Commercial Real Estate Loans FAQ’s

Commercial Overview

A commercial mortgage provides financing for income-producing properties such as multifamily, office, retail, industrial, and other investment real estate. These loans can be used to acquire, refinance, renovate, or improve commercial properties. 

How Commercial Mortgage Work

Lenders evaluate each deal individually, focusing on property income, value, borrower strength, and market conditions. The application and underwriting process is similar to residential loans, but the criteria and loan structures differ significantly. 

Commercial vs. Residential Loans 

• Residential loans focus on personal income & credit. 
• Commercial loans focus on property performance: DSCR, cap rate, NOI, LTV, LTC. 
• Borrowers are usually entities (LLC, LLP, S Corp, C Corp), not individuals. 
• Terms often include shorter fixed periods, balloon payments, prepayment penalties, and varied rate structures (fixed, floating, or hybrid).

Commercial Loan Interest Rates

Rates may be fixed, floating, or floating-to-fixed, based on property type, borrower strength, market indexes, and program. Government-backed programs often offer lower rates. 

Key Terms to Know

• Term vs. Amortization: Payments may be based on a longer amortization (e.g., 25–30 yrs) with a shorter term (e.g., 5–10 yrs), creating a balloon payment at maturity. 
• LTV (Loan-to-Value): Loan amount ÷ property value. Typical max: 70–80%. 
• DSCR (Debt Service Coverage Ratio): NOI ÷ debt service. Common minimum: 1.20–1.30+. 
• Cap Rate: NOI ÷ property value; measures return and market risk. 
• NOI (Net Operating Income): Revenue minus operating expenses. 
• LTC (Loan-to-Cost): Loan amount ÷ construction cost (for construction loans only). 
• Prepayment Penalties: Often include lockout, step-down, yield maintenance, or defeasance.

Documentation Needed 

• Prepare both property and business documentation:
• Property value, rent roll, financials, construction costs (if applicable) 
• Business/entity documents, financial statements, portfolio history 
• Calculations: LTV, DSCR, NOI, cap rate, LTC
  

Your commercial loan officer will customize an exact checklist.

Commercial mortgage rates are typically tied to financial market benchmarks or indexes that reflect the cost of capital, market risk, and lender expectations. These benchmarks act as the "base rate," and lenders apply a spread or margin on top of them based on the risk profile of the borrower, property type, and loan structure. 

Primary Indexes Commercial Rates Are Tied To 

1. SOFR (Secured Overnight Financing Rate)

• Most common benchmark for floating-rate commercial loans. 
• Replaced LIBOR as the industry standard. 
• Reflects the cost of borrowing cash overnight, collateralized by U.S. Treasury securities. 
• Lenders add a spread (e.g., SOFR + 3.00%) based on loan risk. 

• Often used for: 
  • Bridge loans 
  • Construction loans 
  • Floating-rate term loans

 2. U.S. Treasury Yields 

• Commonly used for fixed-rate commercial mortgages, especially those with long terms (5, 7, or 10 years). 
• Treasuries reflect the risk-free rate and are influenced by inflation and Fed policy. 
• Typical pricing structure:
  10-Year Treasury + spread (e.g., 2.50% – 3.50%)
   
• Often used by: 
  • Life insurance companies 
  • CMBS lenders 
  • Agency lenders (for multifamily)

 3. Prime Rate 

• A benchmark rate set by banks, influenced by the Federal Funds Rate. 
• Used more often for small business loans, such as:
   
  • SBA 7(a) loans 
  • Lines of credit
     
• Example pricing:
  Prime + 1.50% to 3.00%

 4. Swap Rates  

• Used for interest rate swaps tied to commercial real estate loans. 
• Common for borrowers who want to fix a floating-rate loan through a swap agreement. 
• Swap rates are based on Treasury yields and market expectations.

 Factors That Influence the Spread 

 Lenders adjust the spread based on:

• Loan-to-Value (LTV)
   
• Debt-Service Coverage Ratio (DSCR)
   
• Property type and location
   
• Borrower credit and experience
   
• Loan size and term
   
• Market liquidity and risk appetite