Quick answer: Commercial loan interest rates depend on both market benchmarks and how risky the deal is based on the lender’s criteria. Some lenders tie their base rate to SOFR or a US Treasury yield and then add a spread based on factors such as LTV, DSCR, property type, and other underwriting factors. At Private Capital Investors, commercial real estate loan rates start at 5.99%.
If you’re putting together a deal and comparing commercial real estate loans to see what financing options are available, one of your first questions will probably be:
What interest rate can I get?
The simple answer is that there’s no universal commercial loan rate. In fact, benchmarks change all the time, which is why it’s dangerous to rely on oversimplified CRE interest rate tables that could become outdated by the time you’re ready to apply.
The rate depends partly on broader financial markets and partly on the condition and characteristics of the property, so the best way to know for sure what your deal is likely to be priced at is to (1) submit your loan request to different lenders and (2) compare the rates and terms they come back with.
Before you do that, it’s also prudent to understand how lenders arrive at that number to begin with. This can help you get better terms because you can prepare the deal with those factors in mind.
How are commercial loan interest rates set?
The simplest formula to represent commercial loan pricing is:
Benchmark rate + lender spread = interest rate
The benchmark is the reference rate used to price the loan, such as SOFR or a Treasury yield. The lender then adds a spread based on the specific deal.
For example, a floating-rate loan priced at SOFR + 3.00% would carry a 7.00% interest rate if the applicable SOFR rate were 4.00%.
Since the 3.00% spread is fixed, your total interest rate will move up or down in exact lockstep with changes to the SOFR rate.
Important: Not all commercial loans use SOFR. Fixed-rate loans may reference US Treasury yields. Some private lenders use their own cost of capital and underwriting model when setting rates.
What is SOFR?
SOFR stands for the Secured Overnight Financing Rate, and it measures the cost of overnight borrowing secured by US Treasury securities. It’s widely used as a reference rate for dollar-denominated loans.
Floating-rate commercial loans often use SOFR as their underlying index. If this benchmark rises, the loan rate can also rise with it, and if SOFR falls, the loan rate may fall (depending on the loan terms).
For the latest reading, check the current Secured Overnight Financing Rate on FRED, which republishes the New York Fed data and is especially useful because it gives readers a clean historical chart.
Keep in mind that the SOFR figure shown on FRED may not be the exact convention used in your loan agreement. This is why you always need to review your term sheet. This document will specify how the benchmark is calculated.
What are treasury yields and how do they affect fixed commercial loan rates?
If you take out a fixed-rate commercial loan, your rate stays fixed for the agreed period. These loans don’t reset whenever SOFR changes. Lenders may price them with reference to a US Treasury yield that corresponds with the loan term: a five-year fixed-rate loan may be priced against the five-year Treasury yield, for instance.
Important: The Treasury yield is not the rate you pay. This reference point simply gives the lender a market benchmark. They then add their own pricing based on the risk they see in your deal.
You can view US Treasury rate data on FRED, which tracks Treasury constant-maturity yields (including five-year and 10-year series).
What affects the spread on your commercial loan?
Even when two loans use the same benchmark as the starting point for pricing, they can end up with different interest rates because the lender prices each deal separately.
| Factor | What the Lender Looks At | Effect on Your Rate |
|---|---|---|
| LTV | How much you’re borrowing relative to the property’s value | Lower LTV → lower rate |
| DSCR | How comfortably NOI covers debt payments | Higher DSCR → lower rate |
| Property Type | How stable the property’s income is | Less stable income → higher rate |
| Rate Structure | Whether the loan is fixed or floating | Floating rates can change |
Loan-to-value ratio (LTV)
Your LTV compares the loan amount with the property’s value.
If your commercial building is worth $1 million and you borrow $700,000, then your LTV is 70%.
The higher the LTV, the larger share of the property’s value the lender is financing and the less you have to put in as equity. The lower the LTV, the less money the lender has at risk and the more protection they have if the property loses value. They can sell the property for less and still have a better chance of recovering the loan balance.
Debt service coverage ratio (DSCR)
Your DSCR is the measure of how much of the property’s net operating income (NOI) is available to cover its debt payments.
DSCR = net operating income ÷ annual debt service
If the commercial property generates $150,000 of annual NOI and must cover $100,000 in annual debt service, the DSCR is 1.50x. This indicates that your property generates 50% more NOI than it needs for debt service.
If your NOI falls to $110,000 and your annual debt service stays at $100,000, then the DSCR comes in lower at 1.10x. That cushion is thin and may cause your quoted interest rate to rise, because commercial real estate loan lenders often look for a DSCR of at least 1.20x to 1.25x.
The higher your DSCR, the less risky it looks in the eyes of lenders. It indicates that the property can still keep up with loan payments even if its income comes in lower or its expenses rise.
Property type
If the income of the property you’re trying to take out a loan for is less predictable, as in the case of seasonal hospitality properties, you may need to show a higher DSCR to qualify for lower interest rates. Lenders sometimes accept a lower ratio for properties with especially stable cash flows, like a fully leased multifamily.
Fixed vs. floating rates
As you can tell from its name, a fixed-rate commercial loan keeps the same interest rate for an agreed period. The interest rate stays the same throughout that term.
A floating-rate loan is the opposite. Its rate changes according to the benchmark specified in the loan agreement. So, a loan priced at SOFR plus a fixed spread can become more expensive when SOFR rises and cheaper when it falls.
Some floating-rate loans set a ‘minimum’ benchmark rate to protect the lender from a sharp drop in interest income. If the actual benchmark falls below that minimum, the lender will still calculate your interest rate using the floor.
If the loan says SOFR + 3% and the floor is set at 2%, the lender will still calculate the rate using the 2% floor even if SOFR drops to 1%. You would therefore still pay 5%.
This is why you always need to check not only the opening rate but also how often a floating rate resets and whether a floor applies when you’re comparing fixed and floating loans.
What are ‘points’ on commercial loans?
Points are fees charged at closing based on the size of the loan. One point generally equals 1% of the loan amount, which means that on a $2 million loan, 1 point = $20,000.
These points can refer to different upfront costs depending on the loan. Some points cover the lender’s origination costs. You might also choose to pay discount points to reduce the interest rate and lower your overall borrowing cost over the life of the loan.
This can make sense if you expect to keep the loan long enough for the interest savings to exceed the cost of the points. Would paying $20,000 in discount points lower your rate enough to save $6,000 a year in interest?
Make sure that you understand how many years it might take to recover that upfront cost. Only after that break-even point does the lower rate produce net savings.
Tip: Don’t assume that paying points will lower your rate. Some points are simply lender fees. And even when points do buy down the rate, you’ll pay more upfront to get that lower rate.
Why the lowest interest rate may not mean the lowest cost
Imagine there were two loan proposals: one has a lower rate but higher upfront fees, and the other has a slightly higher rate but fewer closing costs.
From that snapshot alone, it’s hard to judge which one works out cheaper. That’s because your total borrowing cost depends partly on how long you expect to keep the loan.
The repayment structure will also affect what you actually pay. The payments on an interest-only bridge loan can be much lower at first compared to the payments on an amortizing loan, even if both carry the same stated interest rate.
What can help you qualify for a lower commercial loan rate?
- Put more equity into the property. A larger down payment lowers your LTV, which may help you qualify for a lower rate.
- Improve the property’s DSCR. Stronger NOI relative to debt payments can make the loan less risky for the lender.
- Show that the property’s performance is stable.
What commercial property loan rate can you get from Private Capital Investors?
Our rates start at 5.99%. Your actual rate will depend on the property and the terms of your financing request. If you want to know what terms may be available for your deal, speak with us.
