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Best Commercial Real Estate Loans

Written by JD Esajian

Commercial real estate (CRE) is one of the more lucrative investments a person can make. These income-producing properties offer numerous advantages over residential investments, as they can be a dominant source for not only building wealth but generating monthly cash flow. It is worth noting, however, that building wealth in commercial real estate doesn’t start with the first rent check, but rather the commercial investment property loans used to fund respective deals. If, for nothing else, the commercial real estate financing structure used to fund an acquisition will set the entire exit strategy’s tone.

Buying Property With A Mortgage vs. Commercial Loan

Buying a property with a mortgage and buying a property with a commercial loan are two different things. A mortgage is used to purchase a home or property that contains up to four dwelling units. This would include single family homes, condos, duplexes, and more. On the flip side, a commercial loan is used to purchase a rental property that contains five or more dwelling units like an apartment complex. Commercial loans can also be used to purchase commercial retail locations, office buildings, and other properties meant for commercial use.

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Types Of Commercial Real Estate

In order to understand how to invest in commercial real estate, one must first grasp the various types of commercial real estate. These properties are generally used for business purposes, with owners leasing the occupied space for monthly rent. Commercial real estate generally consists of the following property types:

  • Office

  • Retail

  • Industrial

  • Multifamily

  • Special-Purpose


The most popular type of commercial real estate is office space. These buildings, which can range from single-tenant offices to skyscrapers, are defined by one of three categories: Class A, Class B, or Class C.

  • Class A commercial real estate properties are typically newly built or extensively renovated buildings in excellent areas with easy access to major amenities. They are typically managed by professional real estate management companies.

  • Class B commercial real estate properties are often older buildings requiring capital investment. Although they are well-maintained and managed, these properties require some minor repairs and upgrades—making them a popular target for investors.

  • Class C commercial real estate properties are typically used for redevelopment opportunities. They are generally poorly located, require major capital investments to improve out-of-date infrastructure, and their high vacancy rates are much higher than higher-classed buildings.


Another popular type of commercial real estate is retail buildings. These properties, ranging from strip malls and community retail centers to banks and restaurants, are often located in urban areas. The size of these real estate properties can extend anywhere from 5,000 square feet to 350,000 square feet.


From warehouses to large manufacturing sites, industrial buildings are typically geared towards manufacturing industries, as they offer spaces with height specifications and docking availability. Also, these commercial properties generally lend themselves more to investment opportunities.


These commercial properties are made up of apartment “four-plexes,” high-rise condominium units and smaller multi-family units, which can range from four to 100 units. Unlike other forms of commercial real estate, the lease terms on multi-family buildings are typically shorter than office and retail properties.


Unlike the properties mentioned above, special purpose commercial real estate properties are constructed by the investor. They typically consist of car washes, self-storage facilities, and even churches.

Because the best commercial real estate properties are in high demand, investors must focus on location, future development, and improvements. This is not only how commercial properties gain value, but also appreciate.

Commercial Real Estate Interest Rates & Fees

Differing from residential loans, the interest rates on commercial real estate loans are generally higher. Several fees attribute to the overall cost of commercial real estate loans, including appraisal, legal, application, origination, and survey fees. While some of these fees apply annually, others must be paid upfront even before the loan is approved. For example, a commercial loan for a rental property may have a one-time loan origination fee of 1% and a 0.25% annual fee up until the loan is fully paid. This means if you have a loan for $1 million, it might require a loan origination fee of $10,000 paid upfront and an annual fee of $2,500 with additional interest. Be sure to check interest rates regularly as they will fluctuate and vary.

Commercial Real Estate Loan Prepayment

Often, a commercial real estate loan may also have prepayment restrictions. These restrictions are designed to preserve the lender’s anticipated yield. Investors can settle the debt even before the commercial property investment loan’s maturity date. If they do so, there will likely be prepayment penalties. If you pay off a loan early, there are four primary types of exit penalties:

  • Prepayment Penalty: This is the most common and basic prepayment penalty. This is calculated by multiplying the specified prepayment penalty by the current outstanding balance.

  • Interest Guarantee: Even if the loan is paid off early, a specified amount of interest is entitled to the lender. As an example, a loan can have an interest rate of 10% guaranteed for 60 months and a 5% exit fee after that.

  • Lockout: A borrower is unable to pay off a loan before a specified period of time.

  • Defeasance: This is considered a substitution for collateral. The borrower exchanges new collateral, such as U.S. Treasure securities, for the original loan collateral instead of paying cash to the lender. While this can reduce fees, high penalties can be attached to this type of loan payment.

How To Get Commercial Investment Property Loans

The idea of obtaining commercial real estate financing may seem intimidating at first. Still, investors who learn about the process and the different types of commercial real estate loans will find that they are completely attainable. Below are the main steps involved in obtaining a commercial investment property loan:

  1. Determine whether you will file as an individual or an entity.

  2. Evaluate mortgage options and determine which commercial real estate loans will work best for the subject property and exit strategy.

  3. Calculate LTV to measure the value of the loan to the value of the property.

  4. Measure the ability to service the debt using the debt service coverage ratio.

Individual Vs Entity

The initial step is to determine whether to finance a commercial property as an individual or an entity. Although most commercial real estate is purchased by business entities such as corporations, developers, and business partnerships, it can easily be completed as an individual investor. The lender essentially wants to make certain the borrower can repay the loan, thus requiring borrowers to provide financial track records to secure a loan. The lender will typically require the investor(s) to guarantee the loan for newer businesses with no credit history.

Mortgage Options

Investors need to recognize residential and commercial mortgages are not the same. First, unlike residential mortgages, commercial loans are not backed by government agencies such as Freddie Mac and Fannie Mae — and will typically charge higher interest rates than comparable home loans. Secondly, terms of commercial loans differ from residential ones. Commercial loans range from five to 20 years, whereas residential loans typically range from 15, 25, and 30 years. As an investor, the majority of this will be based on your financial and credit history.

Loan-To-Value Ratio

An important metric that lenders consider when financing commercial real estate is loan-to-value ratios (LTV). This figure measures the value of a loan against the value of the property. It is calculated by dividing the loan amount by the property’s appraisal value or purchase price. Loans for commercial real estate come with an LTV between 65 percent and 80 percent, with lower LTVs qualifying for more favorable financing rates.

Debt Service Coverage Ratio

Lenders also look at the debt-service coverage ratio (DSCR). In essence, this measures a property’s ability to service debt, and it compares a property’s annual net operating income to its annual mortgage debt service, including principal and interest. A DSCR of less than one percent reveals a negative cash flow, and commercial lenders generally look for DSCRs of at least 1.25 to ensure proper cash flow.

Before financing a commercial property, investors need to consider all aspects of the process: loan-to-value ratio, debt-service coverage, and creditworthiness. Additionally, a proper business plan will help investors, especially beginner investors, to streamline the financing process.


Types Of Commercial Real Estate Loans

There is a wide range of commercial investment loan types, and it is up to the investor to decide which financing option best fits their needs. Each type of loan has unique eligibility requirements, such as a minimum credit score, experience level, and down payment requirement. These loans also have varying terms to pay attention to, including the loan term, interest rate, and loan-to-value (LTV) ratio. For example, one investor may be in search of a loan that offers lower interest rates over a longer loan term, while another investor’s priority might be finding a short-term loan as a means of bridging a financial gap. For a better idea of which commercial real estate loans may meet your own needs, please reference the following:

  • Small Business Administration (SBA) 7(a) Loan

  • Certified Development Company (CDC) / SBA 504 Loan

  • Conventional Loan

  • Commercial Bridge Loan

  • Hard Money Loan

  • Conduit Loan

  • Insurance Loans

Small Business Administration (SBA) 7(a) Loans

The U.S. Small Business Administration offers several loans under the 7(a) umbrella, each of which is designed to provide financial assistance for small businesses. Investors looking for commercial real estate loans should carefully consider which of the following 7(a) Loans will work best for their next project:

  • Standard 7(a): The Standard 7(a) coincides with a maximum loan amount of $5 million and a turnaround time of 5-10 business days.

  • 7(a) Small Loan: The smaller variation of the standard 7(a) loan, the 7(a) Small Loan has a maximum loan amount of $350,000.

  • SBA Express: SBA Express loans will award applicants with a 36-hour response window for a loan with a maximum amount of $350,000.

  • Export Express: With an application response time of 24 hours, the Export Express loan is ideal for borrowers who need a streamlined method of obtaining lines of credit up to $500,000.

  • Export Working Capital: Businesses with a need for working capital to facilitate increasing export sales may appreciate this particular SBA loan.

  • International Trade: International Trade loans may be used for fixed assets for construction, building and real estate equipment by businesses that are expanding because of growing export sales.

  • Preferred Lenders: The SBA’s Preferred Lenders program  gives select lenders more authority to process, close, service, and liquidate SBA-guaranteed loans.

  • Veterans Advantage: As their names suggest, Veterans Advantage SBA loans are intended to assist veteran-owned business with reduced fees.

  • CAPLines: As an umbrella program capable of offering short-term working-capital, CAPLines are designed to help small businesses immediately.

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Certified Development Company (CDC) / SBA 504 Loan

The 504 Loan Program is another SBA product made available through Certified Development Companies (CDC). These loans are specifically intended to stimulate business growth and job creation by offering small businesses yet another financing avenue. More specifically, however, the “504 Loan Program provides approved small businesses with long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization,” according to the SBA.

The Small Business Administration’s 504 Loans can’t exceed $5 million, and are specifically designated for fixed asses, including:

  • The acquisition of existing real estate assets;

  • The acquisition of raw land and subsequent improvements;

  • The construction of new facilities or modernizing, renovating or converting existing facilities;

  • The purchase of machinery for long-term use;

  • The refinancing of debt to facilitate the expansion of a business with new or renovated facilities.

Conventional Loan

Otherwise known as traditional loans, conventional commercial real estate loans are issued by banks or lending institutions. Consequently, conventional commercial real estate loans are not backed by the federal government. Often used to purchase and finance assets like owner-occupied office buildings, retail centers, shopping centers, and industrial warehouses, conventional loans have developed a reputation for some of today’s most widely used commercial real estate loans.

A traditional commercial property loan typically finances anywhere from 65% — 85% of an asset’s loan-to-value ratio. As a result, borrowers will often be expected to cover anywhere from 15% — 35% of the property’s fair market value. That said, there is usually no loan maximum. Borrowers can, however, expect commercial real estate loan terms to last anywhere from 5 — 20 years, with payments fully amortized over the loan’s duration. While conventional loans tend to come with lower fees, they are often harder to receive approval for.

Commercial Bridge Loan

As their names suggest, commercial bridge loans represent a temporary loan option for investors to exercise—one that bridges the gap—until refinancing becomes available to make the switch to a longer-term loan. Typically offered by institutionalized lenders, commercial bridge loans award many borrowers the ability to compete with all-cash buyers. Since commercial bridge loans usually finance up to 90% of a property’s LTV, those who can’t use cash should find it easier to get their foot in the commercial real estate sector. Since bridge loans are short-term, they don’t tend to last longer than three years. Therefore, borrowers should expect to refinance to a long-term loan sometime shortly.

Hard Money Loan

A hard money loan is made available to commercial investors by organized semi-institutionalized lenders. More importantly, however, hard money lenders are typically licensed to lend to real estate investors and specialize in short-term high-rate loans with fees that award many investors the chance to buy commercial real estate that they wouldn’t be able to otherwise.

In return for roughly 60% — 75% of the asset’s after repair value (ARV), hard money lenders will require interest fees upwards of 15%, in addition to about four points (another upfront percentage fee based on the loan amount). While hard money lender fees are sometimes as much as four times that of traditional lenders, they may be well worth the cost of admission for short-term loans. Not only is funding granted within a few days (as opposed to months with traditional lenders), but it can be a lot easier to receive approval for. If, for nothing else, hard money loans are asset-based, meaning the lender makes a decision based on the subject property and not entirely on the borrower.

Conduit Loan

Otherwise known as commercial mortgage-backed securities (CMBS), conduit loans are commercial real estate loans secured by a first-position mortgage on a commercial property. Conduit loans are traditionally offered to borrowers through commercial banks; conduit loans offer borrowers a fixed interest rate over 25 — 30 years. However, it is important to note that conduit loans will require a balloon payment at the end of the term. Thanks primarily to their relative flexibility, conduit loans allow many commercial real estate investors to qualify for a loan that typically wouldn’t.

Insurance Loans

Life insurance providers, or conglomerate companies, offer commercial real estate loans where the borrower’s line of credit is secured with a first lien position on the property. These loans are typically only used by strong borrowers who have an excellent credit history. Further, they are best used on newer properties, or those deemed less risky for the borrower. Most providers will favor industrial, office, retail and apartments though investors may still find success funding a mixed-use property with an insurance loan.

Commercial Investment Property Loan FAQs

It’s normal to have questions when diving into the world of commercial real estate. After all, the properties are more expensive and investors will often have to get creative to secure the right financing. Read through the following FAQs to learn more about what to expect.

Will I Qualify For A Commercial Real Estate Loan?

As with all loan types, there are qualifications you must meet before receiving one. If you are looking to apply for a small business administration loan, you will likely be required to have a high business credit score (which can range from 0 to 100), and the size of your business must meet the SBA’s size standards. To successfully qualify for an SBA 504 loan, your business’ income must be less than 15 million. Traditional loans from a bank or mortgage institution will typically require a borrower’s credit score to be 700 or higher. Commercial bridge loans will also require applicants to have a credit score of 680 or higher. Hard money loans are typically easier to secure, but they may have higher interest rates than traditional lenders. Be sure to research your lender’s specific requirements to ensure that the loan you apply for is right for you.

How Long Does It Take To Get A Commercial Real Estate Loan?

Business Financial Advisor, Stewart Dunlop, suggests to “Invest in partnerships. When you back yourself with a partner with significant clout, you’re more likely to get a better response. Find someone in your field that can either share some of the load or will get a significant portion of the profits should they contribute more to your loan efforts”.

“It typically takes three to six weeks for banks to approve a commercial real estate loan, although some claim that they can close it in as fast as one week,” says Anton Konopliov, CEO and Founder of Palma Violets Loans. Banks will spend this time evaluating multiple aspects of your business before deciding whether to approve your loan or not. According to Konopliov, however, “most commercial lenders will expect at least 30 percent downpayment before considering or approving a loan application.” Therefore, it’s fair to assume loan times will vary.

You can obtain a bridge or hard money loan in a week or less, as long as you are willing to accept higher interest fees that are typically attached to these loans. Regardless of the loan you choose to pursue, be sure to research all aspects of your business and the loan terms you agree to before committing.

What Is Owner-Occupied Commercial Real Estate?

The majority of commercial real estate is purchased with the sole intent of generating ongoing income, otherwise known as cash flow. They are made up primarily of tenants who rent individual units through a lease agreement. However, in many cases, investors will purchase commercial real estate to utilize the building for their own purposes. This is known as Owner-Occupied Commercial Real Estate (OOCRE).

In general, owner-occupied commercial real estate is based on two conditions: the owner’s occupancy percentage of the property or the amount of rent paid by the owner. Also, OOCRE loans are completely different than non-owner-occupied loans, and lenders require different qualifications. For one, lenders will look at the primary source of repayment for the OOCRE loan. This is driven predominantly by the borrower’s debt-service coverage, typically determined by business earnings before interest and taxes.


To truly understand how to invest in commercial real estate, investors need to fully comprehend the financial components that go along with it. Commercial investment property loans are nothing short of instrumental in the success or failure of a particular exit strategy. Therefore, take the time to review the commercial real estate financing process before making the leap, including the various loans made available to you.

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The information presented is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing provided shall constitute financial, tax, legal, or accounting advice or individually tailored investment advice. This information is for educational purposes only.