Commercial Real Estate
Financing Solutions

Commercial real estate financing helps American businesses secure the properties they need to operate and grow. Without access to these loans, many companies would not be able to purchase, build, or renovate spaces for offices, manufacturing, retail, or apartments. The process is more complex than getting a regular home loan. The amounts are larger—commercial loans often start at $500,000 and can exceed $100 million for major developments—and lenders look at different criteria. To succeed, you need to know your options, understand what lenders want, and be ready with the right information and documents. 

What Is Commercial Real Estate Financing

Commercial real estate financing is money borrowed to buy, build, or improve property that is used for business, not for personal living. The properties can include office buildings, warehouses, shopping centers, industrial sites, medical offices, and apartment buildings with five or more units. 

Lenders treat these loans differently from home mortgages because commercial properties are mainly investments. The main question lenders ask is: Will the property earn enough money to pay back the loan? This is why commercial loans come with their own rules and requirements.

Federal laws like the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) and the Truth in Lending Act (TILA) set some of the standards lenders must follow. These laws require transparent disclosure of rates, terms, and fees to protect borrowers. States also regulate maximum interest rates (often 6–18% APR depending on the state), fees, and foreclosure procedures.

Commercial property loans are usually made to business entities—such as corporations, LLCs, or partnerships—not to individuals. The business itself is the borrower, but many lenders require personal guarantees from the company owners, putting their personal assets at risk if the business defaults.

Main Types of Commercial Real Estate Loans

There are several types of loans for commercial real estate, each with its own features and requirements. Choosing the right one depends on your business, property, and financial goals.

Traditional Commercial Mortgages

A traditional commercial mortgage is a standard loan used to buy or refinance a business property. Loan terms typically last from 5 to 20 years, but the monthly payments may be calculated as if you have 25 or 30 years (the amortization period), creating a balloon payment at the end—a lump sum that can sometimes be as much as 20–40% of the principal. Loan sizes usually range from $500,000 to $25 million.

Interest rates are generally 1.5–3% higher than residential mortgages, typically between 6% and 9% as of mid-2024, depending on the borrower’s creditworthiness, property type, and market conditions. Down payments are usually 20% to 30%. The property can be income-producing or used primarily by the borrower’s own business (known as owner-occupied financing), with most lenders requiring the business to occupy at least 51% of the space. Traditional commercial mortgages are offered by major banks, credit unions, and commercial lenders. For example, buying a $2 million warehouse might require a $400,000–$600,000 down payment.

SBA Loans

The Small Business Administration (SBA) offers two main loan programs for real estate: SBA 504 and SBA 7(a).

SBA 504 Loans

Used for buying, building, or improving fixed assets, including commercial property. These loans offer long terms (10, 20, or 25 years), fixed interest rates that typically range from 6.5% to 7.5% in 2024, and down payments as low as 10%. SBA 504 loans involve three parties: the borrower, a bank or credit union (financing 50%), and a Certified Development Company (CDC) (financing up to 40%), while the borrower provides at least 10%. The maximum SBA 504 loan amount for the CDC portion is $5.5 million, but projects can be larger when combined with the bank portion.

SBA 7(a) Loans

More flexible, these loans can be used for real estate investment, working capital, or buying equipment. The maximum amount is $5 million, and repayment for real estate can go up to 25 years. Interest rates are usually variable, tied to the Prime Rate plus 2.25–4.75%. SBA 7(a) loans are available through approved banks and lenders. In fiscal year 2023, the average approved SBA 7(a) loan was around $500,000. 

Bridge Loans

Bridge loans are short-term loans designed to “bridge the gap” between immediate financing needs and long-term solutions. Businesses use them to buy a new property quickly, compete with cash buyers, or start construction while arranging permanent financing. Bridge loans typically last from 6 months up to 3 years. As of 2024, interest rates usually fall between 9% and 12%, with fees that can total 1%–2% of the loan amount. Lenders require a clear exit strategy, such as selling another property or refinancing into a traditional loan. Loan-to-value (LTV) ratios are often capped at 65%–75%. These loans are popular for time-sensitive acquisitions or redevelopment projects.

Construction Loans

Construction loans provide funds to build or renovate commercial properties. These loans are disbursed in stages, or “draws,” as the project progresses and milestones are met. Construction loans are short-term, usually 12 to 36 months. Interest rates are typically variable, often based on SOFR or Prime plus a margin (averaging 7%–12% in 2024). Once construction ends, the borrower typically must refinance the debt into a permanent loan. Lenders require detailed plans, budgets, construction contracts, permits, and proof that the developer and contractor have experience with similar projects. For example, a $3 million hotel project may receive construction funding in five draws, with each disbursement triggered by a third-party inspection.

CMBS Loans

Commercial mortgage-backed securities (CMBS) loans are packaged with other commercial loans and sold as bonds to investors. CMBS loans typically offer fixed rates, averaging 6% to 8% in 2024, non-recourse terms (the lender cannot pursue your personal assets if you default), and 5- to 10-year terms, with amortization periods up to 30 years. CMBS loans are most common for large, income-producing properties such as multi-family apartment complexes, hotels, or shopping centers. Minimum loan amounts usually start at $2 million. Borrowers must meet strict underwriting standards, including strong DSCR (usually 1.25 or higher) and robust property cash flow.

How Commercial Loan Terms and Rates Work

Understanding the terms and interest rates of a commercial loan is key to knowing how much you’ll pay over time—and what lenders expect from you in return.

Loan Terms and Repayment

Most commercial loans last between 5 and 20 years. The amortization period (used to calculate monthly payments) can be as long as 25 or 30 years, meaning the borrower may face a large balloon payment at the end of the term. For example, a $2 million, 10-year commercial mortgage with a 25-year amortization schedule may require a balloon payment of over $1.4 million at maturity. Some loans, especially construction or bridge loans, start with interest-only payments for an initial period.

Interest Rates

Interest rates on commercial loans are higher than on home loans, reflecting increased risk. They can be fixed for the life of the loan or variable, resetting annually or at set intervals. The rate depends on:

• Property type and expected cash flow
• Business credit score (lenders prefer scores of 680+)
• Loan-to-value (LTV) ratio (lower LTV = lower rate)
• Market benchmarks such as the SOFR, Prime, or U.S. Treasury yield

As of 2024, typical commercial mortgage rates range from 6% to 12%, with the best rates for low-risk borrowers and stabilized properties.

Fees and Closing Costs

Commercial loans include a range of fees—application, origination (usually 0.5%–1.5%), underwriting, legal, appraisal, environmental assessment, and title insurance. Total closing costs often equal 1%–5% of the loan amount. For example, a $5 million loan could have $100,000–$250,000 in total fees and closing costs. Federal and state laws require lenders to disclose all costs. Under TILA, you must receive a clear breakdown of costs and the APR before closing.

Key Lenders in Commercial Real Estate

Different lenders offer different deals, so it’s important to know who the main players are in commercial real estate financing before you apply: 

Banks and Credit Unions

Banks and credit unions are the most common sources for commercial real estate loans. They offer competitive rates and a wide range of loan products, and work best with businesses that have strong credit and stable cash flow. Approval requires detailed business and financial records. The process can take 30–90 days, depending on the loan and the institution’s underwriting requirements.

Life Insurance Companies

Life insurance companies invest in long-term, stable commercial properties, such as Class A office buildings or large apartment complexes. Minimum loan sizes are high—often starting at $5 million—and the best rates are reserved for low-risk, high-quality properties with long-term leases in major markets. Loan terms are often 10–30 years, with fixed interest rates that can be below 6% for prime borrowers. These lenders are a good fit for institutional-grade borrowers seeking large, low-risk loans.

Commercial Mortgage Brokers

Mortgage brokers help you find the best loan for your needs by shopping your deal to a range of lenders. They can save you time and potentially get you better rates, but charge a broker fee—typically 1% of the loan amount—due at closing. Brokers have access to a wide network of banks, credit unions, CMBS lenders, private funds, and more.

CMBS Lenders

Specialized CMBS lenders provide loans for large, income-producing properties. These loans are structured to be pooled, securitized, and sold to institutional investors. The application process is detailed and may require legal counsel experienced in CMBS transactions.

Loan Application Process and Required Documentation

Applying for a commercial real estate loan is more involved than getting a home loan. Lenders need to fully understand the property, your business, and your plans.

Here are the key steps:

1. Prequalification: Meet with a lender or broker, discuss your project, property details, and financial situation. Receive a preliminary estimate of how much you can borrow.
2. Formal Application: Submit a detailed application with information on the property, your business finances, and your personal finances.
3. Underwriting: The lender reviews documents, orders an appraisal, environmental and engineering reports, checks credit, and inspects the property.
4. Loan Approval: If approved, you receive a commitment letter outlining all terms and conditions.
5. Closing: Final paperwork is signed, closing costs paid, and funds are disbursed. The entire process usually takes 30–90 days for banks, or 60–120 days for CMBS or SBA loans.

Lenders will ask for:

• Business tax returns (last 3 years)
• Personal tax returns for owners (last 2–3 years)
• Year-to-date business financial statements (balance sheet, income statement)
• Current rent rolls and leases (for properties with tenants)
• Purchase and sale agreements or construction contracts
• Proof of business registration (EIN, articles of incorporation)
• Personal financial statement and credit report
• Independent property appraisal
• Environmental Phase I report
• Construction plans and budgets (for construction loans)

For SBA loans, you’ll also need a business plan and personal background statement (SBA Form 912). The SBA has strict eligibility rules, including the requirement that owner-occupants use at least 51% of the property.

Common Eligibility Criteria

Lenders have strict requirements to reduce risk. Meeting these standards improves your chance of approval.

• Credit Score: Most lenders want to see credit scores above 660 for business owners. Higher scores may get you lower rates and better terms.
• Experience: Lenders strongly prefer borrowers with a proven record of managing similar properties or businesses.
• Down Payment: Expect to put down at least 20%–30% of the property’s value. Some SBA loans allow as little as 10% for qualified applicants.
• Debt Service Coverage Ratio (DSCR): Most lenders require a DSCR of 1.25 or higher (net operating income must be at least 25% greater than annual debt payments). For example, if your annual loan payments are $100,000, your net operating income must be at least $125,000.
• Property Value: The property must appraise at or above the purchase price.
• Business Financials: Demonstrated strong, stable cash flow and revenue, with profitability over multiple years.

Risks and Challenges for Borrowers

Commercial real estate loans carry unique risks:

• Market Risk: Property values and rental income can fall during economic downturns. 
• Cash Flow Problems: If tenants leave or cannot pay, income drops, making it harder to cover loan payments.
• Balloon Payments: At the end of the term, you may need to pay off a large balance or refinance. Failure to do so can lead to foreclosure.
• Interest Rate Risk: Variable rates can rise unexpectedly, increasing payment amounts.
• Strict Underwriting: Lenders may reject loans or call in loans early if risk rises.

Careful planning, strong cash reserves, and a deep understanding of your property and market can help manage these risks.

FAQ

How much can I borrow?

Typically 65% to 80% of the property’s appraised value, depending on the property type, borrower strength, and lender policy.

What is a balloon payment?

A large final payment due at the end of a loan term when the loan has not fully amortized.

How long does the process take?

Most approvals take 30 to 90 days. SBA loans and CMBS deals may take longer (up to 120 days).

Can I get a commercial loan with bad credit?

It’s possible, but expect higher rates and stricter terms. Hard money lenders may approve loans based mostly on property value, but costs are much higher.

What is DSCR?

Debt Service Coverage Ratio (DSCR) measures whether the property’s net income is enough to cover loan payments. Most lenders require at least 1.25.

Can I use SBA loans for investment property?

No, SBA loans are only for owner-occupied properties. Your business must use at least 51% of the space.

What happens if I default?

The lender may foreclose on the property and, if you’ve provided a personal guarantee, pursue your personal assets for repayment.

Conclusion

Commercial real estate financing supports business growth across the United States. Understanding your options, lender expectations, and the steps involved makes the process less intimidating. With the right preparation and accurate information, you can secure the property your business needs and build for the future. Always review the terms, ask questions, and work with trusted lenders or brokers. For more guidance, review the resources at the Consumer Financial Protection Bureau and U.S. Small Business Administration.