Commercial Real Estate Loans: Types, Rates & How to Qualify

Commercial real estate loans allow businesses to purchase, refinance, or renovate commercial properties. Whether you're buying your first building or expanding your real estate portfolio, understanding CRE financing is essential to getting the best terms.

What is a Commercial Real Estate Loan?

A commercial real estate (CRE) loan is financing used to purchase or refinance property used for business purposes. Unlike residential mortgages, CRE loans are based on the property's income-generating potential and the business's ability to repay.

Types of Commercial Properties

• Owner-occupied: You own the building and your business occupies 51%+ of it
• Investment properties: Purchased to lease to tenants for income
• Special purpose: Hotels, gas stations, car washes, churches
• Mixed-use: Combination of commercial and residential spaces

Types of Commercial Real Estate Loans

1. SBA 504 Loan

Best for owner-occupied commercial real estate

• Down payment: Only 10%
• Rates: Fixed, 5-6% typical
• Terms: 20-25 years
• Max amount: $5-5.5 million
• Requirement: Must occupy 51%+ of building

2. SBA 7(a) Loan

More flexible than 504, can include working capital

• Down payment: 10-20%
• Rates: Variable, Prime + 2.25-2.75%
• Terms: Up to 25 years
• Max amount: $5 million
• Can finance real estate + other needs

3. Conventional Commercial Mortgage

Traditional bank financing

• Down payment: 20-35%
• Rates: 6-10%
• Terms: 5-25 years (often with balloon)
• Faster closing than SBA
• May have prepayment penalties

4. CMBS (Commercial Mortgage-Backed Securities)

For larger properties ($2M+)

• Non-recourse (no personal guarantee)
• Fixed rates
• Strict prepayment penalties
• Best for investment properties

5. Bridge Loans

Short-term financing until permanent financing secured

• Terms: 6-36 months
• Rates: 8-15%
• Fast closing
• Good for renovations or quick purchases

Commercial Real Estate Loan Requirements

Credit Score

• 680+: Excellent approval odds
• 650-679: Good approval odds
• Below 650: Challenging, may need larger down payment

Down Payment

• SBA 504: 10%
• SBA 7(a): 10-20%
• Conventional: 20-35%
• Investment property: 25-35%

Debt Service Coverage Ratio (DSCR)

Lenders want to see that property income exceeds debt payments:

• DSCR of 1.25+: Preferred
• DSCR of 1.15-1.24: Acceptable
• DSCR below 1.15: Challenging

DSCR = Net Operating Income / Annual Debt Service

Loan-to-Value Ratio (LTV)

• Owner-occupied: Up to 90% LTV (SBA)
• Investment property: 65-75% LTV typical
• Special purpose: 60-65% LTV

Required Documentation

• Personal and business tax returns (3 years)
• Personal financial statement
• Business financial statements
• Purchase agreement or current property appraisal
• Rent roll (for investment properties)
• Property financial statements (existing properties)
• Environmental report (Phase I)
• Property insurance quotes

Commercial Real Estate Loan Costs

Interest Rates (2024)

• SBA 504: 5.5-6.5% fixed
• SBA 7(a): 10.5-11.5% variable
• Conventional: 6.5-10% fixed or variable
• Bridge loans: 8-15%

Closing Costs

Expect 2-5% of loan amount for:

• Appraisal ($2,000-$10,000+)
• Environmental assessment ($1,500-$5,000)
• Title insurance and search
• Attorney fees
• Survey
• Loan origination fee (0-2%)
• SBA guarantee fee (2-3.75% for SBA loans)

Owner-Occupied vs Investment Properties

Owner-Occupied

Your business occupies 51%+ of the property

• Lower down payments (10-20%)
• Better rates
• Longer terms
• SBA options available
• Based on business cash flow + property value

Investment Property

Purchased to lease to tenants

• Higher down payments (25-35%)
• Rates 0.5-1% higher
• Based primarily on property income
• No SBA financing
• Rent rolls critical to approval

Commercial Real Estate Loan Terms

Amortization Period

Length of time to pay off loan if you make minimum payments:

• SBA loans: 20-25 years
• Conventional: 15-30 years

Loan Term vs Amortization

Many conventional CRE loans have a shorter term than amortization, resulting in a balloon payment:

• Example: 25-year amortization, 10-year term
• Make payments as if paying off over 25 years
• After 10 years, remaining balance due (balloon payment)
• Must refinance or pay off at that time

Steps to Get a Commercial Real Estate Loan

Step 1: Determine Your Budget

• How much can you afford as down payment?
• What monthly payment fits your cash flow?
• Factor in property taxes, insurance, maintenance

Step 2: Get Pre-Qualified

• Speak with lenders before property hunting
• Know what you qualify for
• Shows sellers you're a serious buyer

Step 3: Find a Property

• Work with commercial real estate broker
• Ensure property meets your needs and budget
• Research comparable sales

Step 4: Make an Offer

• Include financing contingency
• Allow time for due diligence
• Negotiate based on property condition

Step 5: Apply for Financing

• Submit full application with documentation
• Order appraisal and environmental report
• Provide additional information as requested

Step 6: Due Diligence

• Property inspection
• Review leases (if applicable)
• Verify property income and expenses
• Review title report

Step 7: Closing

• Review and sign loan documents
• Pay closing costs and down payment
• Receive keys and take possession

Pros and Cons of Buying Commercial Real Estate

Advantages

• Build equity: Own an appreciating asset
• Tax benefits: Depreciation, interest deductions
• Control: Make improvements, no landlord
• Stability: Fixed housing costs
• Retirement asset: Sell or lease when you retire
• Appreciation potential: Property may increase in value

Disadvantages

• Large down payment: Ties up capital
• Maintenance responsibility: You pay for all repairs
• Less flexibility: Can't easily relocate
• Market risk: Property values can decline
• Illiquid asset: Takes time to sell if needed
• Ongoing costs: Property taxes, insurance, maintenance

Commercial Real Estate Financing FAQs

What's the difference between commercial and residential mortgages?

• Qualification: CRE based on property income + business finances, not just personal income
• Rates: CRE rates typically 1-2% higher
• Terms: CRE often has balloon payments
• Down payment: CRE requires 10-35% vs. 3-20% residential
• Closing costs: CRE closing costs higher

Can I use an SBA loan for investment property?

No. SBA loans require owner-occupancy of at least 51%. For investment properties, you need conventional financing.

How long does commercial real estate financing take?

• Conventional: 45-60 days
• SBA 504: 60-90 days
• SBA 7(a): 45-75 days
• Bridge loans: 2-4 weeks

Do I need a commercial real estate broker?

While not required, a broker who specializes in commercial real estate can help you:

• Find suitable properties
• Negotiate better terms
• Navigate complex transactions
• Understand market conditions

Get Commercial Real Estate Financing

Commercial real estate financing is complex, with many options depending on property type, use, and your financial situation. Finding a lender who specializes in commercial real estate and understands your specific needs is crucial.

Get matched with commercial real estate lenders who can provide competitive rates and terms for your property purchase. Compare multiple options to find the best fit.