How do commercial real estate loans work?
Commercial real estate loans are generally structured as term loans that you repay over a set period of time, with interest. Just as residential mortgages are secured by a lien on your house, commercial mortgages are typically secured by a lien on your commercial property.
To determine the amount of funding you’re eligible to receive for your business property loan, commercial real estate lenders use the loan-to-value ratio, or LTV. LTV is calculated by dividing the loan amount by the value of the commercial property you own or are looking to buy.
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%).
Commercial lenders usually offer loan amounts with LTVs that range from 65% to 85%, depending on the type of property and your business’s qualifications, among other criteria. In general, the lower the LTV — and the higher the down payment you can offer — the better the interest rates you’ll be able to receive, as these factors indicate that you’ll pose less risk for the lender.
Where to get a commercial real estate loan
Banks and credit unions
Banks and credit unions typically offer conventional commercial mortgage loans — fixed- or variable-rate loans that are secured by your commercial property. These loans, available in amounts of up to $1 million or more, can be used to finance a variety of commercial real estate projects.
Commercial real estate loans from banks and credit unions will usually have the most competitive interest rates and repayment terms, but they’ll also be the most difficult to qualify for. Lenders will require that you have multiple years in business, excellent credit and strong business financials. You’ll likely be required to sign a personal guarantee as well.
Here are some traditional banks that you may want to consider:
Bank of America
Bank of America offers commercial real estate loans to purchase business property or refinance an existing loan with repayment terms of 10 or 15 years. Basic qualification requirements include a minimum of two years in business and at least $250,000 annual revenue.
Loan amounts start at $25,000, but maximum amounts are not provided. Interest rates start at 5.75%, but your actual interest rate will depend on factors such as your creditworthiness and your relationship with Bank of America. There’s an upfront fee of 0.75% of the loan amount and additional fees and closing costs may apply.
Commercial real estate loans to purchase or refinance a business property are available at PNC bank with terms between five and 15 years. Some general requirements for PNC business loans include stable revenue, a minimum of three years in business and a history of paying financial obligations on time.
Loan amounts start at $100,001, but maximum loan amounts are not disclosed. Interest rates are based on the Prime Rate and can be fixed or variable.
With terms of five, 10 and 15 years, U.S. Bank commercial real estate loans can be used to purchase or refinance business properties. Variable and fixed interest rates are available, but no other specifics are disclosed.
As an alternative to a conventional commercial mortgage, you might work with an SBA lender (typically a bank or credit union) to get an SBA real estate loan. Both SBA 7(a) loans and SBA CDC/504 loans can be used as commercial real estate financing. SBA 7(a) loans can be used for a range of real estate-related purposes, with amounts available up to $5 million and repayment terms up to 25 years. SBA CDC/504 loans, on the other hand, are specifically designed for funding major fixed-asset purchases, such as buying real estate or renovating commercial property. These loans are also available in amounts up to $5 million (up to $5.5 million for certain projects) with terms up to 25 years.
Both SBA 7(a) loans and SBA CDC/504 loans have competitive interest rates and may allow for down payments as low as 10%.
To qualify for either type of SBA loan, you’ll generally need a good personal credit score, strong business financials and at least two years in business.
Bank of America, PNC and U.S. Bank are all SBA Preferred Lenders, which means you will be able to explore SBA loan options with those banks if you don’t qualify for their in-house commercial real estate loans.
In addition to local banks and SBA lenders, community development financial institutions, or CDFIs, sometimes offer commercial real estate products. CDFIs are private mission-oriented lending institutions that typically work with small businesses that don’t qualify for traditional bank financing. They may be able to offer loans with little or no money down and accept lower credit scores than a bank.
Online lenders can offer access to commercial property loans with more flexible qualifications than bank or SBA loans. Some online business lenders will work with startups or business owners with less-than-perfect credit histories.
Many online lenders offer streamlined loan applications and quick funding — in some cases, within a few business days. Speed and flexibility come at a cost, however, as commercial real estate loans from online lenders will typically have higher interest rates and shorter repayment terms compared to bank or SBA loans.
Commercial real estate loan terms and repayment
Repayment terms on commercial property loans generally range anywhere from five to 25 years, depending on the type of property, your lender's business loan requirements and other factors. And unlike residential mortgage loans, commercial mortgages often have an amortization period that’s longer than the life of the loan.
For instance, a lender may offer a commercial property loan with a term of five years, but an amortization period of 10 years. In that case, you would make payments on the loan for five years, but the amount of each payment would be based on the loan being paid off over 10 years. At the end of the five-year period, you’d pay one final balloon payment to satisfy the remaining balance.
In other words, if you received a $500,000 loan with an interest rate of 5%, you would make monthly payments of $5,303.28 for five years, followed by a final balloon payment of $281,024.31 to pay off the debt.
Some small-business lenders, on the other hand, offer full amortization — which means the amortization period is the same length as the loan. At the end of the term, the loan is paid in full and there is no remaining balance that needs to be paid off in a balloon payment. The same $500,000 loan fully amortized over 10 years would require monthly payments of $5,303.28 over the 10-year term.
Commercial real estate loan rates and fees
Interest rates on commercial mortgage loans can also vary based on the lender, the type of loan, the value of the property you’re financing, and your business’s qualifications.
Anecdotally, interest rates range from 3% to 12%, though it’s challenging to find recent reports that confirm the average interest rate on commercial property loans in 2023. However, as a traditional lender, Bank of America’s starting rate of 5.75% may at least be a good indicator of the lowest rate you could expect with excellent credit and strong business financials. Commercial mortgages tend to have more fees than other types of business loans. Commercial real estate lenders may charge origination fees, loan application fees, property appraisal fees, legal fees and other closing costs.
Commercial real estate loan requirements
Most commercial loans from banks or traditional institutions factor your personal income, personal assets and credit score into their underwriting decision. Ideally, you should have minimal debt and a decent credit score before you think about applying for a commercial mortgage, as you would for a personal mortgage. At the very least, a review of your personal financial situation will help you going into the process.
Many lenders, including some that offer SBA financing, want to know that you have vested interest in a commercial real estate loan, and will ask for you to put a percentage of cash down. The amount of the required down payment, or equity injection, will vary depending primarily on the lending institution and your business financials.
Time in business
Lenders want to make sure your business is somewhat established with revenue trending upward before granting something as high stakes as a commercial mortgage. Most require at least two years in business, but some want to see as many as four years.
Commercial real estate loans are typically secured business loans which means they are backed by specific collateral, in this case, the property you own or want to buy. Depending on the lender and the loan program you use, a lien may be attached to the property and your business may need to occupy a certain percentage of the building, say the SBA guideline of at least 51%.
Find the right business loan
The best business loan is generally the one with the lowest rates and most ideal terms. But other factors — like time to fund and your business’s qualifications — can help determine which option you should choose. NerdWallet recommends comparing small-business loans to find the right fit for your business.