A commercial real estate (CRE) loan is business financing secured by commercial property. It can fund a purchase, refinance, renovation, development, construction project, or other income-producing real estate. The lender underwrites two things at once: the borrower’s ability to repay and the property’s value and cash flow. The loan’s interest rate, maturity, amortization, collateral, guarantees, covenants, and repayment requirements are set by the contract, so there is no single “standard” CRE loan.
Unlike a personal residential mortgage, a CRE loan is usually evaluated against business finances, property-level operating income, market conditions, and project risks. Eligible U.S. small businesses may also use SBA-backed programs, but 7(a) and 504 loans have different purposes and application channels.
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What a commercial real estate loan can finance
Commercial real estate loans are designed for property used by a business or held to generate business income. The lender’s underwriting approach changes according to the transaction’s purpose and the property type.
Acquisition
An acquisition loan provides the capital to buy an office building, retail property, industrial facility, apartment or other commercial asset, subject to the lender’s eligibility and risk standards. The lender generally considers the purchase price, an independent or lender-ordered valuation, projected and historical property income, tenant quality, vacancy and the borrower’s equity contribution.
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Refinance
A refinance replaces existing debt. It may lower or restructure payments, release equity, consolidate debt or prevent a maturity payoff from becoming a liquidity crisis. The lender will still re-underwrite the property and borrower; a previous approval does not guarantee a new loan.
Improvement and renovation
Loan proceeds may fund building upgrades, tenant improvements, equipment installed as part of the real estate or energy-related work. Disbursements can be staged, and the lender may require inspections, invoices, reserves or completion guarantees.
Development and construction
Development and construction loans finance land preparation, vertical construction and related project costs. They typically involve budgets, plans, permits, feasibility analysis, contractor information, contingency reserves and draw procedures. Repayment depends on a completed project’s sale, lease-up, operating income or permanent refinancing, so construction risk is materially different from lending against an established, occupied property.
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| Purpose | Primary repayment support | Underwriting emphasis |
|---|---|---|
| Purchase | Property cash flow and borrower resources | Price, valuation, tenants, occupancy, equity and market risk |
| Refinance | Existing or continuing property income | Current debt, maturity, updated value and repayment capacity |
| Improvement | Operating income after the work | Scope, budget, collateral value and execution controls |
| Development or construction | Lease-up, sale or permanent financing | Feasibility, permits, costs, sponsor experience, contingencies and draws |
How the CRE lending process works
- Define the transaction. Identify the property, intended use, purchase or project budget, requested loan amount, equity available and expected repayment source. Clarify whether the property will be owner-occupied, leased to tenants or held as an investment, because eligibility and risk treatment can differ.
- Submit an application and financial package. A lender commonly requests the borrower’s and guarantors’ financial statements, tax returns, debt schedules, bank or liquidity statements, organizational documents, business plans and information about the property. A construction request also needs plans, cost estimates, permits and contractor details.
- Undergo borrower and guarantor review. The lender assesses net worth, liquidity, creditworthiness, existing liabilities, global cash flow and the people or entities providing repayment support. Equity and guarantees may be required depending on the transaction.
- Undergo property or project underwriting. The lender reviews historical and projected operating statements, leases, rent rolls, vacancy, operating expenses, tenant concentration, market conditions, environmental matters and the property’s condition. A valuation and, where appropriate, environmental and engineering diligence help establish collateral and project risk.
- Receive a term sheet or commitment. The written proposal should identify the amount, rate type, maturity, amortization, collateral, guarantees, covenants, reserves, fees, prepayment provisions and closing conditions. A term sheet is not the same as final funding; conditions must be satisfied before closing.
- Complete diligence and closing. The lender confirms title, insurance, appraisal or valuation, environmental results, entity authority and other conditions. At closing, the borrower signs the note and security documents, and the lender records its mortgage or other lien.
- Make payments and manage ongoing requirements. After funding, the borrower pays according to the note and supplies financial or property reports required by the loan agreement. Construction loans may use scheduled draws, inspections and retainage. A maturity date requires the debt to be paid, refinanced or renewed under the contract.
What lenders evaluate
Borrower and guarantor strength
Underwriting can include personal and business net worth, liquid funds, credit history, contingent liabilities, other real estate obligations and global cash flow. A lender wants evidence that the sponsor can support the property through vacancies, cost overruns or temporary income declines. Guarantees may be full, limited or absent depending on the deal, but the exact recourse arrangement is contractual.
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Property income and operating performance
For an income-producing asset, the lender analyzes net operating income (NOI): property operating income after operating expenses and before debt service and certain ownership-level costs. Lease terms, tenant credit, expiration dates, renewal assumptions, vacancy, concessions, maintenance and capital expenditures can materially change sustainable NOI. Accounting definitions differ, so ask the lender exactly which income and expense items it includes.
Value and collateral
The lender compares the requested debt with the value it accepts for underwriting. Collateral may include the real estate, assignments of leases and rents, accounts, reserves, guarantees and other pledged assets. Property type, location, condition, liquidity and marketability influence how much collateral support the lender assigns.
Market, environmental and project risk
Vacancy trends, local supply, tenant concentration, interest-rate sensitivity, environmental conditions, insurance availability and operating costs can affect approval. For development, feasibility, permits, construction experience, contractor capacity, budget contingencies and the plan for lease-up or sale become central questions.
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The three ratios borrowers should understand
| Measure | Formula | What it indicates | Important limitation |
|---|---|---|---|
| Debt-service coverage ratio (DSCR) | NOI ÷ annual debt service | Cash flow available relative to scheduled principal and interest | A required level depends on property stability, loan structure and lender policy; there is no universal cutoff. |
| Loan-to-value (LTV) | Loan amount ÷ lender-accepted property value | Leverage relative to collateral value | Prudent levels vary by asset, transaction and market risk. |
| Debt yield | NOI ÷ loan amount | Property income relative to the amount borrowed | It is not a substitute for DSCR or LTV and should be considered with other underwriting criteria. |
Illustrative arithmetic, not a market rule: If a property has $120,000 of annual NOI and annual debt service of $90,000, its DSCR is 1.33 ($120,000 ÷ $90,000). If the loan is $1.5 million and the lender’s value is $2.5 million, LTV is 60%. The same $120,000 NOI produces an 8% debt yield ($120,000 ÷ $1.5 million). A lender could reach a different conclusion after considering leases, expenses, guarantees, market conditions and the loan structure.
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The Office of the Comptroller of the Currency’s Comptroller’s Handbook: Commercial Real Estate Lending (March 2022) describes these measures as part of risk-based underwriting for national banks and federal savings associations. It is supervisory guidance, not a universal term sheet or a promise that every lender uses identical calculations.
Interest, amortization and maturity: where payment surprises arise
A CRE loan may have a fixed rate or a variable rate. With a fixed rate, scheduled principal-and-interest payments generally remain level under the note’s assumptions. With a variable rate, payments can change when the underlying rate resets. The note should identify the index, margin, reset frequency, caps or floors and any notice provisions.
Amortization is the schedule used to calculate periodic principal and interest payments. Maturity is the date the debt becomes due under the contract. They are not the same. For example, a loan can have a 25-year amortization but a five-year maturity. Payments are calculated as though the balance were repaid over 25 years, but the remaining principal is due at year five unless the lender agrees to refinance or renew it.
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That remaining amount is often called a balloon balance. It creates refinance and payoff risk: property value may fall, income may decline, rates may rise, or the borrower may no longer satisfy underwriting requirements. Before signing, determine the projected balance at maturity, whether extension options exist, what conditions apply and whether a prepayment charge limits an early refinance or sale.
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Also review recourse, guarantees, financial covenants, reporting deadlines, reserve requirements, cash-management provisions, default triggers, late charges, closing costs and lender rights after a covenant breach. These terms can matter as much as the stated interest rate.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.SBA-backed real estate financing for eligible U.S. small businesses
SBA programs can help qualifying small businesses finance real estate, but they are not interchangeable and the SBA does not make every 7(a) loan directly.
| Feature | SBA 7(a) | SBA 504 |
|---|---|---|
| Real-estate use | Can acquire, refinance or improve real estate and buildings, alongside other eligible business purposes | Long-term financing for major fixed assets, including purchasing, constructing or renovating buildings or land |
| Maximum stated amount | $5 million, according to the SBA program page accessed October 13, 2026 | $5.5 million, according to the SBA program page accessed October 13, 2026 |
| Application channel | Apply through a participating lender; the borrower does not apply directly to SBA | A Certified Development Company (CDC) originates the 504 piece with a senior lender; SBA advises applicants to contact a CDC |
| Terms and payments | Most term loans use monthly principal-and-interest payments; fixed payments stay the same, while variable-rate payments may change | SBA lists 10-, 20- and 25-year maturity terms and describes the financing as long-term and fixed-rate |
| Key exclusions or limits | Eligibility requires an operating, for-profit U.S. business meeting SBA size and other requirements, being creditworthy and showing reasonable repayment ability | Does not fund working capital or inventory and excludes speculation or investment in rental real estate; eligible operating small-business rules apply |
Program procedures can change. The SBA’s SOP 50-10 page identifies version 8.1 technical updates effective October 1, 2026, so confirm the rules, forms and participating providers in effect when you apply.
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Compare written proposals using identical assumptions rather than focusing only on the headline rate.
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- Purpose and eligibility: Confirm owner-occupied versus investment use, permitted proceeds and any SBA restrictions.
- Amount and equity: Identify the required cash contribution, source-of-funds rules and whether reserves are separate from equity.
- Rate mechanics: Record fixed or variable status, index, margin, reset dates, caps, floors and fees.
- Term structure: Compare maturity with amortization and calculate the balance due at maturity.
- Underwriting tests: Ask how NOI, DSCR, LTV and debt yield are calculated and which period of financial data is used.
- Collateral and recourse: List mortgages, assignments, guarantees, personal recourse, carve-outs and required reserves.
- Prepayment and closing costs: Review defeasance or other prepayment charges, appraisal, environmental, legal, origination, CDC or other program charges.
- Covenants and reporting: Note minimum coverage tests, financial reporting, cash-management requirements and cure periods.
Current commercial rates, ordinary down-payment percentages and lender credit-score cutoffs are not universal figures. They vary with the lender, property, market, borrower, program and date, so obtain current written terms rather than relying on a generic benchmark.
Common pitfalls and ways to reduce them
Confusing a low payment with a low-risk loan
A long amortization can reduce scheduled payments while a short maturity leaves a large balloon balance. Model the payoff amount and a range of refinance conditions before closing.
Using optimistic NOI
Projected rent, minimal vacancy or omitted maintenance can inflate DSCR and debt yield. Reconcile projections with leases, historical statements, realistic expenses and reserves.
Ignoring variable-rate exposure
Stress-test payment increases and coverage if the loan’s rate resets. Confirm whether a cap, floor or hedge is required and what it costs.
Underestimating closing and project costs
Appraisal, environmental review, legal work, inspections, insurance, reserves and construction contingencies can consume cash that was intended for the equity contribution. Build a complete sources-and-uses schedule.
Assuming an SBA program fits any rental property
504 excludes speculation and investment in rental real estate, while both programs impose eligibility rules. Discuss the intended use with a participating lender or CDC before spending money on an application.
What to prepare before applying
- A clear description of the property, business use, ownership structure and requested purpose.
- Historical and projected property operating statements, current leases or rent rolls and vacancy information.
- Business and personal financial statements, tax returns, debt schedules and evidence of liquid funds.
- Purchase contract, existing loan documents or a detailed construction budget, plans, permits and contractor information, as applicable.
- Information on environmental, engineering, insurance, zoning and other diligence issues.
- A written repayment plan covering operating cash flow, sale, lease-up, permanent financing or another documented source.
A commercial real estate loan works when the requested debt, the property’s sustainable cash flow and the borrower’s broader finances support the repayment schedule. Evaluate the maturity and balloon exposure as carefully as the rate, and verify program-specific rules with the lender or CDC before relying on an SBA structure.
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