Commercial Real Estate Loan

Unlike residential mortgages, which can be taken out by individual borrowers, commercial real estate loans are often made to business entities such as corporations, developers, limited partnerships, funds and trusts. These entities are usually formed for the sole purpose of owning commercial property.


Choosing the right lender is critical for any property owner. The best lender will be able to help you determine the type of loan that best fits your needs.

Term Loans

Similar to mortgages, commercial real estate loans function as secured financing backed by the property that serves as collateral. This type of financing is generally used to buy or build business property such as a retail store, manufacturing facility, office complex or restaurant building.

This form of financing can be obtained from both traditional banks and online lenders. Banks typically have stricter requirements and longer application processing times but they offer more favorable rates than online lenders.

When applying for this financing, lenders will look at a variety of factors including the borrower’s credit history and income, the property location and value, and current market conditions. The loan-to-value (LTV) ratio is an important consideration because it defines how much of your total investment you’ll need to make up the difference between the purchase price and appraised value of your property.

A business line of credit is a flexible financing option that allows you to use and reuse borrowed funds. It’s similar to a business credit card, but with higher funding amounts and lower interest rates.

Another common form of commercial real estate financing is a blanket loan, which can be used to buy multiple properties at once. This type of financing may be a better fit for larger companies with the ability to manage and maintain numerous properties.

Recourse Loans

A commercial real estate loan can be recourse or non-recourse. The main difference between these two types of loans is that with recourse financing, if the collateral fails to cover the amount borrowed, the lender can go after personal assets (like paychecks or other investment properties) of the borrower and/or guarantor. Non-recourse financing, on the other hand, limits the lender’s exposure to the property itself.

Most banks and traditional lenders prefer to provide recourse loans because it gives them the ability to seek financial damages from the borrower or guarantor in the event of default. This is especially true when the property is not able to sell for enough money to cover the amount owed on the loan.

To mitigate their risk in the case that a property fails to perform as expected, many CRE borrowers offer up personal guarantees of the loan amount as well as other forms of collateral. This helps to demonstrate a borrower’s confidence in the ability to repay the loan amount, and it can often lead to more favorable terms for the borrower than would otherwise be available.

There are some specific non-recourse lending programs for multifamily real estate, such as HUD 221(d)(4) loans and Fannie Mae’s CMBS platforms. These programs are designed to increase investment in these asset classes by making it easier for investors to obtain financing.

Bank Loans

Generally, this type of loan is used to purchase or construct a building that will house a business. Often, the owner will lease out space in the property to others to generate income. These loans are viewed as investments and often have higher interest rates than residential mortgages. Applicants typically need to submit financial documents like tax returns and bank statements. A lender will also want to know that the business has enough cash flow to make monthly payments on the loan.

Banks are the most common source of commercial real estate loan financing. They usually offer competitive terms and don’t require that the property be owner-occupied. However, they have more stringent underwriting requirements and may request a credit score of at least 660 and a down payment. They also don’t offer mortgage insurance, so borrowers will need to have a high debt service coverage ratio (DSCR) — the amount of annual business income divided by annual debt payments.

Other types of commercial real estate loan providers include private lenders, life insurers, and the Small Business Administration. These lenders offer flexible loan terms and can provide funding for a range of commercial purposes, from land and construction to renovations or purchases of equipment and machinery. Interest rates vary by lender and loan product, but they are typically within a few percentage points of a prime rate.

Online Lenders

Commercial real estate loan financing is a type of loan that is secured by a lien on commercial property, such as office buildings and shopping centers. This financing can be used for the acquisition, construction, or refinance of commercial properties. This loan type differs from residential loans in several ways, including interest rates and fees.

Unlike residential mortgages, which are often made to individual borrowers, most commercial real estate loan financing is provided to business entities like corporations, limited partnerships, funds, trusts, and others. This type of borrower may need to submit more documentation than an individual, including three to five years of financial statements and income tax returns, a detailed business plan, a debt-service coverage ratio (DSCR) calculation, and other relevant financial ratios.

Those seeking a commercial real estate loan should be prepared for a more stringent application process than a traditional residential mortgage. The lender will likely request a minimum amount of annual revenue, or net operating income (NOI), and they may also set a maximum debt-service coverage ratio for the property. Other requirements may include a cash reserve, pending invoices, or valuable assets that can be liquidated to pay off the loan in case of default. Using a commercial real estate financing calculator can help borrowers determine the potential loan amount, interest rate, loan term, and amortization period for their investment.