Definition — What a "Commercial Real Estate Loan" Means in Real Estate
A commercial real estate loan is a financing product used to buy, develop, refinance, or renovate properties that serve business purposes or produce income — for example office buildings, retail centers, hotels, warehouses, or multi-family apartment buildings with five or more units. These loans are designed for businesses, investors, and developers rather than for individuals buying a primary residence.
Key differences from residential mortgages
- Borrower: Typically businesses, investors, or property owners — not individual homebuyers.
- Property type: Income-producing or commercial-use properties, not single-family primary homes.
- Underwriting focus: Lenders review business financials, property cash flow, and market tenancy rather than relying solely on the borrower’s personal credit score.
- Down payment and LTV: Larger down payments are common (often 20–30% or more); loan-to-value (LTV) ratios are usually lower than for residential loans.
- Term and structure: Terms are often shorter (commonly 5–20 years) and many commercial loans include balloon payments rather than full amortization over the loan term.
- Interest and cost: Interest rates and fees are generally higher and loan structures more complex than residential mortgages.
- Regulatory protections: Consumer protections available on home loans are limited or absent for commercial loans; contractual terms are often governed by commercial law and negotiated agreements.
Common types of commercial real estate loans
- Permanent loans: Long-term financing for stabilized, income-producing properties.
- Bridge loans: Short-term, higher-interest loans that “bridge” financing until permanent funding is obtained.
- SBA loans (7(a) and 504): Government-backed options often used by small businesses to buy owner-occupied commercial space with favorable terms.
- Construction loans: Short-term financing to build or significantly renovate a property; typically interest-only during construction.
- Mezzanine financing: Subordinate debt used to fill the gap between senior debt and equity, often carrying higher rates and lender protections.
How lenders underwrite commercial loans
Underwriting focuses on the property’s ability to generate income and the borrower’s business strength. Lenders evaluate:
- Net operating income (NOI), rental rates, occupancy and lease terms.
- Borrower or sponsor financial statements, business plans, and experience managing similar properties.
- Market comparables, property condition and appraised value.
- Debt-service coverage ratio (DSCR) to ensure the property can support loan payments.
Real-world examples
- Small business purchase with mixed use: A heating and plumbing company bought a freehold trading premises with a retail unit and a rental flat using a semi-commercial mortgage at roughly 75% LTV, enabling owner-occupation plus rental income.
- Portfolio re-finance: Investors with dozens of residential rentals used a commercial refinance to extract equity, fund upgrades, and lower annual interest costs — freeing cash for further acquisitions.
- SBA-backed warehouse purchase: A moving company obtained an SBA 7(a) loan to buy an owner-occupied warehouse, stabilizing operations and supporting growth.
- Major redevelopment financing: A developer secured a large commercial loan to convert retail space into an industrial park, illustrating financing for large-scale redevelopment projects.
How this differs from buying a home
Regular homebuyers use residential mortgages, which usually offer longer amortization (15–30 years), lower down payments, stronger consumer protections, and underwriting based primarily on personal income and credit. Commercial loans are more complex, shorter, and built around business cash flow and investment returns — they are not appropriate for purchasing a primary residence.
Quick comparison
| Feature | Commercial Real Estate Loan | Residential Mortgage |
|---|
| Borrower | Businesses, investors, developers | Individual homebuyers |
| Property type | Office, retail, industrial, multi-family (5+ units) | Single-family homes, condos, townhomes |
| Down payment | 20–30%+ common | 3–20% common |
| Term | 5–20 years (often balloon) | 15–30 years (fully amortizing) |
| Underwriting focus | Property income & business finances | Personal credit, income, home value |
| Consumer protections | Limited | Significant |
Key takeaways
- Commercial real estate loans fund income-producing or business-use properties and are intended for investors, owners, and developers — not for buying a personal home.
- They differ from residential mortgages in borrower type, underwriting, down payment, term length, and regulatory protections.
- Common forms include permanent loans, bridge loans, SBA-backed financing, construction loans, and mezzanine financing.
- Successful applicants demonstrate property cash flow, a solid business plan, and capacity to service debt.
If you’re considering commercial financing, compare loan types, ask lenders about LTV limits, DSCR requirements, and balloon-payment schedules, and consider getting professional advice to choose the loan structure that fits your investment or business goals.
