Commercial Real Estate Loans: A Complete Guide

You found the perfect commercial property. Now you have to finance it.

If you treat a commercial loan like a residential mortgage, you will fail. Commercial lenders do not care about your W-2; they care about the asset's net operating income (NOI). Pick the wrong loan type, and you will get crushed by prepayment penalties or short loan proceeds.

Here are the hard facts on loan types and the math lenders use to size them.

Types of Commercial Real Estate Loans

The financing market offers different tools for different jobs. Match the loan to your business plan.

1. CMBS Loans (Conduit Loans)

Commercial Mortgage-Backed Securities (CMBS) loans offer non-recourse debt and fixed rates. They are sold to bond investors, so the underwriting rules are rigid. CMBS lenders rely aggressively on debt yield to measure risk. Read our CMBS vs. Bank Financing breakdown to learn more.

2. Bank Loans

Local banks keep loans on their own balance sheets. This means you can negotiate terms. They offer step-down prepayment penalties instead of painful defeasance. The catch is they often require personal recourse.

3. Bridge Loans

Bridge loans are short-term capital for transitional properties. If you are buying an empty building to lease up, a bridge loan covers the purchase and the renovation costs. Once stabilized, you refinance into a permanent loan.

4. Agency Loans (Fannie Mae & Freddie Mac)

For multifamily properties, Agency debt is the undisputed champion. It offers the best interest rates, non-recourse terms, and long amortization. It is exclusively for residential income properties with five or more units.

5. Life Company Loans

Life insurance companies offer the absolute lowest rates, but they are incredibly conservative. They only finance flawless assets in top markets with low debt amounts.

6. Construction Loans

These fund ground-up development. They are short-term and interest-only. The lender distributes the money in draws as you hit construction milestones.

How Lenders Size Commercial Loans

Asking for $10 million does not mean you get $10 million. Lenders run three brutal mathematical tests. The test that produces the lowest number is your maximum loan.

Constraint 1: Loan-to-Value (LTV)

LTV compares the loan to the property value. If the property is worth $10,000,000 and the max LTV is 70%, your loan caps at $7,000,000.

Constraint 2: Debt Service Coverage Ratio (DSCR)

DSCR measures if your Net Operating Income (NOI) covers the loan payments. A 1.25x DSCR means you have $1.25 of income for every $1.00 of debt service.

Constraint 3: Debt Yield

Debt Yield is NOI divided by the loan amount. It completely ignores interest rates. It tells the lender what return they get if they foreclose tomorrow.

Choosing the Right Loan Type

Your business plan dictates your loan.

• Stabilized assets: Use Life Company, Agency, or CMBS loans for fixed, long-term debt.
• Value-add assets: Use bridge loans to fund the renovations.
• Flexibility needs: Use a local bank if you want to negotiate terms and prepay early.

The math is simple, but the stakes are high. Calculate your Debt Yield right now to see where your deal actually stands.