Commercial Real Estate

Commercial real-estate (CRE) lending is the business of extending credit—secured by commercial property—to finance (or refinance) the acquisition, development, construction, or improvement of income-producing or owner-occupied real estate.

Key take-aways:

1. What counts as “commercial real estate”
   • Any property used primarily for business or investment purposes: offices, retail centers, warehouses, hotels, multifamily apartment buildings (5+ units), medical facilities, etc.
   • The property itself is the lender’s collateral; if the borrower defaults, the lender can foreclose and sell the property to recover its loan.
2. Main types of CRE loans

• Permanent mortgages – Long-term, fully amortizing loans (15-25 yrs) used to buy or refinance stabilized property.
• Construction & development (ADC) loans – Short-term, interest-only advances made in “progress draws” as construction milestones are met.
• Bridge loans – Temporary (6-36 mo) financing that “bridges” the gap between an immediate need (acquisition, lease-up, refinance) and longer-term funding.
• SBA 504 & 7(a) CRE loans – Government-guaranteed programs that provide up to 90 % LTV for owner-occupied small-business properties.
• CMBS (conduit) loans – Fixed-rate loans pooled into commercial mortgage-backed securities and sold to investors.
• Hard-money / private loans – Asset-based, short-term loans from private lenders, typically at higher interest rates and lower LTVs.

1. Typical structure & terms

• Loan-to-Value (LTV): 60-80 % for stabilized properties; 50-70 % for construction or value-add deals.
• Debt-Service-Coverage Ratio (DSCR): 1.20×–1.40× for permanent loans (NOI ÷ annual debt service).
• Recourse: Banks usually require full or partial personal guarantees; CMBS and many life-insurance loans are non-recourse (subject to “bad-boy” carve-outs).
• Amortization vs. Term: Many CRE loans have 20-30 yr amortization but a 5-, 7-, or 10-yr balloon maturity, requiring refinance or sale.

1. Who provides CRE loans

• Commercial banks
• Life-insurance companies (for stabilized, low-leverage loans)
• Credit unions
• CMBS/conduit lenders
• SBA-approved lenders
• Private debt funds / hard-money lenders

1. Underwriting focus

• Property cash flow (rent roll, lease terms, market rents)
• Borrower creditworthiness and global cash flow
• Property condition, location, and market fundamentals
• Appraised value and environmental/engineering reports
• Exit strategy (refinance or sale)

In short, CRE lending is a specialized form of asset-backed finance in which commercial property serves as collateral, and loan structures are tailored to the cash-flow profile and risk of the real-estate asset.

Advantages of applying for a Commercial Real Estate Loan (CRE loan) through BusinessMoney.broker

1. High borrowing limits & scalable growth
   CRE loans finance everything from a small retail condo to a multi-million-dollar apartment complex, letting you acquire larger assets than residential mortgages allow .
2. Build equity instead of paying rent
   Every monthly payment increases your ownership stake and net worth; the property can later secure additional credit lines or cash-out refinancing .
3. Tax advantages
   Deduct interest expense, depreciation, and operating costs, and—if owner-occupied—potentially qualify for Section 179 or bonus depreciation .
4. Rental & ancillary income
   Lease unused suites, billboards, cell-tower space, or parking spots to offset debt service and boost cash flow .
5. Predictable occupancy costs
   Fixed-rate CRE loans lock in your payment for 5–25 years, eliminating rent escalations and giving you long-term budget certainty .
6. Appreciation & capital gains
   Historically, commercial real estate appreciates faster than inflation, creating long-term capital gains and a higher business valuation .
7. Flexible property types
   Finance offices, retail, industrial, mixed-use, multifamily (5+ units), self-storage, medical, or special-purpose buildings .
8. Favorable LTV & amortization
   Some lenders offer up to 80 % LTV and 20- to 25-year amortization schedules, preserving working capital for operations .
9. SBA & USDA leverage
   SBA 504 or 7(a) loans provide 90 % financing at below-market fixed rates and 10- to 25-year terms, dramatically reducing the down-payment hurdle .
10. No prepayment penalties (select programs)
    Certain credit-union and SBA products let you repay early without fees, giving you flexibility if cash flow improves or you sell .
11. Credit-profile boost
    Successfully servicing a CRE loan enhances your business credit scores, unlocking cheaper capital for future expansion .
12. Strategic control & branding
    Owning your location lets you renovate, expand, or reconfigure without landlord approval—perfect for custom build-outs or flagship stores .

In short, a Commercial Real Estate Loan converts monthly rent into equity, provides tax-efficient leverage, and positions your business for long-term wealth creation while locking in occupancy costs.

How Commercial Real Estate (CRE) Financing Works – Step-by-Step

1. Purpose & Deal Structure
   A business entity (LLC, LP, REIT, etc.) identifies an income-producing or owner-occupied property to purchase, build, renovate, or refinance. The legal entity—not the individual owners—will be the borrower and will own the property .
2. Pre-Qualification Call
   Lenders first check loan-to-value (LTV), debt-service-coverage ratio (DSCR ≥ 1.20-1.30), and borrower credit history. Most banks do not issue formal pre-approvals on CRE deals because rents, costs, and timelines are speculative .
3. Letter of Intent (LOI)
   Once a purchase contract is signed, the lender issues a non-binding LOI outlining:

• loan amount (typically 70-80 % LTV, 90 % for SBA 504)
• interest-rate range (Prime + spread, SOFR, or fixed coupon)
• term & amortization (e.g., 7-year term / 25-year amortization with balloon)

1. Application & Underwriting Package
   Borrower supplies:

• 3-5 years of business + personal tax returns
• YTD P&L, balance sheet, rent roll, leases
• Third-party appraisal, environmental Phase I, property condition report
• Business plan or pro-forma for construction / value-add deals

1. Credit Committee Approval
   A bank credit analyst prepares a credit memo that is presented to the bank’s loan committee or board. Approval, decline, or “defer pending additional info” is usually given within 5-10 business days .
2. Commitment Letter & Due Diligence
   After approval, the lender issues a binding commitment letter. Borrower accepts, deposits any required escrow, and the clock starts on:

• title & survey review
• insurance binders (property, hazard, business interruption)
• final environmental or construction draw schedules

1. Closing & Funding
   Attorneys for the bank and borrower prepare loan docs, mortgage, assignment of rents, and UCC filings. Funds are wired at closing; the whole process from application to closing averages 5-6 weeks (longer for construction or complex syndications) .
2. Loan Servicing & Repayment Structures

• Balloon structure: 5-, 7-, or 10-year term with 20-30-year amortization; balance due at maturity.
• Mini-perm: 3-5 year interest-only bridge loan until permanent take-out.
• Fully amortizing: Rare, but available via SBA 504 (20-25 yr fixed) .

1. Ongoing Covenants
   Borrowers provide quarterly or annual financial statements, maintain minimum DSCR, keep insurance in force, and may be subject to lock-box cash-management if cash flow is thin.
2. Exit / Refinance
   At maturity the borrower either:

• pays the balloon from cash or sale proceeds, or
• refinances into a new CRE loan—often arranged 6–12 months ahead via the same lender or a CMBS take-out.

Key Takeaway
CRE financing is asset-based lending secured by the property’s income stream and property value. The lender underwrites the property first, the borrower second, and structures the loan with shorter terms and larger down payments than residential mortgages to match commercial cash-flow cycles .