Why $2.4 Trillion in CRE Debt Gets Priced Differently
Forget everything you know about residential mortgages, commercial real estate financing operates in an entirely different universe. While home loans scrutinize your W-2s and credit scores, CRE lenders obsess over a property's ability to generate net operating income and service debt independently of your personal finances.
This fundamental shift explains why investors with modest personal incomes can secure $5 million office building loans while high earners struggle to finance $500,000 homes. From Class A office towers in downtown Seattle to neighborhood retail centers in suburban Dallas, understanding how commercial lenders evaluate risk, and structure loan-to-value ratios, DSCR requirements, and recourse terms, separates successful investors from perpetual wannabes.
Types of Commercial Properties
The Six Major Asset Classes
Commercial real estate financing spans dramatically different property types, each carrying distinct risk profiles, loan-to-value maximums, and underwriting standards. Lenders price these assets based on tenant quality, lease structures, and historical performance data tracked across thousands of comparable transactions.
Office Buildings
From Class A high-rises with Fortune 500 tenants to suburban flex space housing local professionals, office properties span the full risk spectrum. A 15-story tower in San Francisco's Financial District with Goldman Sachs as anchor tenant commands 75-80% LTV at prime rates, while a dated suburban building with month-to-month tenants might max at 60% LTV with rate premiums of 1-2%.
Lenders demand minimum DSCR of 1.25-1.35 for office assets, with Class A properties at the low end and Class C buildings requiring 1.50+. Typical loan structures feature 25-year amortization with 7-10 year terms, creating balloon payments that require refinancing at maturity.
Retail Properties
Anchored shopping centers with Whole Foods or Target leases securing 80%+ occupancy attract aggressive financing, often 75% LTV with DSCR minimums of 1.25. Unanchored strip centers face tighter standards: 65% LTV and DSCR requirements of 1.40+ reflect higher tenant turnover and market sensitivity.
Single-tenant net lease properties, think Walgreens, CVS, or Starbucks on 20-year absolute net leases, represent the gold standard, frequently financing at 75-80% LTV with rates approaching residential pricing due to minimal landlord responsibilities and investment-grade tenant credit.
Industrial Properties
Warehouse and distribution centers have exploded in popularity, driven by e-commerce logistics and supply chain restructuring. Class A industrial with clear heights exceeding 32 feet, modern dock-high loading, and proximity to major interstate corridors commands 75% LTV and 1.25 DSCR minimums.
Specialized manufacturing facilities or cold storage warehouses face property-specific underwriting, limited tenant pools and expensive tenant improvements often cap LTV at 60-65% with DSCR requirements of 1.40-1.50.
Multi-Family Properties
Apartment buildings with 5+ units transition from residential to commercial financing, unlocking dramatically different economics. A 50-unit garden-style complex in a stable suburban market typically finances at 75-80% LTV with 1.25 DSCR, while luxury high-rises in gateway cities can push 80% LTV with 1.20 DSCR for experienced operators.
Lenders love multi-family assets, diverse tenant bases, predictable cash flows, and robust demand fundamentals translate to the most aggressive pricing in commercial lending. Expect 25-30 year amortization with 5-10 year fixed periods.
Mixed-Use Properties
Properties combining ground-floor retail with upper-level apartments or offices create complex underwriting scenarios. Lenders separately analyze each component, a building with 70% multi-family income and 30% retail revenue gets priced closer to pure multi-family standards, while retail-heavy properties face stricter scrutiny.
Typical LTV ratios land at 70-75% with DSCR minimums of 1.30-1.35, reflecting the added complexity of managing diverse tenant types and lease structures.
Special Purpose Properties
Hotels, medical offices, self-storage, and senior housing require specialized lenders familiar with property-specific operating metrics. A 120-room select-service hotel might secure 65% LTV based on RevPAR history and brand affiliation, while medical office buildings with physician-owned tenancy can reach 75% LTV given stable cash flows.
Self-storage facilities have emerged as lender favorites, recession-resistant performance, minimal tenant improvements, and flexible unit mixes enable 75% LTV for institutional-quality assets with DSCR minimums of 1.25-1.30.
Commercial Loan Structures
Four Financing Approaches
Unlike residential mortgages that clone themselves across millions of borrowers, commercial real estate loans get custom-tailored to match property types, investor experience, and exit strategies. Choose the wrong structure, and you'll hemorrhage thousands in unnecessary costs.
Permanent Loans
The workhorse of CRE financing, permanent loans provide long-term capital with 5-25 year terms. The catch? Terms and amortization schedules rarely align. A typical structure features 25-year amortization with a 10-year fixed rate, creating a balloon payment of 70-80% of the original balance requiring refinancing.
On a $3 million loan, that means refinancing approximately $2.3 million in year 10, exposing you to whatever interest rate environment exists a decade hence. Fully amortizing loans eliminate this risk but command rate premiums of 0.25-0.50%.
Bridge Loans
Need capital for 6-36 months while repositioning an asset, completing renovations, or awaiting permanent financing? Bridge loans fill the gap with interest-only payments and lightning-fast closings, often 15-30 days versus 45-90 days for permanent debt.
Expect rates of 7-12% depending on LTV (typically capped at 65-75%) and loan-to-cost ratios for renovation projects. On a $2 million bridge loan at 9%, you'll pay $15,000 monthly in interest-only payments, expensive, but worth it when acquisition opportunities won't wait for traditional underwriting.
Construction Loans
Ground-up development and major renovation projects require specialized construction financing that disburses funds in stages as work progresses. Lenders fund based on draw schedules tied to completion milestones, charging interest only on outstanding balances.
A $5 million construction loan might provide 10-12 draws over 18 months, with the borrower initially drawing $500,000 for site work and foundations. As construction advances, monthly interest payments escalate, from $2,500 on the initial $500,000 draw (at 6%) to $25,000 once the full amount is outstanding.
Most construction loans convert to permanent financing upon completion, locking in long-term rates and eliminating refinancing costs. Expect LTV ratios of 65-75% based on as-completed appraised value, not current land value.
SBA Loan Programs
The SBA 504 and 7(a) programs offer government-backed financing for owner-occupied commercial properties with dramatically favorable terms: 10% down, 25-year fixed rates, and no balloon payments. The tradeoff? Properties must be 51%+ owner-occupied, and loan processing stretches 60-90 days.
A $2 million property purchase via SBA 504 requires just $200,000 down versus $400,000-$600,000 for conventional financing, conserving $200,000-$400,000 in capital for operations, tenant improvements, or additional acquisitions.
Key Qualification Metrics
DSCR: The Number That Trumps Everything
Your personal income and credit score matter in commercial lending, but they take a back seat to one critical ratio: Debt Service Coverage Ratio (DSCR). This metric measures whether a property generates sufficient net operating income to cover annual debt service with cushion for vacancies and unexpected expenses.
The formula is elegantly simple: divide Net Operating Income (NOI) by annual debt service (principal plus interest). Most lenders demand 1.25 DSCR minimum, meaning the property must generate 25% more income than required to make loan payments.
Here's what that looks like in practice: A retail center generates $450,000 annual NOI. Your $2.5 million loan at 6.5% over 25 years creates annual debt service of $203,000. Divide $450,000 by $203,000 and you get a 2.22 DSCR, well above the 1.25 threshold, signaling strong approval odds and competitive pricing.
Flip the scenario: the same property produces just $240,000 NOI. Now your DSCR drops to 1.18, falling below minimums. Lenders will either reject the loan, reduce the loan amount to $2 million (creating $163,000 annual debt service and 1.47 DSCR), or charge rate premiums of 0.50-1.00% for the elevated risk.
Loan-to-Value Ratios
LTV ratios in commercial lending range from 60-80% depending on property type, borrower experience, and market conditions. Unlike residential mortgages capped at standardized limits, commercial LTV fluctuates with risk assessment.
Multi-family properties with strong occupancy rates and stable markets regularly achieve 75-80% LTV. Office and retail typically cap at 70-75% LTV. Specialized properties or higher-risk assets often max at 60-65% LTV, requiring 35-40% down payments that filter out undercapitalized investors.
On a $4 million office building, 75% LTV means a $3 million loan and $1 million down payment. Drop to 65% LTV, and your down payment balloons to $1.4 million, an extra $400,000 in upfront capital that might force smaller investors out of the deal.
Property Occupancy Standards
Lenders worship stabilized properties with occupancy rates of 85%+ and weighted average lease terms exceeding 3-5 years. Purchase a Class A office building at 92% occupancy with an average 7-year remaining lease term, and you'll secure aggressive pricing at maximum LTV ratios.
Properties below 75% occupancy trigger heightened scrutiny, lenders slash LTV to 60-65%, boost DSCR requirements to 1.40-1.50, and demand detailed lease-up plans with financial reserves covering 12-24 months of debt service. On a $5 million loan, that means proving you have $350,000-$700,000 in liquid reserves beyond your down payment.
Interest Rates and Terms
How CRE Loans Get Priced
Commercial mortgage rates consistently price 0.50-1.50% above comparable residential rates, reflecting higher perceived risk and larger loan balances. A 30-year fixed residential mortgage at 6.5% translates to commercial rates of 7.0-8.0% for 10-year fixed terms on similar credit profiles.
Rates split into fixed and variable structures. Fixed-rate loans lock your rate for 5, 7, 10, or even 25 years, providing payment predictability essential for cash flow underwriting and investor projections. Expect rate premiums of 0.25-0.50% for longer fixed periods, a 5-year fix might price at 7.0% while a 10-year fix costs 7.5%.
Variable-rate loans tie to indices like SOFR (Secured Overnight Financing Rate) or Prime, adjusting quarterly or annually. Initial rates often beat fixed alternatives by 0.50-1.00%, but expose borrowers to payment volatility. A loan starting at SOFR + 2.75% (roughly 7.0% today) could jump to 9-10% if SOFR spikes 2-3% during a rate cycle.
Term Structure: The Balloon Payment Reality
Here's the disconnect confusing new CRE investors: loan terms and amortization schedules operate independently. Your loan might amortize over 25 years (determining monthly payment size) while carrying a 10-year term (when the remaining balance comes due).
On a $3 million loan at 7% with 25-year amortization and a 10-year term, your monthly payment is $21,210, calculated as if you'll pay the loan over 25 years. But in year 10, the remaining principal balance of roughly $2.3 million becomes immediately due, forcing you to refinance at prevailing rates or sell the property.
This structure benefits lenders who recapture loans and re-price them to current markets while giving borrowers lower payments via longer amortization. The risk? Refinancing into a higher rate environment can spike payments by 20-40% overnight.
Required Documentation
The Paper Trail That Closes Deals
Commercial loan underwriting demands exponentially more documentation than residential mortgages, and incomplete packages cause 70%+ of processing delays. Assemble everything before approaching lenders to signal professionalism and accelerate timelines.
Start with three years of property operating statements showing monthly income and expenses. Lenders reconstruct Net Operating Income by adding back non-recurring expenses, owner perks, and excess management fees, then applying market-rate assumptions for repairs, insurance, and property management.
Provide current rent rolls detailing every tenant, lease commencement and expiration dates, monthly rents, security deposits, and square footage. Include lease abstracts or full leases for tenants representing 10%+ of property income, lenders verify tenant creditworthiness and lease terms match your underwriting.
Expect to produce personal and business tax returns for the past three years, personal financial statements listing all assets and liabilities, and business financial statements if you're purchasing through an entity. Properties require professional appraisals ($3,000-$10,000 depending on size and complexity) and Phase I environmental reports ($2,000-$5,000) screening for contamination.
Round out the package with a detailed business plan explaining your acquisition strategy, market analysis demonstrating local supply/demand dynamics, and insurance certificates proving adequate property and liability coverage.
Recourse vs. Non-Recourse Loans
Who's on the Hook When Things Go Wrong?
The single most consequential decision in commercial financing, beyond rate and LTV, is whether your loan carries recourse or non-recourse terms. This determination controls whether lenders can pursue your personal assets if the property fails.
Recourse Loans
With recourse financing, you personally guarantee the debt. If the property forecloses and sells for less than the outstanding balance, lenders can sue you personally and seize bank accounts, investment portfolios, other real estate, and even business interests to recover the deficiency.
On a $2 million recourse loan where the property sells at foreclosure for $1.5 million, you're personally liable for the $500,000 shortfall plus legal fees and costs. This exposure explains why recourse loans typically price 0.25-0.50% below non-recourse alternatives and allow higher LTV ratios, often 75-80% versus 65-70%.
Non-Recourse Loans
Non-recourse financing limits lender recovery to the collateral property alone. Walk away from an underwater asset, and lenders can't touch your personal wealth, the property satisfies the debt entirely, regardless of its value versus the outstanding balance.
This protection costs you: expect rates 0.25-0.75% higher than recourse loans, lower LTV ratios (typically 65-75% maximum), larger down payments, and stricter DSCR requirements often at 1.30-1.40 minimums. Non-recourse loans also include "bad boy" carve-outs, you're personally liable for fraud, misrepresentation, or gross negligence even under non-recourse structures.
Prepayment Penalties and Defeasance
The Hidden Cost of Early Payoff
Unlike residential mortgages that allow penalty-free payoffs, commercial loans almost universally impose prepayment penalties designed to protect lender yield. Sell or refinance early, and these provisions can cost tens or hundreds of thousands in unexpected fees.
Yield maintenance formulas compensate lenders for lost interest by calculating the present value of remaining payments discounted to current Treasury rates. On a $3 million loan with 5 years remaining at 7% prepaid when Treasuries yield 4%, you might owe $200,000-$350,000 in yield maintenance, effectively buying out the lender's expected profit.
Step-down penalties decrease over time, commonly following a 5-4-3-2-1% structure. Prepay in year one, and you'll pay 5% of the outstanding balance, $150,000 on a $3 million loan. Wait until year four, and the penalty drops to 2% or $60,000.
Defeasance represents the most complex and expensive option. You must purchase a portfolio of U.S. Treasury securities generating cash flows matching your remaining loan payments. Legal and processing fees add $50,000-$100,000+ to the cost, making defeasance viable only for large loans or unique circumstances.
Lockout periods prohibit any prepayment for specified periods, often the first 2-5 years, regardless of your willingness to pay penalties. This protects lenders from rapid refinancing in falling rate environments.
Get Expert Commercial Financing Assistance
Navigating commercial real estate financing requires specialized expertise most residential loan officers lack entirely. Our team closes over $300 million annually in CRE transactions spanning office, retail, industrial, and multi-family assets, from $500,000 acquisitions to $25 million portfolio financings.
We'll analyze your acquisition, match you with optimal loan structures, negotiate LTV ratios and DSCR requirements, and guide you through underwriting with precision. Whether you're acquiring your first small office building or refinancing a multi-property portfolio, we have the lender relationships and deal experience to secure competitive terms. Contact us today for a confidential consultation.