Buying commercial real estate is one of the most significant financial decisions a business owner makes. Unlike residential mortgages, commercial real estate financing involves more variables, more parties, and more room for costly mistakes if you're not prepared.
Types of Commercial Real Estate Loans
Conventional Commercial Mortgage
Offered by banks and credit unions, conventional CRE loans are the most straightforward:
- LTV: 65–75% (you put 25–35% down)
- Terms: 5, 7, or 10-year fixed rate with 20–25 year amortization
- Rates: Currently 7.00–9.00% for 5-year fixed
- DSCR: Minimum 1.20–1.25x required
At maturity, the remaining balance is typically due as a balloon payment — refinanced or paid off.
SBA 504 Loan
The SBA 504 program is specifically designed for owner-occupied commercial real estate and major equipment. It's structured as two loans:
- First mortgage (from a bank): 50% of project cost
- SBA debenture (from a Certified Development Company): 40% of project cost
- Borrower equity: 10% down (15% for startups, 15% for special-use property)
The SBA debenture portion carries a fixed rate for 20 or 25 years — currently in the 6.00–6.50% range. This is one of the best long-term fixed rates available in commercial lending.
Best for: Owner-occupants (business must occupy at least 51% of the property)
SBA 7(a) for Real Estate
SBA 7(a) loans can also fund CRE, with up to 25-year terms and 10% down for owner-occupants. Rates are variable (Prime + spread), currently 10–12%.
Best for: When SBA 504 isn't available (multi-purpose use, faster timeline, or lender preference)
Bridge Loans
Bridge loans are short-term (6–24 months) loans used to "bridge" until permanent financing is in place. Common uses:
- Acquiring property that needs renovation before it qualifies for conventional financing
- Buying quickly while securing a long-term loan
- Stabilizing a property before refinancing
Rates: 9–14%, plus origination fees. Short-term by design.
CMBS Loans (Commercial Mortgage-Backed Securities)
Large commercial properties ($2M+) are often financed through conduit loans, which are pooled and securitized. These offer competitive fixed rates and non-recourse structures but come with strict prepayment penalties (defeasance) and limited flexibility.
Key Metrics Lenders Use
DSCR (Debt Service Coverage Ratio): NOI ÷ annual debt service. Most CRE lenders require 1.20–1.30x.
LTV (Loan-to-Value): Loan amount ÷ appraised value. Most lenders cap at 65–75% for commercial; SBA 504 can go to 90%.
LTC (Loan-to-Cost): For construction or heavy renovation deals, lenders evaluate loan vs. total project cost rather than appraised value.
Debt Yield: NOI ÷ loan amount. Increasingly used by institutional lenders; typically minimum 8–9%.
The CRE Loan Process
- Pre-qualification (1–2 weeks): Lender reviews your financials, the property, and gives preliminary terms
- Term sheet (1–2 weeks): Non-binding outline of loan structure
- Due diligence / underwriting (3–6 weeks): Appraisal, environmental report (Phase I), title search, property inspection, borrower financials
- Loan approval (1–2 weeks): Underwriting committee approves
- Closing (1–2 weeks): Title, legal docs, funding
Timeline from application to close: 60–120 days for conventional; 90–150 days for SBA 504.
Common Mistakes
Underestimating closing costs. CRE closing costs typically run 3–5% of the loan amount: appraisal ($3,000–$8,000), environmental ($1,500–$4,000), title, legal, origination fees.
Ignoring the balloon payment. Most commercial loans have a 5–10 year term with a longer amortization. Budget for refinancing — don't assume rates will be favorable when the balloon is due.
Buying a special-use property. Car washes, gas stations, funeral homes, and similar properties are harder to finance and harder to sell. Lenders apply lower LTVs.
Not accounting for vacancy. Lenders underwrite to market vacancy, not your current occupancy. If you have a tenant-dependent property, model what happens if they leave.
Commercial real estate can be a wealth-building asset for business owners — but the financing is complex. Working with advisors who understand the product before you sign a purchase agreement will save significant time and money.