7 Alternative Commercial Real Estate Financing Options for Investing
Savvy investors see commercial real estate (CRE) as a diverse, stable asset and a probable hedge against inflation. They consider CRE a tangible asset with tax benefits and a high potential for returns. Yet, banks are increasingly reluctant to lend to smaller investors and rising interest rates offer a stiff deterrence. The good news is there is a growing field of alternative commercial real estate financing options for investors to tap. [1]
Alternative financing options are offering a challenge to established CRE lending methods in a major way. But why are these less orthodox financing methods gaining traction against vehicles like the traditional mortgage? Simply put, bank loans are not always the best choice or fit for many CRE investor needs and goals. Also, the US’s increasingly high interest rates and much stricter lending criteria are narrowing those options for many investors. [2] You can learn more about these different funding avenues that may be right for you below.
7 Commercial Real Estate Financing Options
This section helps you navigate the uncharted waters of alternative finance for the commercial real estate market. It looks beyond the traditional bank loan, dispelling doubts about non-traditional funding. Each of the seven options below explores the risks, regulations, pros, and cons of traditional and less conventional sources of financing. We also look at the type of investor best suited to each of the financing options available.
Here’s a brief summary of the seven commercial real estate financing options.
| Financing Option | Description |
| Conventional bank loans | Traditional financing, lower interest rates, extended repayments |
| CRE hard money loans | Short-term, high-interest loans for lenders |
| Private equity & joint ventures | Pooled investments, experienced investors, access to deals |
| CRE crowdfunding | Smaller investments for accessible financing |
| Mezzanine financing | Debt financing with higher risk tolerance, more flexibility |
| Sale-leaseback transactions | Quick cash, no property management obligations |
| SBA 7(a) and 504 loans | Government-backed loans, lower rates, stringent criteria |
Let’s start with the conventional bank loan as a baseline for comparison.
Option 1: Commercial Bank Loans (Mortgages)
Commercial bank loans are what most investors would consider traditional financing. Banks generally offer lower interest rates and extended terms compared to the alternative financing options. However, strict qualification criteria and lengthy approval processes present challenges, especially for new CRE investors. And there’s always a chance of rejection, even after a prolonged authorization process.
Pros of commercial property bank loans:
- Lower interest rates than alternatives
- Protracted repayment periods
- Regulatory stability
- Access to established banking systems
Cons of CRE bank loans:
- Rigorous qualification criteria
- Potentially lengthy approval process
Ideal Investor Profile for Commercial Property Bank Loans
The ideal investor for traditional bank loans is someone who is financially stable. They have a strong credit score and an excellent track record of repayment. Those with a substantial amount of equity in the property typically experience faster approval times.
Option 2: CRE Hard Money Loans
Hard money loans offer swift collateral-backed (bridge) financing for investors. This type of loan has higher interest rates and shorter repayment periods than bank loans. Hard money lending is less strictly regulated than traditional loans, resulting in faster processing.
Pros of hard money loans:
- Quick funding; ideal for time-sensitive opportunities
- Flexible approval, focused on property value, not credit scores
- Useful for fix-and-flip or distressed properties
- Early repayment with no extra or hidden fees
Cons of CRE hard money loans:
- High-interest rates: high-cost loans due to increased risk
- Short repayment terms (typically 6-24 months)
- Collateral requirement: assets serve as security
Ideal Investor Profile for Hard Bank Loans
Hard bank loan investors are seasoned and often seek short-term commercial real estate financing for value-driven CRE projects. That means a solid exit strategy. These investors are comfortable with higher interest rates and experienced at managing quick turnarounds.
Option 3: Private Equity and Joint Ventures
Private equity and joint venture investors pool resources for commercial real estate financing. This type of funding often requires complex negotiations, due diligence, and risk management. Because of this, these loans can take a considerable time to close.
Pros of private equity and joint venture financing:
- Funds larger real estate projects; increased potential
- Leverages combined resources for profitability
- The shared risk reduces individual investor exposure
- Offers access to wider industry connections
Cons of private equity and joint venture funding:
- Complexity requires intricate negotiations and terms
- Potential for disagreements and subsequent delays
- Shared decision-making may require compromises
Ideal Investor Profile for Private Equity and Joint Venture Financing
The ideal private equity and joint venture funding investor is collaborative and informed. They are willing to navigate complexities, conduct due diligence, and share risks.
Inexperienced or busy investors may feel overwhelmed by the different types of financing options and their associated nuances. Consider teaming up with an expert CRE agent, their professional guidance can help you make the correct financing decision.
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Option 4: Real Estate Crowdfunding
Technological innovation is behind CRE crowdfunding. This option is reshaping alternative commercial real estate financing. Investors pool funds online for CRE properties with low barriers and multiple options. However, CRE financing is not without its own investing regulations and risks. This is due to it being a relatively new investment option with little long-term analysis to draw upon.
Pros of crowdfunding for CRE investors:
- Low entry costs
- Accessible to the smaller investor
- Streamlined online participation
- Diversified portfolios
Cons of CRE crowdfunding:
- Potential illiquidity (potentially difficult to sell investment property quickly)
- Limited decision-making influence
Ideal Investor Profile for CRE Crowdfunding
Crowdfunding is fast becoming a practical financing option for small to mid-sized investors looking to diversify their portfolios. Removing the need for significant capital commitment is one of its main appeals. And CRE crowdfunding is especially attractive for investors comfortable working through online platforms.
Option 5: Mezzanine Commercial Real Estate Financing
Investors seeking a hybrid type of funding can benefit from mezzanine financing. It combines debt and equity to provide higher amounts of financial backing than bank loans or asset-based lending. It also offers flexible repayment options and avoids ownership dilution. These traits combined make mezzanine financing an attractive option for the right type of CRE investor seeking alternative financing.
Pros of private mezzanine commercial real estate financing:
- Enhanced funding bridges financing gaps
- Flexible repayment options ease financial stress
- Ownership control avoids dilution
- Potentially quick processing
Cons of CRE mezzanine financing:
- Elevated interest rates mean higher costs
- Not as secure as other debts
Ideal Investor Profile for Mezzanine Financing
Mezzanine financing is often the preferred choice for investors looking for capital augmentation. They accept higher interest rates for flexibility and ownership control. This type of funding is particularly helpful for projects facing traditional funding limitations.
Option 6: Sale-Leaseback Transactions
A sale-leaseback transaction offers a unique financing avenue. It allows property owners to sell their assets to investors and lease them back. This approach attracts property owners who want to raise quick cash or free up capital for additional investments. Other benefits of sale-leaseback transactions include a lump sum of money and predictable cash flow.
Pros of sale-leaseback transactions:
- Equity release unlocks capital for other investments
- Capital liquidity frees up cash for expenses
- Stable income from predictable cash flow from lease payments
- Reduced maintenance results in lower upkeep costs
Cons of CRE sale-leaseback transactions:
- Loss of ownership due to transferring property to an investor
- Long-term lease payments due to lease commitment
Ideal Investor Profile for Sale-Leaseback Transactions
Prime candidates for the sale-leaseback model are investors who want to unlock their property’s equity, access liquidity, and streamline operations. They want to generate a steady income while keeping their current location.
Option 7: SBA 7(a) and 504 Loans
Government-backed SBA 7(a) and 504 loans offer an excellent alternative for CRE investors seeking low-interest rates and extended repayment terms. These loans are especially helpful to individuals struggling to find success through conventional commercial real estate financing routes. They have more relaxed requirements for eligibility and are willing to work with different credit histories. The most notable downside is that processing can sometimes be painfully slow.
Pros of commercial real estate SBA 7(a) and 504 loans:
- Favorable terms, e.g., lower rates, longer terms
- Versatile use: acquisitions, expansions, renovations
- Simplified prerequisites make it easier to qualify
- Extended repayment allows more time to repay
Cons of CRE SBA 7(a) and 504 loans:
- Regulatory complexity means lots of paperwork
- Potentially long processing times
Ideal Investor Profile for SBA 7(a) and 504 Loans
This type of funding presents another good choice for those who may not qualify for more traditional financing options. SBA 7(a) and 504 loans offer favorable terms and accessible financing options for CRE projects. They are flexible and have accessible eligibility.
Closing Thoughts on Alternative Commercial Real Estate Financing Options
Commercial real estate alternative financing options are changing the game for investors, business owners, and franchisees across the US. From private equity to hard money loans and crowdfunding, today’s investors have more choices than ever to find financing that fits their needs.
Which alternative funding option will help you seize new opportunities as you build your CRE investment portfolio? If you need expert guidance, don’t hesitate to contact LiNC Commercial Realty to see how we help clients to empower their growth.
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