Commercial real estate loans

What is a commercial real estate loan?

It is a mortgage on a property that is not a one to four unit home. The lender takes a first lien on the property, and the loan is sized by two numbers: loan to value, usually 65% to 80%, and DSCR, the property's or business's net income divided by the proposed payment, usually 1.20 or higher.

Owner occupied loans are underwritten on your business's cash flow. Investment property loans are underwritten on the rent. The two have different lenders, different paperwork and different rates; owner occupied is cheaper and can use the SBA 504 or 7(a) programs. Investors should start at financing for real estate investors.

Who qualifies for a commercial real estate loan?

For owner occupied property, banks want two or more years in business, owner credit of 680 or higher, profitable returns and a DSCR of 1.25 after the new payment. For investment property, they want the rent to cover the payment at 1.20 to 1.25, a lease history or a credible rent roll, and personal net worth close to the loan amount.

• Down payment is the usual stopping point: 20% to 35% conventionally, 10% to 15% through SBA programs for owner occupied property.
• Declined most often: special purpose buildings in weak markets, environmental concerns on the site, borrowers with recent foreclosures, and businesses whose last return shows a loss.

What does a commercial real estate loan really cost?

A typical example: you buy a $1,500,000 building with 25% down, so $375,000, and borrow $1,125,000 at 7.5% on a 25 year amortization. The payment is about $8,300 a month. Closing costs of 2% to 4% add $22,000 to $45,000: an appraisal at $2,000 to $5,000, an environmental report at $1,500 to $3,000, an origination fee of 0.5% to 1%, plus title, legal and survey.

Most bank loans reset or balloon at year five or ten, so budget for a refinance. SBA 504 avoids that with a fixed 25 year rate on the CDC portion. Compare structures in the business loan calculator and the 7(a) versus 504 comparison.

How do you qualify, and what documents do you need?

Expect three years of business and personal tax returns, interim financials, a personal financial statement for each 20% owner, a debt schedule, the purchase contract, and for investment property the rent roll, leases and operating statements. Construction adds plans, a budget, contractor bids and a timeline. The lender orders the appraisal and environmental report at your cost.

Start with our document checklist and run your numbers through the DSCR calculator before you make an offer. If the DSCR is under 1.20, you need a bigger down payment, a lower price, or an SBA structure that allows a longer amortization.

How long does a commercial real estate loan take?

Typically 30 to 90 days from a complete application to closing. The appraisal and environmental report take two to four weeks each and are the usual bottleneck, so order them the day the contract is signed. SBA 504 loans run 45 to 120 days, and construction loans add time for plan review.

Private and bridge lenders close in one to three weeks at a higher rate, which is why buyers facing a hard closing date sometimes take a bridge loan and refinance into a bank loan later. See how long business loans take for the detail.

When should you choose something else?

Choose an SBA 504 loan if your business will occupy the building and you want 10% down with a fixed rate; it is the cheapest structure for most owner occupiers. Choose a bridge loan if you must close in weeks or the property needs work before a bank will lend on it.

Choose to keep leasing if you expect to outgrow the space in under five years. Closing costs, the balloon risk and the illiquidity of a building add up, and a 10 year loan on a 3 year plan rarely pays off.

How do you apply for a commercial real estate loan?

Apply once on this site and your application reaches banks, credit unions, SBA lenders and private real estate lenders that fit your property type and location, so you can compare a 25 year SBA structure against a five year bank term. It is free for your business, and we are paid the same whichever lender you choose. Or ask your AI assistant to apply through our MCP server: it reads your returns and the rent roll, fills the application and submits it.