How Do Commercial Real Estate Loans Work?

Last updated: November 5, 2026

Commercial real estate loans finance income-producing property such as apartments, offices, retail, and industrial buildings. Lenders underwrite mainly the property's income and value using measures like DSCR, LTV, and debt yield, plus the sponsor's experience and finances. Loans often have shorter terms than home mortgages, with a balloon payment due at maturity.

How are commercial loans different from home mortgages?

Home mortgages focus on the borrower's income and credit and often run 30 years fully amortizing. Commercial loans focus on the property's income and the sponsor's strength, are usually made to an entity such as an LLC, and commonly have terms of five, seven, or ten years with a longer amortization schedule. The remaining balance is due at maturity, which means owners typically refinance or sell.

Who makes commercial real estate loans?

• Banks and credit unions, often for local and relationship-based deals

• Life insurance companies, often for lower-leverage loans on stable assets

• Agency lenders for multifamily, through programs backed by Fannie Mae and Freddie Mac

• CMBS lenders, who pool loans into securities

• Debt funds and private lenders, for bridge and transitional loans

• SBA programs for owner-occupied business property

How do lenders underwrite a commercial loan?

Lenders estimate the property's NOI, then apply tests such as minimum DSCR, maximum LTV, and sometimes minimum debt yield. The loan is sized to the most restrictive test. They also review the rent roll, leases, operating history, property condition, environmental reports, and the sponsor's net worth, liquidity, and track record.

Common loan structures

• Fixed or floating interest rates

• Amortization schedules longer than the loan term, creating a balloon

• Interest-only periods, especially on bridge loans

• Prepayment terms such as yield maintenance, defeasance, or step-down penalties

• Reserves for taxes, insurance, and capital improvements

Recourse versus non-recourse

A recourse loan lets the lender pursue the borrower or guarantor personally if the property does not cover the debt. A non-recourse loan limits recovery mainly to the property, though most include carve-outs for issues like fraud or environmental problems. Which one you get depends on the lender type, leverage, and deal.

The process from term sheet to closing

A borrower submits property and sponsor information. The lender issues a term sheet or letter of intent. After acceptance, third-party reports are ordered, such as an appraisal, environmental assessment, and property condition report. Underwriting and legal documents follow, and the loan closes once conditions are satisfied. Timelines vary by lender and deal complexity.

What borrowers should prepare

• Trailing twelve-month operating statement and prior year financials

• Current rent roll and copies of major leases

• Purchase contract or existing loan details

• Sponsor resume showing real estate experience

• Personal financial statement and schedule of real estate owned

• Business plan for any renovation or lease-up

What happens at maturity?

Since many commercial loans have balloon payments, owners plan well ahead of maturity. Options include refinancing, selling, or negotiating an extension. Refinancing depends on the property's income, value, and interest rates at that time, which is why maturity risk is a key part of commercial real estate planning.

Quick FAQ

Can individuals get commercial loans? Yes, though loans are usually made to an entity with personal guarantees as required.

Is multifamily financed with commercial loans? Properties with five or more units generally are. See briefcase.email/guides/is-multifamily-considered-commercial.

More on coverage: briefcase.email/guides/dscr-loan-for-commercial-property and briefcase.email/guides/dscr-loans.

Important disclaimer

Educational note: This page is general information, not investment, lending, tax, or legal advice. Briefcase is a media and marketing company, not a lender, broker, or advisor. Confirm terms and figures with qualified professionals before making decisions.

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