Commercial Real Estate Loans 101

How commercial loans differ from home loans

Commercial real estate loans finance income-producing or business-use properties such as apartment buildings with five or more units, mixed-use buildings, retail centers, offices, warehouses and industrial space. Unlike residential mortgages, which focus primarily on the borrower's personal income, commercial loans focus heavily on the property itself: its income, expenses, condition and market.

Commercial loans are business-purpose loans and are not consumer loans. They follow different rules, disclosures and documentation standards.

Common property types

Multifamily properties with five or more units are among the most commonly financed commercial assets. Mixed-use properties combine residential and commercial space, often with retail on the ground floor. Retail, office and industrial properties can be investor-owned and leased to tenants, or owner-occupied by a business. Special-purpose properties like hotels or self-storage have their own lending niches.

Types of commercial financing

Permanent loans provide long-term financing for stabilized properties. Bridge loans provide short-term financing to acquire, renovate or stabilize a property before refinancing into permanent debt. Fix-and-flip loans fund acquisition and renovation for resale. Construction loans fund ground-up development or major rehab, usually with draws released as work is completed. Commercial refinances replace existing debt or pull cash out of equity.

Lenders include banks, credit unions, life insurance companies, agency-style programs for multifamily, debt funds and private lenders. Each has its own appetite for property types, leverage and risk.

Key metrics lenders use

Net operating income, or NOI, is the property's income minus operating expenses, before debt service. Debt service coverage ratio, or DSCR, compares NOI with the annual loan payment; many lenders require a minimum coverage. Loan-to-value, or LTV, compares the loan amount with the property's value. Debt yield, NOI divided by the loan amount, is another measure some lenders use.

These metrics together determine how much you can borrow. A property with strong, stable income can usually support more debt than one with high vacancy or short leases.

What lenders want to see

Expect to provide a rent roll, operating statements for recent years, current leases, a purchase contract or payoff information, and a description of your business plan. Lenders also review the borrower's financial strength and experience, including a personal financial statement, schedule of real estate owned, and credit. For construction and value-add deals, budgets, plans and contractor information are important.

Third-party reports and timelines

Commercial loans often require a commercial appraisal and environmental report, and sometimes a property condition report or survey. These reports take time, so commercial loans usually take longer to close than residential loans. Private and bridge lenders can sometimes move faster.

Terms to understand

Commercial loans may have shorter terms than residential loans, with a balloon payment due at maturity. Amortization periods may be longer than the loan term. Some loans have prepayment penalties such as step-downs or yield maintenance. Loans can be full recourse, meaning you're personally liable, or non-recourse with certain carve-outs. Understanding these terms is just as important as comparing rates.

How a broker helps

I arrange commercial financing in 43 states, including Ground Up Construction. Availability varies by lender, state and project. Because commercial lenders vary so widely, matching your deal to the right lender matters. I help package your deal, present it to lenders that fit the asset and strategy, and compare term sheets so you can make an informed decision.

Next steps

Whether you're buying your first apartment building or refinancing a portfolio, let's review the property and your goals and find the right financing structure.