A commercial real estate loan, commonly called a CRE loan, is mortgage financing used to buy, build, or renovate property held for business use rather than personal housing. The borrower is almost always a business entity, the collateral is the property itself, and approval turns on whether the building can generate enough income to service the debt. CRE loans run shorter than home mortgages, usually end in a balloon payment, and carry underwriting, documentation, and closing costs well above what residential borrowers see.
How the Loan Is Structured
The borrower on a CRE loan is typically an LLC, partnership, or corporation rather than an individual. That entity signs a promissory note promising to repay principal and interest on a set schedule, and the lender records a lien against the property to secure the debt. If the borrower defaults, the lien lets the lender foreclose and sell the property to recover what it is owed.
Lenders usually go a step further and file a financing statement under the Uniform Commercial Code. The UCC filing gives them a claim on business equipment, fixtures, and other personal property inside the building, so the collateral covers both the real estate and what operates within it.
What Properties Qualify
A CRE loan can be used to finance any property that produces income or serves a business purpose, with the specific classification governed by local zoning. The categories lenders see most often are:
- Multifamily housing with five or more units (four units or fewer is treated as residential)
- Office buildings, single-tenant or multi-tenant
- Retail properties, from shopping centers and strip malls to standalone stores
- Industrial space, including warehouses, distribution centers, and manufacturing facilities
- Hospitality assets like hotels, motels, and resorts
- Mixed-use buildings that combine retail, office, or residential space
- Special-purpose properties such as self-storage, medical offices, and gas stations
Special-purpose properties get tougher treatment because they are hard to repurpose if the original business fails. Expect lower loan-to-value limits and stronger financial requirements when the building only fits one kind of user.
Loan Terms, Amortization, and Rates
Most CRE loans mature in 5 to 20 years, but the monthly payments are calculated on a longer 15 to 30-year amortization schedule.1OCC. Commercial Real Estate Lending – Comptroller’s Handbook A common example is a 5-year loan with payments based on a 20-year schedule. Because the payments are sized for a longer payoff than the actual term, a large balance is still outstanding at maturity.
That balance comes due as a balloon payment. On the maturity date, you pay the remaining principal in full, refinance into a new loan, or sell the property. Interest-only structures, where no principal is paid during the term, leave an even bigger balloon at the end.
Fixed and Variable Rates
Rates can be fixed for the life of the loan or float against a benchmark plus a lender margin. After the market moved away from LIBOR, the common benchmarks for variable CRE loans are the Secured Overnight Financing Rate, U.S. Treasury yields, and the bank prime rate. As of early 2026, the prime rate is 6.75 percent and the 10-year Treasury yield is around 4.02 percent.2Federal Reserve Board. H.15 – Selected Interest Rates (Daily) CMBS lenders and life insurance companies typically write fixed-rate loans; banks write both.
Prepayment Penalties
Most CRE loans limit your ability to pay off early without a cost. Three structures dominate:
- Yield maintenance: you pay the present value of the interest the lender would have collected through maturity, discounted at a current Treasury yield. The charge is largest early in the term and shrinks as maturity approaches.
- Defeasance: rather than paying off the loan, you buy a portfolio of U.S. government securities that generates the cash flow needed to make every remaining loan payment. The securities substitute for the property as collateral, freeing you to sell the building while the loan continues on schedule.
- Step-down: a declining percentage of the outstanding balance, often written as 5-4-3-2-1 by loan year. Most lenders waive the charge in the last 90 days of the term.
Recourse, Non-Recourse, and Personal Guarantees
A recourse CRE loan lets the lender pursue the borrower’s other assets, and the guarantor’s personal assets, if the foreclosure sale does not cover the debt. A non-recourse loan limits the lender to the collateral itself.1OCC. Commercial Real Estate Lending – Comptroller’s Handbook
Non-recourse is not absolute. Nearly every non-recourse loan contains carve-outs, often called “bad boy” provisions, that flip the loan to full recourse if the borrower does certain things. Common triggers include fraud or misrepresentation, voluntary bankruptcy, environmental contamination, unauthorized liens or transfers, waste of the collateral, and diversion of funds.1OCC. Commercial Real Estate Lending – Comptroller’s Handbook Any of these events can make the borrower and guarantor personally liable for the full balance.
Personal guarantees are the norm even when the entity is the named borrower. A full guarantee is an unlimited, joint and several promise from the principals with controlling ownership, meaning the lender can collect the entire debt from any one signer.3NCUA Examiner’s Guide. Personal Guarantees A limited guarantee caps liability at a set dollar amount or percentage. On non-recourse loans, a limited guarantee tied specifically to the bad-boy carve-outs is standard.
The Numbers Lenders Check
Two ratios control most approval decisions on a CRE loan, and a third comes into play on smaller deals.
Loan-to-Value Ratio
The loan-to-value (LTV) ratio measures debt against the appraised value of the property. Federal regulatory ceilings vary by property type: 65 percent for raw land, 75 percent for land development, and 80 percent for commercial construction, including multifamily.4eCFR. Appendix A to Part 628 – Loan-to-Value Limits for High Volatility Commercial Real Estate Exposures Most stabilized commercial loans land between 65 and 80 percent LTV, which puts the required down payment at 20 to 35 percent. A lower LTV usually earns a better rate.
Debt Service Coverage Ratio
Debt service coverage ratio (DSCR) compares the property’s net operating income (NOI) to its annual loan payments. To get NOI, subtract operating expenses like property taxes, insurance, maintenance, and management from gross rents. Divide NOI by annual principal and interest, and you have DSCR. A 1.25 minimum is widely used, meaning the property produces 25 percent more income than the loan requires. Riskier property types or weaker markets can push the requirement to 1.30 or higher.
Global Cash Flow Analysis
On smaller loans, and when a borrower owns several businesses, lenders often run a global cash flow analysis. This combines income and debt from the borrower’s primary business, other businesses, and personal finances into a single coverage picture. It is common when personal and business finances are intertwined.
Due Diligence and Closing Costs
The paperwork and third-party reports required to close a CRE loan run well beyond a residential file.
Environmental Assessment
A Phase I Environmental Site Assessment is a standard requirement. It combines historical records, government database review, interviews with current and past owners, and a site visit to identify contamination risk on the property and neighboring parcels. Federal rules require the assessment to be completed within one year of acquisition.5US EPA. Brownfields All Appropriate Inquiries Costs typically run from $1,600 to $6,500, higher for properties with an industrial history.
Appraisal and Property Reports
A commercial appraisal by a certified general appraiser is nearly universal. For a standard office or retail property, fees run $2,000 to $4,000, more for unusual or large assets. Lenders also commonly request a property condition report on the building’s structural and mechanical systems, a current rent roll, and three years of audited or certified financial statements for the property.
Total Closing Costs
Add up origination fees, appraisal, environmental work, title insurance, legal fees, and recording taxes, and total closing costs on a CRE loan generally run 3 to 6 percent of the loan amount. Some jurisdictions charge percentage-based mortgage recording taxes on top of that. On even a modest commercial deal, plan for tens of thousands of dollars at closing.
Who Makes CRE Loans
The source of the loan shapes rate, term, and how much flexibility you get later.
- Commercial banks are the most common lender, particularly for regional deals. They tend to favor borrowers with existing deposit relationships, offer both fixed and variable rates, and often keep the loan on their own books, which leaves room to negotiate terms.
- Life insurance companies write competitive fixed-rate loans on high-quality, stabilized properties in strong markets. Underwriting is stricter and their appetite for property type and location is narrower.
- CMBS lenders originate loans and then pool them into trusts that issue bonds to investors. CMBS loans are typically fixed-rate and non-recourse, but the prepayment terms are rigid (usually yield maintenance or defeasance), and modifications after closing are difficult.
- Bridge lenders provide short-term financing, generally up to three years, for properties that are not yet stabilized. A bridge loan carries the property through lease-up until it produces enough income to qualify for permanent financing, and the rate is higher than a permanent loan to reflect the added risk.1OCC. Commercial Real Estate Lending – Comptroller’s Handbook
SBA 7(a) and 504 Loans
Two Small Business Administration programs are commonly used for commercial property. Both are made by private lenders and carry a government guarantee, which typically produces lower down payments and longer terms than conventional CRE financing.
SBA 7(a)
The 7(a) program is the SBA’s primary business loan, with a maximum of $5 million usable for real estate, equipment, refinancing business debt, and working capital.6U.S. Small Business Administration. 7(a) Loans Real estate terms run up to 25 years. Rates are negotiated between borrower and lender but capped by the SBA. On variable-rate loans over $350,000, the ceiling is the base rate plus 3.0 percent; smaller loans allow wider spreads, up to base plus 6.5 percent on loans of $50,000 or less.7U.S. Small Business Administration. Terms, Conditions, and Eligibility Rates may be fixed or variable.
SBA 504
The 504 program is built for long-term, fixed-rate financing of major assets like land, buildings, and heavy equipment. The maximum loan amount is $5.5 million, with 10, 20, or 25-year repayment terms available.8U.S. Small Business Administration. 504 Loans
A 504 deal has a three-part structure. A conventional lender funds up to 50 percent of the project cost through a first-lien loan, a Certified Development Company (CDC) contributes up to 40 percent through an SBA-backed debenture in second position, and the borrower puts in at least 10 percent equity.9OCC. SBA Certified Development Company/504 Loan Program Businesses less than two years old, or those buying special-purpose properties, generally need 15 percent equity. A new business buying a special-purpose building may need 20 percent.
Depreciation and Interest Deductions
Owning commercial property carries a meaningful tax benefit through depreciation. Federal tax law lets you deduct the cost of a commercial building, though not the land, over a 39-year straight-line schedule under the Modified Accelerated Cost Recovery System. Residential rental property, by contrast, uses a 27.5-year schedule.10Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System The IRS specifies straight-line under the general depreciation system for nonresidential real property.11IRS. Publication 946 – How to Depreciate Property
On a $1 million commercial building (excluding land), a 39-year schedule produces roughly $25,600 in annual depreciation. That deduction is a paper loss that reduces taxable income from the property without a cash outlay. Interest on the CRE loan is generally deductible as a business expense as well. Together, the two deductions lower the effective cost of financing the property.