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An overview of how commercial real estate loan rates work:

1. Type of Loan

  • Fixed-Rate Loans: These loans have a fixed interest rate for the entire term.

  • Variable or Adjustable-Rate Loans (ARMs): The interest rate can fluctuate based on a benchmark interest rate or index.

2. Benchmark Rates

  • Many commercial loans are tied to benchmark interest rates such as the Prime Rate, LIBOR (London Interbank Offered Rate), or the U.S. Treasury rates.

  • The loan rate might be expressed as the benchmark rate plus a certain percentage (e.g., LIBOR + 3%).

3. Lender Margins

  • Lenders add a margin to the benchmark rate to determine the final interest rate. This margin can depend on the perceived risk of the loan, the borrower’s creditworthiness, and the loan term.

4. Creditworthiness of the Borrower

  • Borrower’s credit score, financial history, and the credit rating of their business.

  • Lenders may also look at the borrower’s debt-to-income ratio and the financial health of the business.

5. Property Type and Location

  • The type of property (office, retail, industrial, etc.) and its location can affect the interest rate.

  • Properties in prime locations or with higher potential for revenue might get more favorable rates.

6. Loan-to-Value (LTV) Ratio

  • The LTV ratio is the loan amount compared to the appraised value of the property.

  • Lower LTV ratios (indicating more equity in the property) usually result in lower interest rates.

7. Loan Term

  • Shorter-term loans typically have lower interest rates than longer-term loans.

  • The term can range from a few years to several decades.

8. Economic Conditions

  • Interest rates are influenced by the overall economic environment, including inflation, economic growth, and monetary policy.

9. Prepayment Penalties

  • Some commercial loans have penalties for paying off the loan early. These penalties can affect the effective interest rate.

10. Additional Fees

  • Commercial loans often come with fees such as origination fees, appraisal fees, and closing costs, which can affect the overall cost of the loan.

Example Calculation

Suppose a borrower takes a commercial real estate loan with the following terms:

  • Benchmark Rate (LIBOR): 1.5%

  • Lender Margin: 3%

  • Loan Amount: $1,000,000

  • Term: 10 years

  • LTV Ratio: 70%

The interest rate would be calculated as: Interest Rate = Benchmark Rate + Lender Margin Interest Rate = 1.5% + 3% = 4.5%

This rate would apply to the loan amount, and the borrower would make payments based on this rate.

Understanding these components can help borrowers negotiate better terms and make informed decisions about financing their commercial real estate investments.

For commercial real estate loan rates call Commercial Partners of Texas at

6464 Savoy Dr

Suite 785

Houston, TX. 77036


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