Let’s talk about money.
Commercial real estate deals typically involve larger sums of money than the loans a buyer would take out for a residential property. When it comes to lending in commercial real estate, there’s also more complex underwriting processes and nuanced repayment structures.
It needs an investor’s full attention and understanding because proper financing not only makes acquisition possible but also determines long-term profitability, cash flow, and exit options. Given California’s high property values, leveraging the right loan product can significantly enhance return on investment (ROI).
The right financing structure can unlock major opportunities, while the wrong one can undermine an otherwise solid investment.
We’ve put together some information that breaks down the key types of commercial real estate financing available in California, important considerations for investors, and strategies to choose the right loan for specific investment goals.
Common Commercial Real Estate Loan Types
Investors who are preparing to acquire a new property will need to decide how to pay for it. Cash is unlikely. Here are some of the most common types of loans that investors gravitate towards.
1. Conventional Bank Loans
These conventional bank loans are exactly what they say they are: traditional loans offered by banks or credit unions. These loans typically require strong credit, a solid business plan, and a healthy down payment which is usually expected to be 20–30% of the property price.
Why might this type of financing work? It often comes with lower interest rates compared to other options. Investors can count on predictable terms and payments, and the loan is available for various property types.
There are stringent credit and income requirements before a borrower is approved, and that approval process can feel burdensome and long. Some lenders won’t finance properties with high vacancy or deferred maintenance.
This type of funding is generally best for investors with excellent credit, strong financials, and a stabilized property.
2. SBA 504 and 7(a) Loans
There are a couple of loans backed by the Small Business Administration (SBA), and these are ideal for owner-occupied commercial properties. The 504 loan is used primarily for fixed assets like buildings, while the 7(a) is more flexible and can be used for working capital as well.
Borrowers like these loans because the down payment is lower, sometimes as low as 10%. Interest rates are competitive, and there are repayment terms that stretch to 25 years.
However, there is an owner-occupancy requirement, meaning that as the property owner you have to occupy at least 51% of the property. There’s a lot of paperwork involved, and it’s not ideal for a property that’s going to be completely rented out by others.
This is the best type of funding for small business owners looking to purchase or renovate their own operational space in California.
3. Commercial Bridge Loans
There’s also the commercial bridge loan, a short-term loan that’s usually 6–36 months. This will "bridge" the gap between immediate financing needs and long-term funding. Investors can expect fast approval and funding and flexible underwriting criteria. If there’s a time-sensitive deal that needs immediate funding or a value-add project that will recover the money that was spent pretty quickly, this loan can be helpful.
However, expect higher interest rates and fees. Be mindful of the short repayment window, and make sure to be comfortable with typically interest-only payments. This will be best for investors needing fast capital for acquisitions, renovations, or to stabilize a property before refinancing.
4. Hard Money Loans
A hard money loan is an asset-based loan from private lenders. In this type of circumstance, the property (not the borrower) is the primary collateral. There’s usually very fast approval. Investors can sometimes hear within days if they’ve been approved, and credit requirements are not as strict as other types of loans. This borrowed money can be used for any kind of investment activity. Investors can buy a property, flip a property, construct a new building, or reposition what they already own.
Be warned that interest rates are usually higher. The loan term will likely be only for a year or two, and there are significant upfront fees. It’s best for investors pursuing high-risk, high-reward projects or less traditional properties.
5. CMBS Loans (Commercial Mortgage-Backed Securities)
Loans pooled together and sold to investors in the secondary market are called CMBS loans. These are typically non-recourse and offered by investment banks or conduit lenders. The borrower is not personally liable, the interest rates are fixed, and larger properties will have attractive terms. But, these loans can be difficult to modify. Prepaying is nearly impossible, and they come with a complex legal structure. Institutional investors seem to have the most luck with these lending products.
6. Construction Loans
Thinking about new construction instead of buying a property that’s already out there? A construction loan could be especially appealing. This is a short-term financing plan that’s used to fund the ground-up construction or major redevelopment of commercial properties.
Investors have the funds disbursed in stages (draws) based on project milestones and these loans can become a permanent way to finance a project. Investors can also customize the terms based on project scope.
Borrowers will encounter complex underwriting and approval. A lot of detailed plans and permits are necessary, and while the loan is interest-only during construction, there is a balloon payment due at completion. Developers building new retail, office, industrial, or multifamily properties will find construction loans to be best for them.
Key Considerations for California Investors
Wondering what commercial real estate investors should be thinking about when deciding what type of loan to apply for? We can help. With our experience as commercial property management experts, we can talk you through several of the key considerations that go into such a decision. Contact us at Bell Properties Commercial Real Estate to talk about:
Local Market Nuances
California's markets are not monolithic. San Francisco’s tech-heavy ecosystem differs significantly from the logistics-driven Inland Empire or the tourism-focused economy in Anaheim. Loan terms, lender appetites, and underwriting standards will vary by region. Aligning loan strategies with the local economic drivers and zoning policies is essential.
Environmental Regulations
California has some of the strictest environmental and sustainability standards in the U.S. From seismic retrofitting to energy efficiency mandates, lenders may require additional due diligence, which can affect loan approval timelines and terms. Investors planning to borrow money will have to demonstrate that they’re protecting their property from potential compliance issues. We always recommend that owners engage an environmental consultant early to address potential issues.
Cap Rates and Leverage
Cap rates in California tend to be lower due to high demand and limited supply, especially in core commercial real estate markets. This puts more pressure on cash flow, which lenders analyze closely.
Consider using interest-only periods or blended financing structures (like mezzanine debt) to enhance leverage without compromising cash flow. If you’re not sure what this is and how to leverage it, contact Bell Properties Commercial Real Estate and we can tell you more.
Exit Strategy Alignment
It’s never too early to think about exit strategies. Lenders care about how and when a borrower plans to exit the investment. Establish any plans to sell, refinance, or hold for the long-term. Loan products like bridge or construction loans are designed with clear exit strategies in mind. It helps to match loan terms to business plan timelines. Taking a five-year loan on a ten-year hold strategy will seem silly.
How to Choose the Right Loan for a California Commercial Investment
Consider property type when choosing a loan. Is this an investment property only, or will the owner occupy some of the space? What kind of timeframe is needed? Evaluate credit history and financial position and think about whether risk is easy to absorb or difficult to manage.
Tips to Strengthen Your Loan Application
Once an investor has decided on an ideal loan product to fund a commercial investment, it’s time to apply for the money. Here’s what we recommend to strengthen the application:
Improve DSCR (Debt-Service Coverage Ratio). Lenders want to see that investors can cover their debt payments. Most require a DSCR of at least 1.20.
Provide a Clear Business Plan. Especially for bridge and construction loans, show how the property will become profitable.
Build Lender Relationships. In California’s competitive CRE market, relationships can expedite approvals and improve terms.
Prequalify Early. Understand what can be borrowed before shopping for properties or submitting offers.
Have Backup Financing. Deals fall through. Always have a secondary loan option or capital partner lined up.
Financing can have a major impact on every aspect of your investment. California commercial investors face both incredible opportunities and unique challenges thanks to the nature of the markets here. The ability to secure the right loan can be the edge that sets you apart.
By understanding your financing options and aligning them with your investment strategy, you position yourself to grow lasting value and better profitability.
Contact us at Bell Properties Commercial Real Estate, and we can talk about your specific situation and what might work best.
