# Commercial Real Estate Loans: The Complete Guide to CRE Financing Commercial real estate (CRE) financing looks complicated from the outside because every lender seems to speak a different dialect of the same language. Underneath, almost every CRE loan is sized and priced from the same handful of ideas. This guide explains those ideas in plain English, walks through the main loan types, and shows you how to compare lenders on more than the interest rate. *This article is general education, not financial, legal or tax advice. Loan terms vary by lender, market and borrower, and they change over time. Confirm current terms with the lenders you speak to and with your own advisers.* ### What counts as a commercial real estate loan? A commercial real estate loan is a mortgage secured by property that is used for business or investment rather than as the borrower’s home. That covers multifamily buildings (typically five units or more), office, retail, industrial and warehouse space, hospitality, self-storage, medical office, mixed-use buildings, land, and special-purpose properties such as car washes, daycares or religious facilities. Two distinctions shape everything that follows: - **Owner-occupied vs. investment.** If your operating business occupies most of the building, lenders underwrite the business as much as the real estate, and programs such as SBA 504 and SBA 7(a) become available. If the property is held for rental income, the lender focuses on the property’s cash flow and the sponsor’s experience. - **Stabilized vs. transitional.** A stabilized property is leased up and producing steady income. A transitional property needs something first: renovation, lease-up, a change of use, or construction. Stabilized assets suit long-term, lower-cost debt. Transitional assets usually need shorter-term bridge or construction financing. ### How commercial loans differ from a home mortgage Feature | Typical home mortgage | Typical commercial real estate loan | What the lender underwrites | Your personal income and credit | The property’s income, the sponsor’s strength and experience, and often the business | Borrower | An individual | Usually an entity (LLC, corporation, partnership), often with personal guarantors | Term vs. amortization | Usually the same (for example, 30 and 30) | Often different: a shorter term with a longer amortization, leaving a balloon balance at maturity | Prepayment | Often free | Frequently restricted or penalized | Standardization | High | Low: criteria, documents and pricing vary widely between lenders | That last row is why lender selection matters so much in commercial lending. Two lenders can look at the same property and reach very different conclusions about leverage, pricing and structure. ### The four numbers every CRE lender looks at Lenders size loans by testing the request against several constraints at once. The loan amount is normally capped by whichever test is most restrictive. #### 1. Net operating income (NOI) NOI is the property’s income after operating expenses but before debt payments, income taxes and depreciation. Lenders usually “underwrite” their own version of NOI: they may apply a vacancy factor even if the building is full, add a management fee even if you self-manage, and set aside reserves for replacements. Expect the lender’s NOI to be lower than the number on a broker’s marketing flyer. #### 2. Loan-to-value (LTV) and loan-to-cost (LTC) **LTV** is the loan amount divided by the property’s appraised value. **LTC** is the loan amount divided by total project cost (purchase price plus renovation or construction costs and certain soft costs), and it is the key measure for construction and value-add deals. Maximum leverage varies by property type, lender type and market conditions. Properties seen as riskier or more specialized, such as hospitality or land, are generally offered lower leverage than, say, stabilized multifamily. #### 3. Debt service coverage ratio (DSCR) DSCR is NOI divided by annual debt service (principal and interest). A DSCR of 1.00x means the property earns exactly enough to pay the loan. Lenders want a cushion above that, and the required cushion rises with perceived risk. Because debt service depends on the interest rate and amortization, DSCR is the constraint that tightens when rates rise: the same NOI supports a smaller loan. **Worked example.** Suppose a property’s underwritten NOI is $300,000 and the lender requires a minimum DSCR of 1.25x. The maximum annual debt service is $300,000 ÷ 1.25 = $240,000. The loan amount is then whatever principal produces $240,000 of annual payments at the quoted rate and amortization. If that figure is lower than the LTV-based maximum, DSCR is your binding constraint, and negotiating a higher LTV will not help. #### 4. Debt yield Debt yield is NOI divided by the loan amount, expressed as a percentage. It ignores interest rate and amortization, so it lets a lender compare risk across loans regardless of structure. It is most common with CMBS and institutional lenders. Using the same example, a $3,000,000 loan on $300,000 of NOI is a 10% debt yield. If you know these four numbers for your deal before you talk to lenders, you can tell within minutes whether a program is realistic. They are also the fields that drive matching on LenderMatrix: when you [describe your deal](https://lendermatrix.com/?page_id=7), we calculate leverage, DSCR and debt yield from your answers and compare them with each program’s published limits. ### Main types of commercial real estate loans #### Bank and credit union loans Portfolio loans from banks and credit unions are the workhorse of CRE lending. They often offer competitive pricing, flexibility on structure and a relationship that can extend to deposits and lines of credit. Trade-offs commonly include personal recourse, shorter fixed-rate periods, and a preference for borrowers and properties within the institution’s footprint. #### SBA 504 and SBA 7(a) for owner-occupied property If your business will occupy the majority of the building, SBA programs are worth a close look. A 504 project typically combines a conventional first mortgage from a lender with a second mortgage funded through a Certified Development Company, which can reduce the borrower’s down payment compared with many conventional loans. SBA 7(a) loans can finance owner-occupied real estate along with other business needs in a single loan. Program rules, maximum amounts, fees and occupancy requirements are set by the U.S. Small Business Administration and change from time to time, so check the current details on [SBA.gov](https://www.sba.gov/funding-programs/loans) and with an experienced SBA lender. #### Agency and government-backed multifamily loans For apartment properties, loans purchased or backed by Fannie Mae, Freddie Mac and HUD/FHA programs are a major source of long-term, typically non-recourse financing. They are delivered through approved lenders, tend to involve more process and third-party reports, and generally reward stabilized properties with experienced owners. #### CMBS (conduit) loans Commercial mortgage-backed securities loans are pooled and sold to investors. They are typically fixed-rate, non-recourse (with standard carve-outs) and available across many property types. The price of that structure is rigidity: prepayment is usually handled through defeasance or yield maintenance, and after closing you deal with a servicer rather than a relationship banker. #### Life insurance company loans Life companies lend their own long-term capital and generally favor high-quality, stabilized properties at conservative leverage. Borrowers who qualify often find attractive long-term fixed rates. #### Bridge loans Bridge loans are short-term loans, often interest-only, that carry a property from one state to another: through renovation, lease-up, a partner buyout or a fast closing. They are offered by debt funds, private lenders and some banks. Pricing is higher than permanent debt, and the lender will want to understand your exit: a sale or a refinance into permanent financing. #### Construction loans Construction loans fund in draws as work is completed. Lenders underwrite the budget, the contractor, the borrower’s experience and liquidity, and how the loan will be repaid. Expect requirements such as completion guarantees, contingency in the budget, interest reserves and inspections before each draw. #### Private money and hard money Private lenders focus primarily on the asset and the exit rather than on conventional income documentation. They can close quickly and handle situations banks avoid. The cost is higher rates and fees and shorter terms, so they work best as a deliberate, temporary tool with a clear path out. #### Mezzanine debt and second mortgages When the senior loan does not reach the leverage a sponsor wants, subordinate capital can fill part of the gap. It is more expensive than senior debt, requires the senior lender’s consent, and adds complexity that is usually only justified on larger transactions. You can browse programs by type on the [loan program search](https://lendermatrix.com/?post_type=lm_loan_program), filter by property type and state, and open any program to see its full criteria. ### Terms that matter as much as the rate - **Fixed vs. floating.** Floating-rate loans are quoted as a spread over an index. Ask which index, how often it resets, whether there is a floor, and whether the lender requires an interest rate cap. - **Term and amortization.** A five-year term on a 25-year amortization leaves most of the principal due at maturity. Know your balloon balance and how you expect to refinance it. - **Interest-only periods.** They raise cash flow early and leave a larger balance later. - **Recourse.** Full recourse means guarantors are personally liable for the debt. Non-recourse loans limit the lender to the collateral, but almost always include “bad boy” carve-outs for fraud, misapplication of funds, unauthorized transfers and similar acts. - **Prepayment.** Step-down penalties, yield maintenance and defeasance behave very differently. If you may sell or refinance early, the prepayment structure can matter more than a quarter-point of rate. - **Reserves and escrows.** Taxes, insurance, replacement reserves, tenant improvement and leasing reserves all reduce usable cash flow. - **Covenants.** Ongoing DSCR tests, reporting requirements, limits on additional debt and cash management triggers are easy to overlook and painful to breach. - **Fees.** Origination fees, broker fees, exit fees, legal costs and third-party reports (appraisal, environmental, property condition) belong in your all-in cost comparison. ### What lenders will ask you for Requirements vary, but a well-prepared borrower can usually answer these on day one: - A one-page summary: property, address, purchase price or value, requested loan, business plan and timeline. - Rent roll and trailing-12-month operating statement (or a pro forma and budget for a transitional deal). - Purchase contract or existing loan details. - Sponsor information: real estate experience, a schedule of properties owned, personal financial statement, liquidity and net worth, and an approximate credit profile. - Entity structure: who owns what, and who will guarantee. - For construction or renovation: budget, plans, contractor information, permits and entitlement status. LenderMatrix does not collect documents. You share a structured summary of the deal, and any documents go directly to the lenders you decide to work with, through their own secure process. ### The financing timeline, step by step - **Define the request.** Amount, purpose, property facts, your numbers and your deadline. - **Build a shortlist.** Identify lenders whose published criteria fit the property type, size, location and leverage. Three to six well-chosen lenders beats twenty cold emails. - **Preliminary quotes.** Lenders give indicative terms from your summary. - **Term sheet or letter of intent.** A non-binding outline of terms. Read the conditions as carefully as the rate, and understand any deposit you are asked to pay and whether it is refundable. - **Underwriting and third-party reports.** Appraisal, environmental assessment, property condition report, title and survey. - **Credit approval and commitment.** The lender’s committee approves the loan. Approval is the lender’s decision alone. - **Legal documentation and closing.** Loan documents, insurance, entity documents and funding. Timing ranges from a couple of weeks for some private bridge loans to several months for agency, CMBS, HUD or SBA financing. If you have a hard closing date, say so early: closing speed is a filter you can apply when you [search programs](https://lendermatrix.com/?post_type=lm_loan_program). ### Common mistakes to avoid - **Shopping on rate alone.** A lower rate with heavy prepayment penalties, tighter covenants or lower proceeds can be the worse loan. - **Using the seller’s NOI.** Underwrite your own number with realistic vacancy, management and reserves. - **Ignoring the binding constraint.** Know whether LTV, DSCR or debt yield limits your proceeds and negotiate the right thing. - **Approaching lenders who do not do your deal type.** It wastes weeks. Filter by property type, size and geography first. - **Leaving the exit unplanned on short-term debt.** Bridge and construction lenders want a credible repayment path, and so should you. - **Underestimating closing costs and reserves.** Budget for third-party reports, legal fees, title, insurance and any upfront reserves. ### A worked example: reading a deal the way a lender does The figures below are invented purely to show the arithmetic. They are not market data and not a quote. Suppose you are buying a small industrial building for $4,000,000. It produces $420,000 a year in rent and costs $140,000 a year to operate, so net operating income is $280,000. You would like to borrow $2,800,000. - **Loan-to-value:** $2,800,000 ÷ $4,000,000 = 70%. Many programs publish a maximum LTV; if a program’s ceiling is 65%, the most it could lend on this value is $2,600,000 and you would need $200,000 more equity. - **Debt yield:** $280,000 ÷ $2,800,000 = 10%. Debt yield ignores the interest rate and amortization, which is why some lenders like it as a sanity check. - **DSCR:** this one depends on the loan terms. If annual principal and interest came to $215,000, DSCR would be $280,000 ÷ $215,000 = 1.30x. If a higher rate or shorter amortization pushed debt service to $240,000, DSCR falls to about 1.17x, and a program with a 1.25x minimum would size the loan down until the ratio works. Two lessons follow. First, the binding constraint is often not the one borrowers expect: a deal can clear LTV comfortably and still be limited by DSCR when rates are higher. Second, small changes to inputs you control, such as a slightly larger down payment, a longer amortization, or a realistic rather than optimistic expense figure, can change which programs fit. Run the numbers before you approach lenders, and be ready to show how you arrived at NOI. A lender will rebuild it from your rent roll and operating statements anyway, usually adding allowances for vacancy, management and reserves even if you do not currently pay them. ### How LenderMatrix helps LenderMatrix is a marketplace, not a lender. Lenders publish their programs with the criteria they apply, and you can [search those programs](https://lendermatrix.com/?post_type=lm_loan_program), [browse lenders](https://lendermatrix.com/?post_type=lm_lender), or [describe your deal once](https://lendermatrix.com/?page_id=7) to see potential matches with a plain list of which criteria lined up and which did not. You choose which lenders receive your request, and each lender sees only its own copy. A potential match is a comparison against published criteria. It is not an approval or an offer, and every lender makes its own decision. ### Frequently asked questions #### How much down payment do I need for a commercial property? It depends on the property type, the loan program and the lender. Conventional investment-property loans generally require more equity than owner-occupied SBA financing. The practical answer comes from running your deal through the LTV, DSCR and debt-yield tests above, because the most restrictive one sets your proceeds. #### Can I get a commercial real estate loan with average credit? Often, yes. Commercial lenders weigh the property’s income, your experience, liquidity and the overall structure alongside credit. Bank and SBA programs tend to be more credit-sensitive, while private and bridge lenders focus more on the asset and exit, at a higher cost. #### What is a balloon payment? When a loan’s term is shorter than its amortization, the remaining principal is due in one payment at maturity. Most borrowers refinance or sell before that date, which is why refinancing risk deserves attention when you choose a term. #### Is non-recourse financing really non-recourse? It limits the lender’s remedies to the property in most circumstances, but guarantors typically remain liable for specific carve-outs such as fraud, waste, environmental issues and prohibited transfers. Read the carve-out guaranty with your attorney. #### Should I use a commercial mortgage broker? A good broker brings lender relationships and packaging expertise, particularly on larger or more complex deals, in exchange for a fee. Whether you use one or go direct, understanding your own numbers and the lender landscape puts you in a stronger position. On LenderMatrix, brokers are labeled as brokers so you always know who you are dealing with. #### Does LenderMatrix charge borrowers? No. Borrowers use LenderMatrix free. Lenders pay a subscription to list their programs. --- Source: https://lendermatrix.com/commercial-real-estate-loans-guide/ LenderMatrix is a marketplace, not a lender. Program information is supplied by lenders and can change. A potential match is not an approval or an offer of credit.