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Commercial Real Estate Loans: What You Need To Know

commercial real estate guide

Commercial real estate loans grant property investors access to capital for the acquisition, repair, or improvement of real estate properties. Lenders offer many different types of commercial property loans, and each one has unique features that make it advantageous in certain situations.

Investors need to choose the right loan product for their property and purpose.

What is a Commercial Real Estate Loan?

Commercial real estate loans provide financing for investment properties. Loans are available for multifamily residential, commercial (e.g. office, retail), industrial (e.g. manufacturing, distribution), and other investment properties.

These loan products can be used to acquire new properties, renovate income-producing properties, improve properties, restructure existing debt, or for other purposes.

How Do Commercial Real Estate Loans Work?

Lenders evaluate properties and investors on a case-by-case basis to determine whether the lender is able to extend the requested commercial property financing.

The criteria that lenders consider are largely specific to investment properties, but the process of submitting an application, going through underwriting, and hopefully securing financing is much like any other loan process. The requested information and loan features are simply different (see What You Need to Know).

Residential Loans vs. Commercial Real Estate Loans

Commercial real estate loans work much like personal residential loans in principle, but there are substantial differences in the loan amount, loan features, repayment schedule, and evaluated criteria.

Whereas a personal mortgage normally requires certain income and employment history, a commercial property loan weighs recurring revenue and some other business-related factors heavily. Calculations such as DSCR, cap rate, and NOI are much more common. So too are non-recourse, personal guaranty, and similar clauses.

The common 30-year fixed-rate mortgage is still available for commercial property, but it’s used much less frequently. Borrowers more often get shorter-term loans that may have longer amortization schedules, balloon payments, prepayment penalties, and other features that are infrequently found in residential mortgages.

Individuals vs. Entities

A large difference between residential loans and commercial real estate loans is simply who the borrower is. Commercial property loans aren’t offered to individuals, but rather limited liability corporations, limited liability partnerships, general partnerships, S corporations, and C corporations.

Although individuals might technically secure financing for a small investment property (e.g. duplex) as a sole proprietor, this generally isn’t recommended and usually isn’t considered a true commercial property loan. Commercial property financing is usually for LLCs, LLPs, GPs, S Corps, and C Corps that have larger properties (e.g. minimum 5-unit multifamilies, offices, stores, etc.).

Types of Commercial Real Estate Loans

CMBS Loans

The defining characteristic of commercial mortgage-backed securities is that they’re resold to financial investors, providing investors with fixed-rate returns and minimal downside risk.

CMBS real estate loans are some of the most common first-position mortgages used for investment properties. Properties that don’t qualify for Freddie Mac or Fannie Mae programs are often financed through CMBS loans, as they have more lenient requirements.

CMBS loans are available for many different types of investment properties, including residential, commercial, industrial, and others. They normally can range from $1 million to $1 billion.

SBA 504 Loans

SBA 504 real estate loans help grow businesses and create jobs, while still acting as commercial property loans. These loans are available to small businesses that have owner-occupied properties. Manufacturers, healthcare providers, self-storage services, restaurants, hotels, daycares, assisted living facilities, and many other businesses are eligible.

Qualifying small businesses can secure up to $5 million through the SBA 504 program, but they mused either create or retain one job for every $65,000 borrowed. The limit for manufacturers and energy-efficient projects is $5.5 million.

SBA 7(a) Loans

The SBA 7(a) program consists of several distinct sub-programs, including the standard SBA 7(a), SBA 7(a) Small Loan, SBA Express Loan, SBA CAPlines, and SBA Veterans Advantage programs. Each of these has its own requirements and terms.

Investors typically consider SBA 7(a) loans when other loan types aren’t available, either because of an investor’s finances or a property’s condition.


FHA/HUD loans offer some of the most generous terms for multifamily residential properties. These loans are overseen by the Department of Housing and Urban Development, which is tasked with promoting equal and fair housing. The loans are guaranteed by the Federal Housing Authority, which is under the direction of HUD.

The FHA offers several distinct loan programs, including the FHA 223(F), FHA 223(a)(7) and FHA 221(d)(4) programs. Each program has its own unique requirements and terms, but all programs are generally for low- to moderate-income housing projects.

Bridge Loans

Bridge loans provide short-term financing that’s used to “bridge” a gap when acquiring or renovating properties. These loans are used by both property investors, and businesses in other industries that purchase land or buildings.

Most bridge loans are underwritten for 3-6 months. Lenders may consider as-is value, as-stabilized value, and value-add plans.

Conventional Bank Loans

Conventional bank loans give borrowers access to commercial property financing even if they don’t meet specific CMBS, SBA, FHA, Fannie Mae, or Freddie Mac requirements. Banks directly underwrite these loans, and thus don’t have to adhere to special eligibility considerations.

Conventional loans normally don’t offer the most advantageous terms, but they can be available even if other specialized loan programs aren’t available. Almost any type of investment property, including distressed properties, can be financed through these loans.

Most conventional loans require a personal guarantee, and each investor might have to provide their own guarantee.

Fannie Mae Loans

Fannie Mae has loan programs for student, military, senior, apartment, and other multifamily housing properties.

The agency offers several distinct loan programs, including the Fannie Mae Standard DUS, Fannie Mae Small Loan, Fannie Mae Affordable Housing, Fannie Mae Green Financing, and Fannie Mae Manufactured Housing programs. Each of these has its own requirements and terms.

Many of the Fannie Mae commercial financing programs have stringent requirements for properties, tenants, and borrowers. The programs also have highly advantageous terms, though.

Freddie Mac Loans

Freddie Mac has several loan programs for student, military, senior, apartment, and other multifamily housing properties.

The agency offers several distinct programs and loan types, including Freddie Mac Floating Rate, Freddie Mac Floating-to-Fixed Rate, Freddie Mac Small Balance, Freddie Mac Green Advantage, Freddie Mac Student Housing, Freddie Mac Senior Housing, Freddie Mac Manufactured Housing, and Freddie Mac Supplemental loans. Each of these has its own requirements and terms.

The numerous programs make Freddie Mac financing available for diverse properties and situations.

Life Insurance Loans

Life insurance companies underwrite their own commercial property loans, which give the life insurers some positive returns with low negative risk exposure. The risk-mitigation purpose of these loans is what drives many of their requirements and terms.

Life insurance loans can be used to finance diverse property types, but properties usually must be near-impeccable. The loans are generally only available for Grade A properties that have low LTV and high DSCR figures.

What You Need to Know About Commercial Real Estate Loans

The requirements and features of commercial real estate loans are somewhat particular to this category of loan. Here are the specific terms to know when applying for this type of funding.

Repayment Schedules

Commercial real estate loan repayment schedules are based on term and amortization, and these frequently are different durations. The term is how long regular payments will be made. The amortization is the duration that’s used to calculate those regular payments.

For example, a commercial property loan might have a 10-year term and 30-year amortization. The regular payments (usually monthly) would be calculated as if the loan would take 30 years to pay off. The payments would only be made for 10 years, at which time a large payment would be required to clear the remaining balance of the loan.

Because term is often shorter than amortization, balloon payments are common with commercial property loans. Investors frequently manage balloon payments by refinancing or selling, but simply paying them is, of course, acceptable.

Loan-to-Value Ratio (LTV)

Loan-to-value ratios measure the balance of a commercial property loan against the value of a financed property. Loan programs have maximum allowed LTVs so that lenders don’t assume too much risk.

Loan-to-value is calculated as follows: LTV = Loan Balance / Property Value

A maximum allowed LTV of 80% is common, but some programs have different allowed maximums. Non-guaranteed programs might have lower LTV requirements. Guaranteed programs might have slightly higher LTV allowances.

Debt-Service Coverage Ratio (DSCR)

Debt-service coverage ratios measure a property’s income against the property’s debt. Lenders use DSCR to evaluate whether a property has enough income to service its monthly debt payments.

Debt-service coverage ratio is calculated as follows: DSCR = NOI / Debt Service

Net operating income encompasses a property’s revenues less its operating expenses. Debt service encompasses the interest payments and principal repaying, often of all loans on the property.

Prepayment Penalty

Prepayment penalties are charged when a commercial property loan is fully paid before the maturation date. Lenders use prepayment penalties to ensure at least a portion of their expected return on a loan. Penalties are common on most types of commercial real estate loans.

Prepayment penalties can be structured a number of different ways:

  • Lockout Period: Doesn’t allow early repayment for the duration of the period
  • Fixed Fee: Assesses a fixed percentage fee if fully repaid early
  • Step Down: Assesses a percentage fee that decreases with time
  • Yield Maintenance: Assesses a fee based on the expected interest a lender loses
  • Defeasance: Assesses a fee in the form of government-based securities

Cap Rate

Cap rates measure the expected annual return that a property should generate. The rate represents the annual expected return that an all-cash investment would yield. Lenders use the rate to evaluate the financial health of an investment property.

Cap rate is calculated as follows: NOI / Property Value

Net operating income encompasses a property’s revenues less its operating expenses.

Net Operating Income (NOI)

Net operating income encompasses a property’s revenues less its operating expenses.

Net operating income is calculated as follows: RR – OE

Recurring revenue can stem from rental income, parking fees, service charges, vending machines, or any other regularly recurring form of revenue.

Operating expenses encompass repairs, maintenance, taxes, insurance, utilities, management fees, and other recurring expenses that are necessary to operate a property. Improvements aren’t part of operating expenses.

Loan To Cost Ratio (LTC)

Loan to cost ratios measure the cost of financing a property against the cost of building it. The ratio is specific to construction, and not used for acquisition or refinancing. Lenders consider LTC when calculating the amount of equity that must be retained during construction.

LTC is calculated as follows: LTC = Loan Amount / Construction Cost

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Interest Rates for Commercial Real Estate Loans

Commercial real estate loans can come with floating (variable) interest rates, fixed interest rates, or floating-to-fixed rates. Floating rates change over the course of a loan as market rates adjust, often changing once per year. Fixed rates are set for the duration of the loan.

Lenders consider the property, borrower, market rates, and other factors when setting interest rates. Government-backed loan programs sometimes have slightly lower interest rates.

When calculating repayment, the interest rate is applied to the full amortization schedule rather than only the loan term.

Commercial Loan Calculator

Since a loan’s repayment schedule is impacted by the loan’s term, amortization, balance, interest rate structure, and interest rate, manually calculating repayment is cumbersome. A loan calculator makes it easy to see how repayment changes as the interest rate and other factors change, though.

Importantly, investors should use a commercial loan calculator rather than a residential mortgage calculator. Residential mortgage calculators won’t adequately account for the various factors that affect commercial loan repayment schedules.

How to Get a Commercial Real Estate Loan

Applying for a commercial real estate loan requires evaluating program eligibility requirements, property type and specifics, borrower qualification data, and other factors. You can either go through the application process yourself or use a streamlined commercial loan quote tool.

Manual Commercial Property Loan Application

Manually evaluating commercial property loans and applying for one is time-consuming but possible. Knowledgeable investors who have financed many properties might choose this option if they already know what loan program and lender they’d like to use. Rarely, manual application might also be necessary for a highly unique property (this is uncommon).

CommLoan Property Loan Application

CommLoan streamlines the commercial property loan evaluation and application process.

Guided prompts will take you through the entire process of obtaining quotes, and help you secure quotes from multiple lenders. Having several quotes makes it easy to compare specific terms and features, which can still vary even within particular loan programs.

The process of obtaining quotes is quick and easy, and all lenders that provide quotes are established, reliable, and approved for any federally guaranteed programs that they offer.

It’s quick, complete this form and get a quote now.

How to Prepare for a Commercial Real Estate Loan

Preparing for a commercial real estate loan requires having documents about both the property and your business in order.

You should have property value, revenue, construction costs (if building or renovating), tenant (if multifamily), and other relevant information available. While you ought to calculate LTV, DSCR, cap rate, and other ratios yourself, a lender will likely review each of these with you. You’ll also need any information that’s necessary to show a property qualifies for a specific program.

You should also have business data ready. Be prepared with ownership, portfolio, revenue, expense, and other relevant information. Lenders will consider your application in light of your business’s past performance, current portfolio, cash flow, credit, and other factors.

How to Find the Right Commercial Real Estate Loan

Finding the right commercial real estate loan requires comparing different financing offers, and sometimes those offers should be through different loan programs. An online commercial real estate loan tool can help you initially compare financing options across lenders and programs.

Once you identify the best quote offered, the loan consultant will work closely with you to compile all necessary documentation and apply for your chosen loan.

Compare Your Commercial Financing Options

If you need financing for the acquisition, renovation, improvement, or debt restructuring of an investment property, begin the process of comparing financing offers today. Some programs can take time to be approved for, so this isn’t something that should be delayed.

Get quotes for commercial real estate loans today, beginning the process so you can obtain the best available financing as soon as possible.

About Author

David Luke

David Luke

David was immediately drawn to the CommLoan mission of creating a better borrower experience when joining the firm in 2015. Initially, David helped grow the lenders on the platform by 6X and worked closely with the software team to improve accuracy and efficiency within the loan fulfillment process. David has underwritten and closed more than $2 billion in transactions ranging from bridge to permanent financing across all major capital sources. He appreciates the wealth creation that real estate has to offer and has been self-managing a small portfolio of single and multifamily properties for the last 10 years. David earned a master’s degree in business from W.P. Carey School of Business at ASU and will be completing his CCIM Designation in 2021. Show More...