How is commercial real estate financed?

Commercial real estate finance is provided by banks and other investors to finance the development of property and the investment in developed property, to refinance and restructure existing real estate financing, and to acquire distressed or non-performing loans (NPLs).

CRE loans are fundamentally different from commercial and industrial (C&I) loans in terms of loan documentation, collateral, assignment and transfer restrictions, liquidity expectations and trading conventions, servicing requirements after the trade is settled, foreclosure and restructuring strategies, and tax treatment.

CRE financing can be categorized by type as acquisition, development and construction (ADC) financing, bridge financing or permanent financing.  Each of type of financing is utilized for different purposes during the different phases in the life cycle of commercial real estate.  The financing for large development projects is commonly syndicated.

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The structure of a real estate financing transaction generally depends on the purpose of the financing – development or investment, the location of the borrower/sponsor, the lender’s loan portfolio, the security package, and tax considerations.  Where real estate development finance is typically leveraged project finance involving various facilities, real estate investment finance commonly comprises only senior debt.