New to CRE and interested in financing a property? It’s important to look at its two key features when you take out a commercial real estate loan: the loan term and the amortization period.
These elements sound similar, so it is easy to mistake one for the other.
But they have different effects on your payments and your long-term strategy.
In this blog, we’re differentiating the two and explaining why they both matter when calculating your loan payments.
What does loan term mean in commercial real estate?
A loan term refers to the length of time that you have to pay back the principal. This period varies depending on the structure of the deal and the lender’s appetite for commitment.
One key factor that influences your loan term is how you intend to use the funds.
Are you financing a short-term project — like acquiring a CRE property and then renovating it to sell for a profit?
The lender may structure your loan with a shorter term, often 3 to 5 years. This matches the timeline of your business plan.
But if your goal is to hold the property and collect steady rental income from it for many years, you’re more likely to secure a longer loan term of 7, 10, or even longer because the property is expected to generate cash flow over time.
The economy also plays a big role.
If lenders expect interest rates to rise or the market to become more volatile, they may prefer shorter loan terms to reduce their risk and keep their capital flexible.
But if they anticipate stable conditions, they may be more willing to commit funds for longer periods.
What does amortization period mean in commercial real estate?
Your loan’s amortization period refers to the timeline used to calculate its monthly payments.
In commercial real estate, it’s common for the amortization period to differ from the actual loan term, creating what’s known as a ‘split amortization.’
For instance, your loan may carry a five-year term but use a 25-year amortization schedule to determine monthly payments.
This setup reduces the payment amount and helps you manage cash flow. However, it also results in a balloon payment at the end of the term — a large lump-sum payment that represents the remaining principal.
Like your loan term, your amortization period can vary based on the needs of the deal. Most commercial loans use amortization periods between 20 and 30 years.
After setting that period, your lender creates an amortization schedule that outlines how you should allocate each payment between the interest and principal reduction throughout the life of the loan.
How do I calculate the monthly payments I have to make on my commercial real estate loan?
There are four key inputs required to calculate your payment and build an amortization schedule:
- Loan term
- Amortization period
- Loan amount
- Interest rate
It’s easier to see how these inputs work together when you have a clear example.
Let’s imagine that you are securing a commercial real estate loan with the following details:
- A 5-year loan term
- 20-year amortization
- Loan amount of $5,000,000
- 6% Interest rate
Using a commercial loan calculator or spreadsheet, this setup would generate a monthly payment of approximately $35,823.15.
That payment is based on a 20-year amortization even though the loan matures in five years.
The calculator shows your recurring monthly payment, but the amortization schedule goes a step further and breaks down each payment over time, showing how much goes toward interest and how much pays down the principal.
It also shows the remaining balance at any point, so it’s essential if you’re planning a refinance or preparing for a balloon payment at the end of the term.
How can I calculate my amortization schedule?
Using the numbers above, here’s how you can calculate your amortization schedule for the first month of your loan.
Summary:
Your first payment allocates $25,000 to interest and $10,823.15 to principal.
Here’s how it will go for your second payment:
Summary: Your second payment allocates $24,945.88 to interest and $10,877.27 to principal. The ending balance is $4,978,299.58.
How do I calculate the balloon payment on my commercial property loan?
When you follow the amortization schedule through the full 5-year loan term, whatever balance remains at the end of month 60 becomes your balloon payment.
Because the loan is amortized over 20 years but only carried for 5 years, the remaining principal will be substantial, and you must pay it off in one lump sum through refinancing or selling the property, or even by paying the balance directly.
Your monthly payment (as calculated earlier) is $35,823.15. This is how your 60th payment should go:
Your 60th payment allocates $21,296.97 to interest and $14,526.18 to principal.
The remaining balance of $4,244,868.49 becomes your balloon payment at the end of the loan term.
Why is it important to understand the differences between the loan term and the amortization period?
The way your loan term and amortization period interact affects everything from your monthly cash flow to your long-term exit plan. In general:
- A shorter loan term means you’ll need to repay or refinance sooner, which adds some uncertainty to your long-term payment outlook. But it also gives you a chance to adjust financing earlier, whether to secure a better rate, pull out equity, or restructure the loan to match a new investment strategy.
- A longer amortization spreads repayment over more years, so your monthly payments are smaller and easier to manage. However, this also means that you pay down the loan more slowly and build equity at a reduced pace, leaving a larger balance if you refinance or sell early.
Most commercial real estate loans don’t run full amortization.
Instead, they’re structured with shorter terms (often 3, 5, or 10 years) followed by a balloon payment or refinance.
As you move through each term, your amortization schedule carries forward.
That means your payments slowly build equity even if you refinance with a new lender later on.
Understanding both timelines lets you estimate how much income can be distributed or when you’ll need to bring in new capital.
You need a clear view of how debt service evolves over the hold period. These details also shape your refinancing options and affect your timing for a sale or recapitalization.
What happens when the amortization period and loan term are equal?
If the loan term and amortization period are the same (say, five years), you’ll fully repay the loan by the end of the term.
Each monthly payment is calculated to pay down both principal and interest over exactly five years.
You don’t have to make a balloon payment or refinance the loan, and there is no leftover balance.
The loan is closed once you’ve made the final payment.
What if the amortization period is longer than the loan term?
If your loan term is five years but the amortization period is longer — say 8 or even 15 to 20 years — your monthly payments become smaller, but the loan won’t be fully repaid by the end of the term.
When the five years are up, the remaining principal comes due as a balloon payment.
At that point, you’ll need to either refinance the balance, sell the property, or pay it off in full.
There is a risk that if interest rates go up or credit conditions tighten before the term ends, your next loan could be more expensive or harder to secure.
That’s why it’s very important to plan ahead for the refinance and not just the purchase.
What is negative equity in commercial real estate?
Negative equity happens when the outstanding loan balance exceeds the current value of the property. This can happen if the property’s value falls dramatically or if it underperforms.
It can also happen if the loan was aggressively underwritten with a high LTV ratio.
For example, if you take out a $5 million loan to purchase a building valued at $6.25 million (80% LTV), and the market value later drops to $4.5 million, you now owe more than the property is worth. This puts you in a negative equity position.
Lenders view this as a serious risk. If you try to refinance when you’re underwater, you may be required to bring in additional equity or accept stricter loan terms and higher rates.
In some cases, negative equity can limit your ability to sell or refinance.
Where can I apply for a commercial property loan?
Our team at Private Capital Investors is ready to support you if you need guidance with loan terms and amortization structures, or even with your overall CRE financing strategy.
As a direct private lender, we take a personalized approach to your needs and transaction, focusing on building a long-term relationship rather than one-time deals.
Besides being your lender, we will also be your commercial finance advisor.
With more than 25 years in the CRE industry and over $8.5 billion in funding secured for investors, we have the experience and insight to help you move forward with confidence.
Through our extensive network of capital partners, we can help you finance a wide range of commercial property types and investment goals.
Our wide selection of financial products allows us to tailor solutions to your specific needs and growth plans.
If you’re ready to begin or want professional guidance on your next acquisition or refinance, call us at 972-865-6206 to get started.
