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Commercial Real Estate Loans Explained

The main kinds of commercial property loans, how lenders judge them, and what terms such as DSCR, LTV, amortization and balloon payment mean.

Updated

How commercial loans differ

Lenders judge a commercial loan mainly on the property's income and on the borrower's finances. Loans are often shorter than the schedule used to calculate the payments, so a large balance can fall due at the end of the term.

Common kinds of loan

The right one depends on the property, the buyer and the timing.

  • Conventional commercial loans from banks and credit unions.
  • SBA loans for owner-occupied business properties, such as the SBA 504 and 7(a) programs.
  • Agency and life company loans, usually for larger apartment and income properties.
  • Bridge loans, short-term and priced higher, used until a longer loan or a sale.
  • Private or hard money loans, fast and costly, based mainly on the property.

Terms you will see

Loan-to-value (LTV) is the loan as a share of the property's value. The debt service coverage ratio (DSCR) is the net operating income divided by the loan payments. Amortization is the period over which the payments are calculated. A balloon payment is the balance due at the end of a shorter term.

What lenders look at

The property's income and leases, the borrower's experience and finances, the down payment and the condition and location of the building. Expect a valuation and an environmental review.

How to compare offers

Look beyond the rate. Compare the fees, how long the rate is fixed, the amortization, penalties for paying early and any limits on what you can do with the property.

Common questions

It varies by lender and loan type. Many look for a ratio comfortably above 1.0, such as 1.20 to 1.35, so the income covers the payments with a margin. Ask the lender for its minimum.

It is a large payment of the remaining loan balance due at the end of a term that is shorter than the amortization. Many commercial loans work this way, so borrowers plan to refinance or sell before it falls due.

This guide gives general information, not legal, tax or financial advice. Laws, rates and practices differ by state and by deal, so talk to a licensed professional before you decide.