the pros and cons of each option based on the specific deal. Financing is never one size fits all in commercial, and taking time to match structure to situation materially improves long term returns.
One additional consideration is the prepayment penalty structure. Many commercial loans include yield maintenance or defeasance clauses that make early payoff expensive, sometimes tens of thousands of dollars on mid size deals. Investors planning to refinance or sell within a few years should pay close attention to these clauses. A loan with flexible prepayment options might have a slightly higher rate but saves far more when it is time to reposition the property.
