Commercial real estate (CRE) investments are expensive, but there many different financing options available for investors.

Financing for CRE is available as equity financing or debt financing. Here’s a breakdown of the main types of financing used in CRE deals.

Debt Financing Options for CRE

Most CRE purchases are funded in large part through debt financing. Financing can be taken out by owner-occupants, investors, and developers. While loan terms differ depending on who the borrower is and what the property will be used for, the same loan type options are used by all types of borrowers.

There are a few main options for financing a CRE purchase:

Conventional Mortgage

Class A commercial banks offer conventional mortgages to investors who are buying a CRE property. Banks are very particular about underwriting CRE deals, focusing exclusively on properties with demonstrably strong cash flow in a good location.

There’s usually a thorough underwriting process involved that will examine the property characteristics as well as the investors themselves and any management team that will be involved in operating the property.

Private Lending

Instead of taking out a loan from a bank, investors can choose to finance through a private lender. Private lending is borrowing money from any private organization or individual. The term broadly covers everything from borrowing money from a family member to taking out a loan from a private lender.

For CRE purchases, there are organizations that offer private lending for investors with a solid business plan. These institutions may be willing to give out loans for CRE deals with a little more risk, in order to benefit from the higher margins on the loan. This is especially true if the lender is acting as an investment vehicle for private individuals who want to loan out their money to get returns.

Credit Unions

CRE loans from credit unions are becoming more common, but the ones who tend to benefit the most are local investors, owner-occupants, and small businesses.

Developing a relationship with a local credit union can help you get a CRE loan with better terms than a bank would offer.

Equity Financing Options for CRE

Rather than taking out a loan, investors can choose to purchase CRE using equity financing. Equity financing does not need to be repaid since the financing is given in exchange for partial ownership of the property.

While this is often part of CRE deals, equity financing rarely makes up the entirety of the finance structure. It’s normally used in conjunction with debt financing as investors put capital together for a down payment.

Angel Investment

Angel investors are wealthy individuals who invest in a business in return for ownership shares. This is a single source of equity investment. Angel investors are often involved in long-term investments where they will bring their own skills and experience into the mix.

Venture Capital

Venture capital firms are organizations that offer private equity financing. They invest in high-growth CRE deals in exchange for equity and are usually focused on turning a profit when the property is sold again.

Venture capital funding is difficult to get for CRE deals, since CRE doesn’t usually offer the high-growth scenarios that venture capital firms prefer.

Syndication

Real estate syndication is when multiple investors join together to finance a property. It’s normally done through an LLC, with most of the investors acting as partners (AKA syndicators) and a single investor being the sponsor. While all investors have ownership in the LLC, sponsors are responsible for managing the investment property once it’s purchased, and they’re usually involved in selecting and underwriting the deal initially.

Syndication sponsors may also seek out debt financing to cover the remainder of the CRE purchase, with the down payment and initial investment covered by the investors.

While syndication is sometimes referred to as the original real estate crowdfunding, it’s a much more regulated financing process that’s only available for accredited investors.

Crowdfunding & Tokenization

Crowdfunding purchases are financed by a large number of investors chipping in smaller amounts in exchange for partial ownership of a property.

This is similar to property tokenization, which happens when ownership of a CRE asset is split up into digital tokens that are sold to investors. Both of these equity financing methods involve selling partial ownership in exchange for financing of a CRE deal.

These two methods in particular usually keep the small-scale owners as silent partners, allowing the deal’s sponsor to have more control over the ongoing management of the investment once it’s purchased.