Loan Programs
Commercial Real Estate
Commercial Loans
Financing for income-producing commercial properties including office buildings, retail centers, industrial facilities, apartment complexes, and mixed-use developments. Structured around property performance and borrower experience.
What Is a Commercial Loan?
A commercial loan is a mortgage secured by income-producing commercial real estate rather than a residential property. Unlike residential mortgages, commercial loans are primarily underwritten based on the property’s net operating income (NOI) and its ability to service the debt. Lender approval is also influenced by the borrower’s real estate experience, creditworthiness, and the strength of the property’s tenant base.
Key Distinction: Commercial loans are typically made to business entities (LLCs, corporations, partnerships) rather than individuals, and they carry shorter terms (5-25 years) with amortization periods of 20-30 years. Many commercial loans include balloon payments due at the end of the initial term.
Types of Commercial Loans
The commercial lending market offers several distinct loan structures depending on property type, borrower profile, and financing goals:
| Loan Type | Property Types | Typical Use |
|---|---|---|
| Conventional Commercial | Office, retail, industrial, mixed-use | Stabilized properties with strong tenants |
| SBA 7(a) Loan | Owner-occupied commercial | Small businesses buying their own space |
| SBA 504 Loan | Owner-occupied real estate + equipment | Fixed-rate long-term financing up to $5.5M |
| Bridge Loan | Any commercial property | Short-term financing during renovation or lease-up |
| Construction Loan | Ground-up development | Fund construction then convert to permanent loan |
| Multifamily (5+ units) | Apartment complexes | Agency (Fannie/Freddie) or conventional |
| Hard Money Commercial | Any commercial property | Quick close, value-add, distressed assets |
Commercial Loan Requirements
| Requirement | Typical Standard | Notes |
|---|---|---|
| Credit Score | 660 minimum | 700+ preferred; some SBA lenders require 680+ |
| Down Payment | 20-30% | SBA 504: as low as 10%; conventional: 25-30% |
| DSCR (Debt Service Coverage) | 1.20x minimum | 1.25x-1.35x preferred; some lenders require 1.30x |
| Loan-to-Value (LTV) | 65-75% | SBA up to 90%; bridge loans 60-70% |
| Loan Amount | $500K – $25M+ | SBA 7(a) up to $5M; SBA 504 up to $5.5M per project |
| Property Occupancy | 85%+ for stabilized | Bridge/construction for value-add or lease-up |
| Borrower Experience | Preferred but not always required | First-time commercial buyers need strong financials |
| Personal Guarantee | Typically required | Most lenders require personal guarantee from principals |
| Environmental Review | Required (Phase I) | Phase II may be required for industrial or gas stations |
| Reserves | 6-12 months PITI | Varies by lender and property type |
How Commercial DSCR Is Calculated
Commercial DSCR uses net operating income (NOI) — not gross rent — divided by annual debt service. This is a more conservative calculation than residential DSCR:
Commercial DSCR Formula: Net Operating Income (NOI) divided by Annual Debt Service = DSCR. NOI = Gross Rental Income minus Vacancy minus Operating Expenses (taxes, insurance, management, maintenance). Example: NOI of $120,000 / Annual debt service of $96,000 = 1.25x DSCR.
| DSCR Ratio | Lender Interpretation | Typical Loan Outcome |
|---|---|---|
| 1.35x or higher | Strong cash flow cushion | Best rates, full leverage, easy approval |
| 1.25x – 1.34x | Adequate coverage | Standard commercial loan terms |
| 1.20x – 1.24x | Minimum acceptable | Approved with tighter terms or higher down payment |
| Below 1.20x | Insufficient coverage | Most lenders decline; bridge loan or seller financing needed |
SBA Loans vs. Conventional Commercial
| Feature | SBA 7(a) | SBA 504 | Conventional Commercial |
|---|---|---|---|
| Max Loan Amount | $5 million | $5.5M per project | No set limit |
| Down Payment | 10-15% | 10% (borrower) | 25-30% |
| Occupancy Requirement | 51%+ owner-occupied | 51%+ owner-occupied | Investment OK |
| Rate Type | Variable (Prime-based) | Fixed (below market) | Fixed or floating |
| Personal Guarantee | Required (20%+ owners) | Required (20%+ owners) | Typically required |
| Best For | Working capital + RE | Long-term fixed-rate RE | Investment properties |
Advantages
- Finance large income-producing properties beyond residential loan limits
- SBA programs offer low down payments (10%) for owner-occupants
- LLC and corporate borrowing — separates personal and business liability
- Interest-only periods available on bridge and construction loans
- Leverage commercial properties to build long-term wealth and equity
- Tax advantages: depreciation, interest deductions, cost segregation
- Multiple property types accepted — office, retail, industrial, multifamily
Disadvantages
- Higher down payments than residential loans (20-30% typical)
- Balloon payments at end of term require refinance or payoff
- Personal guarantee usually required — personal assets at risk
- Environmental review (Phase I) adds time and cost to closing
- More complex underwriting — property appraisal, rent rolls, operating statements
- Prepayment penalties common — defeasance or step-down prepay
- Longer approval timelines compared to residential mortgage
Commercial vs. Other Investment Loan Options
| Feature | Commercial Loan | DSCR (Residential) | Hard Money | SBA 504 |
|---|---|---|---|---|
| Property Type | 5+ units, commercial | 1-4 unit residential | Any | Owner-occupied commercial |
| Min. Down Payment | 20-30% | 20-25% | 20-30% | 10% |
| Min. DSCR | 1.20x (NOI-based) | 1.0x (gross rent) | Flexible | 1.25x+ |
| Loan Term | 5-25 years + balloon | 30-year fixed available | 6-24 months | 10-25 years (fixed) |
| Personal Income Needed | Typically not primary | Not required | Not required | Business financials required |
| Closing Timeline | 45-90 days | 21-45 days | 7-21 days | 60-120 days |
How to Qualify for a Commercial Loan
- Analyze the property financials: Calculate net operating income by taking gross annual rents, subtracting vacancy (typically 5-10%), and subtracting annual operating expenses. Divide NOI by the projected annual debt service to confirm a DSCR of 1.20x or higher before approaching lenders.
- Prepare your borrower package: Gather 2-3 years of personal and business tax returns, current rent rolls, property operating statements, and proof of reserves. Lenders will also request a Phase I environmental site assessment for most commercial properties.
- Determine ownership structure: Most commercial investors take title through an LLC, LP, or corporation. Confirm your entity is properly formed and in good standing. Many lenders require principals with 20% or more ownership to sign a personal guarantee.
- Shop loan programs: Compare conventional commercial lenders, community banks, credit unions, CMBS lenders, and SBA lenders. Each has different strengths — SBA is best for owner-users needing low down payments, while CMBS is strong for stabilized investment properties over $2M.
- Build your team: Commercial transactions require a commercial real estate attorney, CPA, and often an environmental consultant. Factor these costs into your acquisition budget and timeline. Close coordination between your broker, attorney, and lender is essential for smooth execution.
Commercial Loan FAQs
What is a balloon payment and how does it work on commercial loans?
A balloon payment is a large lump-sum payment due at the end of a commercial loan term, representing the remaining principal balance. For example, a commercial loan may amortize over 25 years but have a 10-year term — meaning after 10 years of payments, the remaining balance (the balloon) comes due all at once. Borrowers typically refinance or sell the property at that point. It is critical to plan your balloon payment strategy before closing.
Do I need to personally guarantee a commercial loan?
In most cases, yes. Conventional commercial lenders typically require a full personal guarantee from principals who own 20% or more of the borrowing entity. This means your personal assets (home, savings, investments) are at risk if the commercial property defaults. Some non-recourse commercial loans are available for larger, stabilized properties — but these carry stricter underwriting standards and higher rates.
Can I use an SBA loan to buy an investment property?
No. SBA 7(a) and SBA 504 loans require that the borrowing business occupy at least 51% of the property being financed (for existing buildings) or 60% for new construction. These programs are designed to help small businesses own their workspace, not to finance pure investment or rental properties. For investment properties, conventional commercial loans or DSCR programs are the appropriate options.
What documents are needed for a commercial loan application?
A typical commercial loan package includes: 2-3 years of personal and business tax returns, year-to-date profit and loss statement, current rent roll with lease abstracts, operating statements for the property (2-3 years), entity documents (LLC operating agreement, articles of incorporation), personal financial statement, and a Phase I environmental report. For construction or bridge loans, a detailed project budget and construction timeline are also required.
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