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Commercial Real Estate Loans

Key Takeaways:

  • CRE loans are typically granted to organizations or corporations that own commercial real estate.
  • CRE loans are offered by insurance companies, independent lenders, retirement funds, banks, and other private investors.
  • A 504 loan is available through SBA’s community-based partners and CDCs.
  • Commercial real estate loans are usually more expensive compared to home loans.

A commercial real estate (CRE) loan is a mortgage that is secured by commercial real estate, as opposed to a traditional residential property.

Commercial real estate refers to a property that is utilized for commercial purposes – examples include shops, offices, apartments, and hotels.

A CRE loan is available to small businesses looking to buy, expand, or renew their properties. These loans are usually made to corporations, partnerships, trusts, developers, mutual funds, and real estate trusts.

A business entity buys a commercial property, rents space, and then collects rental income from businesses on the property.

The financing is done through a commercial real estate loan for these ventures, which includes the purchase, construction, and development of properties.

A business entity or investor who buys a commercial property may rent space with the goal of collecting rental income from business tenants using the property.

If the property is financed, it is done with a commercial real estate loan for these ventures. Possible uses of the CRE loan may include the purchase, construction, or development of properties.

How a CRE Loan Works

Just like residential real estate, the market for providing CRE loans has many players. These include lenders, banks, pension funds, private investors, insurance companies, and other entities such as the US Small Business Administration (SBA).

The SBA’s 504 loan program is actively involved in helping small businesses with commercial real estate loans.

💡 Tip: Compare the best commercial loans for real estate here.

Like home lenders, commercial lenders also take on various levels of risk, which is why they offer different terms to borrowers.

The most popular home loan is a fixed-rate, 30-year mortgage. Loans for commercial real estate tend to be shorter, with terms ranging from five years (or less) to 20 years. The amortization period may also be longer than loan term.

Example:

  • A lender can provide a commercial real estate loan for seven years with a 30-year amortization.
  • The borrower pays monthly installments during the seven-year term.

  • The lender determines the monthly payments as if the loan was repaid over a 30-year period. This is then followed by a last “balloon” payment of the remaining loan balance.

When applying for a commercial real estate loan, lenders consider:

  • The nature of the collateral (property purchased).
  • The entity’s creditworthiness (or that of the principals/owners), which may require financial statements and tax returns for the last three to five years.
  • The business’s loan-to-value and debt service coverage ratios.


Commercial real estate loans are usually more expensive compared to home loans. Down payments typically range between 20% and 30% of the purchase price.

Commercial Real Estate Loan Rates

Commercial real estate loan rates are higher than home loan rates as well: around 10-20%.

Loans backed by the Small Business Administration (SBA) are usually among the cheapest but still may carry interest rates above 10% in 2022.

Note: CRE loans are aimed at financing real estate that is specifically used for business purposes.

Types of Commercial Real Estate Loans

These are the most common CRE loan types:

  • Fixed loans are the first commercial real estate mortgage loans. An indefinite loan must have amortization and a minimum period of five years.
  • SBA loans are made by traditional and non-traditional lenders but are guaranteed by the SBA. There are several different SBA loans that are designed for different types of borrowers. The most popular of which is the 7 (a) loan.
  • Bridging loans provide a short-term first commercial mortgage loan, typically for a period of six months to three years. Bridging loans are usually obtained while the borrower works to secure long-term financing.

SBA 504 Loans

The SBA 504 loan program provides fixed-rate, long-term financing for commercial entities up to $5 million to promote job creation and business growth.

SBA commercial real estate loan programs are available through SBA’s community-based partners and Certified Development Companies (CDCs).

A Certified Development Company is a non-profit organization that promotes job creation and economic development with 504 loans.

You are eligible for a 504 loan if your business:

  • Operates as a for-profit company in the United States.
  • Has a net worth of less than $15 million.
  • Has an average net income of less than $5 million for the two years preceding your application, and after federal income taxes.


To apply for an SBA commercial real estate loan, find a CDC near you to ensure you are dealing with an approved lender.

Prepare your 504 loan authorization package with the available 504 Authorization File Library to keep track of all documents you’ll need to apply for a 504 CDC loan.

Commercial Bridging Loans

Bridging loans offer quick financing that is used to fill the gap until long-term financing for commercial real estate is secured.

A business owner, for example, can use a bridging loan to compete with bidders when making offers on a property. Once they have secured the property, they can refinance to a long-term loan.

In general, most bridging loans are very short-lived (often six months to three years) and must be repaid in full at maturity.

The interest rate on bridging loans is typically several percentage points higher than the current market rate.

Commercial bridging loans are more readily available from alternative lenders than banks and credit unions.

Note: As shorter terms increase the lender’s risk, it can be difficult to qualify for a bridging loan.

Business owners typically need strong credit and a low debt-to-income ratio to be approved.

Advances typically range from 10% to 20% and often close faster than conventional real estate loans.

Find the best commercial real estate loans here.

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Sources

Lorien is the Country Manager for Financer US and has a strong background in finance and digital marketing. She is a fintech enthusiast and a lover of all things digital.

Financial information reviewed byRoss Loehr - CFP®, MBA
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Last Updated: July 13, 2022

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