{"id":36623,"date":"2019-11-28T15:55:30","date_gmt":"2019-11-28T13:55:30","guid":{"rendered":"https:\/\/www.propertyshark.com\/Real-Estate-Reports\/?p=36623"},"modified":"2025-04-10T14:33:23","modified_gmt":"2025-04-10T11:33:23","slug":"commercial-real-estate-financing-explained","status":"publish","type":"post","link":"https:\/\/www.propertyshark.com\/Real-Estate-Reports\/2019\/11\/28\/commercial-real-estate-financing-explained\/","title":{"rendered":"Commercial Real Estate Financing Explained"},"content":{"rendered":"<p><strong>Key takeaways<\/strong><\/p>\n<ul>\n<li>CRE loans tend to be more flex and offer more options than non-commercial loans like shorter terms and a variety of payment options<\/li>\n<li>There\u2019s a variety of commercial financing depending on the asset type and the investment strategy<\/li>\n<li>Get familiar with financial metrics used by lenders to evaluate commercial properties like LTV and\u00a0the experience the borrower<\/li>\n<\/ul>\n<p>\u00a0<\/p>\n<p>Commercial real estate financing is used to acquire, maintain, improve, and develop commercial properties. Loans come in all shapes and sizes, with terms and conditions that are unique to each property and are based on factors like the experience of the borrower, the investment strategy, and the profitability of property. I will also note that different cities and states may vary in how they approach commercial lending. Similar properties in <a href=\"https:\/\/www.propertyshark.com\/cre\/office\/us\/ny\/new-york-city\/\" target=\"_blank\" rel=\"noopener\">New York<\/a> and <a href=\"https:\/\/www.propertyshark.com\/cre\/office\/us\/ca\/los-angeles\/\" target=\"_blank\" rel=\"noopener\">Los Angeles<\/a> may be financed completely different from one another.<\/p>\n<p>In this article we\u2019ll discuss the ins and outs of how commercial lending really works.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_Financing_Works_for_Commercial_Real_Estate\"><\/span>How Financing Works for Commercial Real Estate<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Financing is used to buy property for income-producing investments, an owner-occupied business, new development, or repositioning a building to a new use.<\/p>\n<p>Types of commercial properties:<\/p>\n<ul>\n<li>Office<\/li>\n<li>Retail<\/li>\n<li>Industrial<\/li>\n<li>Warehouse<\/li>\n<li>Multifamily (5 units or more)<\/li>\n<li>Special purpose<\/li>\n<li>Development projects<\/li>\n<\/ul>\n<h4><span class=\"ez-toc-section\" id=\"Non-Commercial_vs_Commercial_Loans\"><\/span>Non-Commercial vs. Commercial Loans<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>Most people are familiar with non-commercial mortgages used to buy a house. Normally this type of loan comes with a fixed rate over a 30-year term. However, commercial mortgages are an entirely different ball game.<\/p>\n<p>Common features of a commercial mortgage:<\/p>\n<ul>\n<li>Larger down payments<\/li>\n<li>Higher interest rates and fees<\/li>\n<li>More variable loan terms; 5 years or less in some cases (Bridge Loan)<\/li>\n<li>Amortization periods are longer than the term<\/li>\n<li>Balloon and Interest Only payment structures for more frequent refinancing<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"General_Steps_Before_Applying\"><\/span><strong>General Steps Before Applying<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<h4><span class=\"ez-toc-section\" id=\"1_Decide_how_to_apply_for_the_loan_as_an_individual_or_a_business_entity\"><\/span>#1. Decide how to apply for the loan: as an individual or a business entity<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>There are numerous advantages to buying a commercial property as an entity\u2014preferential tax treatment and protection of personal assets\u2014but what happens if you\u2019re a brand-new business without a history of ownership?<\/p>\n<p>For borrowers with no credit history or investment experience, lenders will usually ask for a personal guarantee. Oftentimes, a bank will also require a cross-collateralization of assets, meaning one or more properties already owned by the borrower will be pledged as additional collateral for the loan being applied for.<\/p>\n<h4><span class=\"ez-toc-section\" id=\"2_Review_the_financing_options_available\"><\/span>#2. Review the financing options available<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>While most non-commercial loans come in one shape and size, there is a much wider variety of financing options available for commercial real estate.<\/p>\n<p>Investors should review the different types of loans and select the one that best matches the property being purchased, how the building will be used, and the exit strategy of the investor.<\/p>\n<p>Most common types of loans:<\/p>\n<ul>\n<li>SBA 7(a) loans from the U.S. Small Business Administration<\/li>\n<li>Certified Development Company (CDC) \/ SBA 504 loans used for economic development<\/li>\n<li>Conventional commercial loans used by investors with income-producing properties<\/li>\n<li>Commercial bridge loans to provide take-out financing while a conventional loan is being obtained<\/li>\n<li>Hard money loans with shorter terms and higher interest rates used for rehabs or redevelopment<\/li>\n<li>Conduit loans issued by lenders, then bundled together and sold as CMBS (commercial mortgage backed securities) to fixed-income investors looking for bond-like yields<\/li>\n<\/ul>\n<h4><span class=\"ez-toc-section\" id=\"3_Calculate_metrics_such_as_LTV_and_DSCR\"><\/span>#3. Calculate metrics such as LTV and DSCR<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>There are two common metrics that borrowers and lenders consider when financing commercial real estate:<\/p>\n<p><strong>LTV (Loan to Value)<\/strong><\/p>\n<p>Loan to value is the ratio between the amount of the loan and the property value. For example, the LTV of a $1 million property purchased with a $250,000 down payment and a $750,000 loan is 75%.<\/p>\n<p>Most commercial real estate lenders won\u2019t offer a loan if the LTV is higher than 80%. That\u2019s because the higher the LTV is, the more risk of default there is to the lender. In general, the more \u201cskin in the game\u201d a borrower has with a large down payment, the better the terms will be.<\/p>\n<p><strong>DSCR (Debt Service Coverage Ratio)<\/strong><\/p>\n<p>Debt service coverage ratio measures how much income is left over to pay normal operating expenses and capital repairs after the mortgage is paid, or the debt is serviced:<\/p>\n<p style=\"text-align: center;\"><strong>DSCR = NOI (annual net operating income) \/ Total annual debt service<\/strong><\/p>\n<p style=\"text-align: center;\">$200,000 NOI \/ $150,000 Total debt service<\/p>\n<p style=\"text-align: center;\">DSCR= 1.33<\/p>\n<p>A DSCR ratio of 1.0 means that the property is only generating enough net operating income to pay the mortgage, while a DSCR ratio of less than 1.0 means the property has negative cash flow after debt service. Normally, lenders won\u2019t offer commercial real estate financing if the DSCR is less than 1.25 due to the higher level of risk.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Rates_and_Fees\"><\/span><strong>Rates and Fees<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Commercial real estate loans are also more expensive since:<\/p>\n<ul>\n<li>Down payments typically range from 20% or more of the property value<\/li>\n<li>Interest rates on average range from 7.5% up to 20% depending on if the property is financed with an SBA loan, conventional commercial mortgage, or a hard money loan<\/li>\n<li>Loan terms range from a few months up to 20 years, may be amortized over 20 or 30 years, and require a balloon payment for the principal due at the end of the loan term<\/li>\n<\/ul>\n<p>Fees for appraisal, legal counsel, loan application and origination, surveying, and a Phase I inspections are also higher, because CRE property values are larger and there\u2019s more expertise involved in commercial real estate due diligence.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Key takeaways CRE loans tend to be more flex and offer more options than non-commercial loans like shorter terms and a variety of payment options There\u2019s a variety of commercial financing depending on the asset type and the investment strategy Get familiar with financial metrics used by lenders to evaluate commercial properties like LTV and\u00a0the&hellip;<\/p>\n","protected":false},"author":63,"featured_media":36626,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[796,10609],"tags":[11172],"class_list":["post-36623","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-how-to","category-useful-tools","tag-old-how-to"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v23.4 (Yoast SEO v24.6) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Commercial Real Estate Financing Explained - PropertyShark Real Estate Blog<\/title>\n<meta name=\"description\" content=\"Real estate financing can be extremely complicated. 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