Commercial real estate loans: Smart strategies for 2025

In 2025, many commercial real estate investors face a high-stakes refinancing cycle. Roughly $544 billion in loans mature this year. Most of these loans originated before interest rates climbed, which means borrowers must now refinance at higher costs and still protect profitability.

While the lending environment remains tight, average commercial loan costs have dropped by 0.3%, and apartment building loan rates are at their lowest in over three years. This change provides opportunities for lower-cost financing.

Banks continue to pull back, which gives private debt funds a larger role in the market. These funds made up 24.3% of all capital raised in 2024 and provide short-term loans to keep projects moving.

This article shows how borrowers can secure financing and manage risk in line with their investment strategies in the current market.

Understanding commercial real estate loans

Commercial real estate financing provides capital to buy, build or improve property used for business. This includes asset categories like office, industrial, retail, hotels and multifamily properties. 

These loans help investors use leverage to expand their portfolios, increase returns, or gain long-term control over critical business locations.

Commercial vs residential real estate loans

The differences between commercial property financing and residential financing include:

 

CategoryResidential loansCommercial loans
Number of unitsUp to 4 rental units.5 or more rental units.
QualificationsBased on borrower income and credit score.Based on the borrower profile and property income potential. 
DownpaymentLower downpayment required.Higher downpayment of 20% or more.
Loan structure30-year fixed with full payoff at the end of the term. 5 to 10-year terms with a balloon payment at the end of the term.
Interest ratesLower rates.Higher rates often with variable terms.

 

  • Number of units: Properties with five or more rental units fall under commercial mortgage funding.
  • Qualifications: Banks approve residential loans based on borrower income and credit score, while commercial real estate financing also considers the property’s income-generating potential.
  • Downpayment: Commercial real estate loans require a higher downpayment of 20% or more.
  • Loan structure: Residential loans are usually 30-year fixed, and the borrower pays off the entire loan at the end of the term. Commercial loans have shorter terms of 5-10 years with a balloon payment at the end of the term.
  • Interest rates: Residential loans have lower fixed interest rates. Commercial loan rates are higher and commonly variable, tied to market indexes.

Types of commercial real estate loans

There are several loan types based on property, occupancy, and timeline.

  • Owner-occupied property loans: Mixed-use properties can qualify for this type of loan if the business occupies at least 51% of the property’s usable space.
  • Income-generating property loans: These types of loans apply to non-owner-occupied properties like office buildings, self-storage facilities, or industrial space.
  • Construction and development loans: Banks provide these financing options for building or renovating various property types.
  • Bridge loans and short-term options: For immediate scenarios where traditional financing would take too long, these loans provide funding until the investor can arrange for longer-term loans.
  • Mezzanine financing: If there’s a gap between the bank loan amount and available investor capital, mezzanine loans provide an additional funding option.
  • SBA loans (504 & 7a): The Small Business Administration (SBA) provides these loans for properties that house the borrower’s business.
  • Real estate debt funds: This capital source pools private investor funds and acts as a lender for real estate projects.
  • Commercial equity lines of credit (CELOC): Investors can also borrow against the equity in a property. The line of credit allows them to draw money up to a certain amount, repay it, and borrow again as needed.

Benefits of a commercial real estate loan

Commercial real estate loans give investors leverage to buy larger property types or expand their business. Using these funding sources can help preserve capital and provide the ability to build equity over time.

Applying for a CRE Loan

Key steps to apply for a commercial real estate loan include:

Checking eligibility and loan fit

The first step is to see if the property is a good fit for commercial real estate financing. This involves evaluating the property type, potential income, available capital, and loan options. Depending on your business plan and goals, there might be several different ways to approach funding. 

Gathering and organizing documentation

Gather documentation for the lender’s evaluation process. This includes personal and business tax returns, pro-formas or P&L statements for the property, a personal financial statement, and details about the property. You’ll also need business entity documents, information on real estate you already own, and details about any existing debt.

Submission, negotiation, and closing process

You’ll submit all of the information to the lender, who then reviews the opportunity to decide on approval and loan details. This includes evaluating the property’s income potential and your ability to make ongoing payments. If approved, the lender will issue a term sheet with the proposed loan terms.

You may have the opportunity to negotiate terms like the actual interest rate, closing costs, monthly payments, and down payment. Once both parties have reached an agreement, the loan moves into the closing process.

How commercial real estate loans work

Here’s how these loans function:

Loan terms and amortization

Most commercial real estate loans have terms of 5 to 10 years. This includes bank loans, CMBS loans, and agency loans from Fannie Mae and Freddie Mac. These loans have 20 to 30-year amortization schedules, which keep monthly payments lower but require a full payoff or refinancing at the end of the term.

There are some exceptions. Short-term bridge loans can range from 6 to 36 months. HUD multifamily loans offer fully amortizing terms of up to 35 years for acquisitions and refinances. For new construction or substantial rehabilitation, terms can go up to 40 years.

Down payments and loan-to-value ratios

Lenders reduce their risk by requiring down payments between 20% and 30% of the property’s purchase price. This helps keep loan-to-values in the 65% to 80% range. Factors that impact this range include property type, location, borrower profile, and the lender’s existing portfolio of similar investments.

Exceptions include government-sponsored HUD and SBA loans, which may allow for lower ratios.

Interest rate structures

Interest rates can be fixed or variable. If you choose a variable-rate loan, the rate gets periodically adjusted based on a benchmark index like SOFR, the Prime Rate, or the Federal Funds Rate plus a margin.

Borrowers can find the best rates from multifamily agency loans, insurance company loans, and SBA 504 loans.

Prepayment penalties and balloon payments

Commercial mortgages can have prepayment penalties, which borrowers can negotiate upfront. Penalties may range from 1% to 5% of the outstanding balance. Lenders may structure these as declining penalties, yield maintenance, or defeasance.

Short-term bridge or hard money loans don’t usually have a prepayment penalty after the first few months.

Eligibility, documentation, and requirements for commercial real estate loans

Loan approval depends on financial and property-related information:

RequirementDetails
Credit and historyCredit score of 650+ and relevant experience.
Appraisal and financialsProperty appraisal, income statements, and tax returns.
Business plan and revenueRevenue projections and DSCR coverage.
Collateral and documentationProperty as collateral, guarantees, and legal documents.

 

  • Minimum credit and business history: To receive credit approval for commercial loans, lenders look for a personal score of 650 or higher. They’ll also evaluate business operating history and experience across relevant asset classes.
  • Property appraisal and financials: Lenders order an appraisal to determine the commercial property’s market value. They’ll also review income statements to understand income and operating expenses and tax returns to get an idea of financial performance.
  • Business plan and revenue requirements: Any commercial property purchase requires a detailed business plan explaining revenue projections and the use of funds. This helps determine if the property can generate enough income to meet debt service coverage ratios (DSCR).
  • Collateral, guarantees, and legal documentation: The property serves as collateral, and lenders may require personal guarantees in the event of loan default. Lenders also collect legal documents like entity structure, leases, and insurance.

Sources for commercial real estate loans

Funding options can come from a range of traditional and nontraditional sources.

  • Traditional banks and credit unions: These capital sources provide competitive rates and terms, but have higher qualification requirements.
  • Online and alternative lenders: Funding through alternative lenders may offer more flexible approval criteria, but with higher rates.
  • SBA and government-backed programs: Government programs like SBA, Fannie Mae, Freddie Mac, and HUD loans have better terms and rates if your property qualifies.
  • Real estate lending platforms: These platforms make it easy to evaluate solutions from several different funding sources.

How to choose the right CRE loan

The best option depends on property details and financial goals.

Matching loan type to property purpose

One of the first steps is to match the right loan to your specific business needs. For example, if you’re buying a commercial property tied to a business, an SBA loan may offer better terms and lower fees. Or, if you need temporary funding to move quickly with a plan to refinance in the future, a shorter-term loan might make more sense.

To get a sense of your options, meet with several lenders and talk with industry peers.

Evaluating repayment terms and cash flow

Understand the key loan terms up front. How long is the loan? Can you pay it off early if a better financing option comes along? What will the balloon payment look like at the end? And how will all of this impact your cash flow?

As we’ve seen since 2022, the market can shift quickly, with rising interest rates or tighter lending conditions. Plan for worst-case scenarios so you don’t get stuck with loans that lead to unsustainable payments or refinancing issues later on.

Understanding risks and guarantees

There are risks with commercial real estate loans, especially if the borrower needs to personally guarantee the loan. In those cases, you pledge your own assets to repay the loan if your business or property entity cannot.

Some loans are nonrecourse, where the lender can only claim the property and not pursue personal assets. The guarantees and risks depend on the property type, borrower track record, and loan structure.

Comparing multiple lender offers

Consider multiple options and look at the interest rate, loan term, fees, and pre-payment details. Evaluate how much you can borrow, the required down payment, and any other loan details to make the best choice for your project.

Common challenges in CRE loans

Knowing risks can help reduce costly scenarios like:

  • Market volatility and interest rate changes: Borrowers face higher costs and refinancing risks with higher interest rates. The current amount of maturing loans can make it difficult to find favorable financing options.
  • Underwriting complexity: Lenders have higher standards than in the past, which require more financial analysis and detailed documentation.
  • Project delays and cost overruns: Projects involving construction or renovation may encounter delays and unexpected costs. These delays can disrupt loan schedules and the overall project.

Mistakes to avoid in CRE financing

Avoiding common errors can protect both the deal and long-term returns.

  • Ignoring loan covenants: Not adhering to loan covenants can result in loan defaults even if you make payments on time.
  • Overleveraging your property: Taking on too much debt can make it difficult to support ongoing payments and increase the risk of default.
  • Not stress testing for rate hikes: If you don’t test financial models at various interest rates, you increase your risk of default when payments rise.
  • Underestimating costs: Not fully understanding operating expenses and other costs can impact cash flow and your ability to repay the loan.
  • Poor documentation: Lack of records and information can delay approval or cause a denial of the loan.
  • Lacking an exit strategy: If you don’t have plans to sell, refinance, or pay off the loan, you’re subject to risk at the end of the loan term.

The role of technology in CRE loans

The commercial loan financing process is evolving with new tech-driven solutions.

  • Automating loan and asset performance: Technology solutions can automate repetitive data entry, document review, and risk assessment tasks. This can help financial institutions process loans faster and more effectively manage assets.
  • Real-time metrics and investor reporting: Firms that raise capital for debt funds can provide real-time reporting and analytics on investment performance. This keeps funding partners updated on status and allows for better decision-making.
  • Digital loan origination and data rooms: Technology platforms also speed up the loan application and approval process. Data rooms provide a secure way to centralize documentation, which helps reduce manual paperwork and fast-track closing.

Conclusion

Financing impacts every stage of a deal, from acquisition to exit. Evaluating available options and assessing terms can help you choose the right capital source for your specific needs.

Support your investors with Agora’s technology platform to raise capital, keep stakeholders informed, and build trust as you scale your business.