At its core, a commercial real estate loan is just like any other type of loan:
Someone lends you money based on their confidence that you can repay it.
The primary question lenders want answered is whether the property can generate enough income to cover the debt payments, but they also want to determine whether you, as a borrower, have the financial strength and background to meet your obligations.
Are you interested in financing a commercial property?
We’re demystifying CRE loans in this guide to give you a more informed starting point.
What is a CRE loan?
Commercial real estate loans are extended to borrowers to finance properties used for business or investment purposes. You can use it to:
- buy a building your own business will occupy, or
- to invest in income-producing property that you will professionally run and lease to tenants.
The more common properties financed this way include:
- Office buildings
- Retail properties
- Warehouses
- Multifamily properties (with five or more units)
Some CRE loan lenders also offer loans for less conventional properties such as:
- Hotels and motels
- Data centers
- Self-storage facilities
- Gas stations
- Car washes
- Marinas
- Mobile home parks
- Senior living facilities
- Student housing
- Medical offices
- Mixed-use developments
- Cold-storage facilities
What are the main types of CRE loans and what are they suited for?
| Loan Type | Best Suited For | Main Advantage | Key Drawback |
|---|---|---|---|
| Conventional Commercial Loan | Stabilized properties with reliable occupancy and income. | Lower interest rates than short-term private financing. | Requires strong credit and substantial equity. Underwriting is stricter. |
| SBA Loan | Eligible businesses purchasing commercial property they will occupy. | Can provide longer repayment terms for qualifying businesses. | Generally unavailable for passive investments and requires extensive documentation. |
| Bridge Loan | Properties needing renovations or higher occupancy before sale or refinance. | Can finance a property before it qualifies for permanent debt. | Higher interest rates and a credible exit plan are required. |
| Hard Money Loan | Time-sensitive purchases or properties requiring major renovations. | Fast closing with underwriting based primarily on collateral value. | Short loan terms and typically higher fees. |
| CMBS Loan | Stabilized income-producing commercial properties. | May offer longer loan terms and nonrecourse financing. | Loan terms can be rigid and difficult to modify after closing. |
| Private or Portfolio Loan | Transactions that fall outside standard bank lending criteria. | More flexible underwriting and loan structures. | May be more expensive than conventional financing. |
What are the main qualification criteria for CRE loans?
Credit profile
The lender will likely examine both your personal credit and business credit. They will also look at your borrowing history.
Do your records show late payments or defaults? Past or current tax liens?
Those can raise red flags for the lender.
And while having a lower credit score won’t necessarily disqualify you, it may affect the interest rate (making it higher) or required down payment (making it larger).
Review your credit reports before applying to improve your chances. Prepare an explanation for past issues that you think may prompt questions.
Debt service coverage ratio (DSCR)
The DSCR compares the property’s net operating income with its annual loan payments.
Read our guide to what DSCR means in commercial real estate if you aren’t yet familiar with this metric.
Each lender sets its own minimum, though 1.25 is a common benchmark. Depending on the property type and the stability of its income, the lender may require a higher ratio.
Loan-to-value ratio (LTV)
The loan-to-value ratio compares the loan amount with the property’s appraised value. Read our guide to LTV in commercial real estate to know more.
The more of your own money you put into the property — meaning the lower the LTV — the lower the lender’s risk.
So if the property’s income is unreliable and/or if it needs expensive rehab work, the lender may lend a smaller percentage of its value and require you to make a larger down payment.
Down payment
Ask how much equity the lender requires for your property and intended use.
Your cash requirement may include more than the down payment. You may also need to cover closing costs and immediate repairs.
Cash reserves
The lender may also require you to keep some cash available for things like vacancies and unexpected repairs. These reserves are intended to help cover debt payments if the property’s income falls.
To make sure you have enough liquidity, don’t commit all available cash to the down payment before you understand the reserve requirement.
What are the required documents for commercial real estate loans?
Expect lenders to usually ask you (the borrower) to provide the following information:
- Personal tax returns
- Business tax returns
- Personal financial statements
- Business financial statements
- Bank statements
- Schedule of existing debts
- Entity formation documents
- Information about guarantors
- Summary of relevant experience
They may also request the following property documents:
- The purchase contract
- Current leases
- A rent roll
- Historical operating statements
- A current budget
- Property tax records
- Insurance information
- Renovation estimates
- Environmental reports
- Surveys
- Prior appraisals
How do commercial property loan lenders evaluate the property?
The bottom line is that the lender wants to know whether the property generates enough income or will appreciate enough by the time the property is sold or refinanced so that the loan can be fully repaid.
For an investment property, CRE loan lenders look at:
- Current occupancy
- Tenant quality
- Lease expiration dates
- Rental income
- Operating expenses
- Property condition
- Local market demand
Even if the appraisal shows that the property is worth enough to secure the debt, the lender still wants proof that rental income or another reliable source will make the payments.
How do CRE loan lenders evaluate the borrower?
Because it’s you who will oversee the investment, lenders also want to know if you have enough experience and liquidity to both manage the property and solve problems when they arise.
They may examine your:
- Credit history
- Available cash
- Existing debt
- Real estate experience
- Business experience
Do you own other commercial properties that are successful, in that they generate reliable income?
Be sure to bring evidence (operating statements) of those results. Lenders may view a strong track record as evidence that you can manage another property.
Are you bringing guarantors into the deal?
The lender will want to see the same financial information required from you.
Can a first-time commercial property investor qualify for a loan?
It’s possible to get approved for a CRE loan even if you’ve never owned or managed a commercial property before.
However, the lender may want proof that you understand the property’s finances in the form of detailed projections.
Some lenders will also require you to have qualified professionals (such as a property manager) involved.
If you will occupy the property for your own business, the lender will closely review your company’s cash flow.
The point is that they want to see whether your business reliably generates enough cash to pay the CRE loan while meeting its other obligations.
Ask these questions before signing
Is the rate fixed or variable?
For a variable rate, ask which benchmark the lender uses. Also ask how often the rate can change and whether a cap applies.
What fees will I pay?
Request an itemized list. It may include origination fees and underwriting charges. You may also pay appraisal or legal costs.
Is there a prepayment penalty?
Ask how the penalty works and how long it applies. Some penalties can make an early sale or refinance expensive.
Is the loan recourse or nonrecourse?
If it’s a recourse loan, you may still owe money personally if the property is sold and the proceeds do not fully repay the loan.
If it’s a nonrecourse loan, the lender usually cannot pursue your personal assets, except in specific situations listed in the loan agreement (such as fraud or misrepresentation).
What reporting is required after closing?
Some lenders require regular financial statements or updated rent rolls. Understand these duties before signing.
What happens at maturity?
Ask whether the loan includes extension options. You should also understand any extension fees and conditions.
