Commercial Real Estate Loans: Types and How to Get One

Commercial real estate loans, also referred to as commercial mortgages, are small-business loans that are used to acquire commercial properties like office buildings, restaurants, storefronts or warehouses. They are available through traditional lenders like banks or credit unions, online lenders, SBA lenders and community development financial institutions (CDFIs).

A commercial real estate loan is a type of commercial loan used to purchase, refinance or renovate a property that’s used for business purposes, such as office buildings, storefronts, restaurants or warehouses. They can also be used to finance investment properties like apartment buildings or commercial spaces to be leased out, or the construction of commercial properties.

Commercial real estate loans work similarly to personal mortgages. They are structured as term loans to be repaid over a set period of time, with interest, and are usually secured by the property being financed.

Balloon mortgages are real estate loans where the amortization term, the period of time it would take to fully pay off the loan amount plus interest, is longer than the repayment term. They are more commonly found in commercial real estate loans than consumer mortgages. Balloon loans essentially limit the amount of cash you need upfront to purchase a property, and lower your monthly payments; however, at the end of the loan term, the remaining balance of the loan, or the “balloon” payment, is due.

Loan-to-value (LTV) ratio, is a ratio used by lenders to compare the amount of the loan with the total value of the asset being purchased. It also reflects the amount of equity you have in the property, or indicates the amount of money a lender is expecting you to put down.

LTV is calculated by dividing the loan amount by the value of the commercial property. For example, say you have a commercial office space valued at $500,000 and a lender offers a $350,000 loan for you to buy the property. The loan amount is 70% of the property value and the lender is using a 70% LTV ratio ($350,000 / $500,000 = 0.7, or 70%). The remaining 30% would be your down payment.

Depending on your lender, the type of commercial property you’re financing and your business qualifications, LTVs can range between 65% and 85%. The lower the LTV — and therefore, the higher the down payment — the more likely you are to qualify for a commercial real estate loan, and get the best interest rates.

Interest rates on commercial loans can range between 5% and 30% depending on the type of commercial mortgage, the lender, the loan term and your business’s qualifications. The current average rates for bank loans for commercial real estate are just under 7% for a five-year term.

Owner-occupied commercial real estate simply refers to commercial space that’s occupied and used by the owner of the property, as opposed to being leased to other tenants. Some lenders have different loan products for owner-occupied real estate and investment properties, and some may only lend to you if you plan to occupy at least a percentage of the property, typically at least 51%, although some lenders may go as low as 30% owner occupied. Owner-occupied commercial real estate is considered to be less risky than investment real estate because the space has a guaranteed tenant, and because business owners may be more invested in properties that they own and use.

Commercial real estate loans for investment properties are loans specifically designed for businesses that don’t intend to occupy the property they are purchasing. Instead, the property will be leased to commercial or residential clients to provide rental income to the business.

Investment properties are considered a bit riskier to finance than owner-occupied properties, and as a result, commercial investment loans may be more difficult to qualify for, and more expensive.

Commercial construction loans are commercial real estate loans that are specifically designed for new construction or renovations to existing properties. These loans can finance construction for owner use, or for companies that are contracted to build properties for other companies. They are usually structured under a draw schedule, where instead of receiving the full loan amount upfront, you receive disbursements as certain milestones of the project are completed.

Speculative construction loans are a type of commercial construction loan that involve financing new construction, such as homes or commercial spaces, without having upfront buyers or tenants. Speculative construction can provide good investment opportunities if you are able to buy land at a low price, and sell or rent at a high price; however, the lack of guaranteed tenants or purchasers makes speculative construction overall riskier, and many lenders won’t fund those projects.

• Banks and credit unions. Banks and credit unions, like Bank of America, PNC and U.S. Bank, offer commercial real estate loans for both owner-occupied real estate and investment properties. Depending on the bank and your specific qualifications, banks and credit unions typically offer the most competitive interest rates and terms; however, they also have some of the most stringent qualification requirements. Typically, you’ll need multiple years in business, strong personal credit and strong business financials. 

• SBA lenders. Both SBA 7(a) and SBA 504 loans can be used to finance commercial real estate, with maximum loan amounts up to $5.5 million, terms up to 25 years, competitive interest rates and down payment requirements as low as 10%. To qualify for an SBA real estate loan, however, you’ll need strong personal credit and business finances, as well as at least two years in business. 

• Online lenders. Online business lenders usually have less stringent qualification requirements and offer high loan amounts, streamlined applications and faster funding than traditional lenders; however, they also typically come with higher rates and fees. They are a good option if you can’t qualify for a commercial real estate loan with a traditional lender. 

• Community development financial institutions (CDFIs). CDFIs are bank or nonbank lenders that are missioned to provide capital access and other resources to underserved communities. Some provide commercial real estate loans and may help borrowers who don’t qualify for traditional financing. Clearinghouse CDFI, for example, is a California-based CDFI that offers commercial real estate and construction loans up to $15 million with a maximum LTV of 80%.

Specific requirements for commercial real estate loans will vary based on your business’s specific needs, the type of lender you choose and your business’s qualifications, but you can generally expect to follow these steps:

1. Review your personal finances. Most commercial real estate lenders will take your personal finances into consideration, and some require a personal guarantee. Personal finances include personal assets, personal income and credit score. The better your personal finances, the more likely you are to qualify for the best rates and terms, though it’s possible to get a commercial mortgage from CDFIs and some online lenders with less-than-stellar personal finances.

2. Assess your available cash for a down payment. A commercial real estate lender will likely require a down payment, though the amount you are required to put down will vary based on the lender and your eligibility. Down payments reduce the amount you need to borrow, and they show that you have skin in the game, which both demonstrate a higher likelihood of repayment to a lender. 

3. Research and compare lenders. Consider your specific financing need — new purchase, construction or refinance — and assess your business’s basic qualifications to help determine which type of lender is best for your business. You may use your business bank as a starting point for your research. 

4. Gather documents and apply. Each lender will have its own list of required documents, but generally, you can expect to submit items such as business and personal tax returns and bank statements, business legal documents, insurance information and other information about the property, including a property appraisal.