Whether you’re building a high-rise or acquiring a strip mall, choosing the right commercial real estate (CRE) loan can make or break your investment. That’s why it’s important to understand the different types of CRE loans available.
What is a commercial real estate loan?
A commercial real estate loan is a mortgage used to purchase, develop, or refinance income-producing commercial properties, such as office buildings, retail centers, or warehouses. Unlike residential mortgages, these loans are typically issued to businesses, not individuals, and come with different qualification requirements and loan terms.
8 main types of commercial real estate loans
Here are the 8 most common types of commercial real estate loans:
1. Term loans
A term loan is the most common type of commercial real estate mortgage, best suited for stabilized properties that already have steady cash flow. The loan is defined by having a fixed repayment term, typically 5 to 20 years.
That said, most term loans are amortized over longer periods with a balloon payment at the end. For example, a 10-year term loan could be amortized over 30 years, meaning the monthly payments are structured so that it would take 30 years to pay off the loan. However, since the loan matures in 10 years, the remaining balance is due as a lump sum at the end. The interest rate can be fixed or variable (pegged to an industry benchmark like the prime rate or the SOFR).
2. Construction loans
Construction loans are short-term mortgages for financing ground-up developments or major renovations. Typically, the lender disburses loan funds according to an agreed-upon draw schedule tied to construction milestones.
Meanwhile, the borrower usually makes interest-only payments to keep their expenses low during the most capital-intensive period of the project. Then once the loan matures, they pay back the principal in one lump sum. This usually requires refinancing the construction loan with a permanent loan or selling the property.
3. Bridge loans
Bridge loans are short-term mortgages with loan terms of 6-36 months. They’re ideal for acquiring properties quickly while you arrange for more permanent financing. That way, you can secure properties before your competition beats you to it.
In some cases, bridge loans can also serve as construction loans, e.g., to finance a commercial property until construction is complete and permanent financing is in place.
4. CMBS (conduit) loans
A Commercial Mortgage-Backed Security (CMBS) or conduit loan is a mortgage that is pooled with other mortgages and turned into a security that can be sold to investors on the secondary market. As such, CMBS loans have strict loan requirements. They’re typically fixed-rate, non-recourse loans with 5-10-year terms.
Though less flexible than other commercial real estate loan types, CMBS loans often offer competitive interest rates since they’re less risky to lenders, who can sell the loans to investors and transfer the risk.
5. Hard money loans
Hard money loans are mortgages secured by an asset (typically the property being financed), which also serves as the main criterion by which loans are approved. For example, instead of focusing on the borrower’s creditworthiness, lenders focus on the current and after-repair value (ARV) of the collateralized asset. If the deal pencils out, they’re more likely to extend credit.
Hard money lenders are also private lenders, so they aren’t subject to the same regulations as traditional banks. This allows them to offer more flexible loan terms, faster closings, and lenient qualification criteria. However, these loans typically have short terms and high interest rates.
6. Mezzanine financing
Mezzanine financing is a hybrid of debt and equity financing used to fill funding gaps. For example, if you’re raising capital for a deal but have already maxed out your conventional commercial loan options, mezzanine financing can bridge the gap.
Mezzanine financing is typically unsecured debt that the lender can convert into an ownership stake if the borrower defaults. In the real estate capital stack, it sits below senior debt but above equity in repayment priority.
7. Commercial lines of credit
Though not strictly a CRE loan, commercial lines of credit are flexible, short-term loans that let businesses borrow up to a set limit as needed, rather than receiving a one-time lump sum. It works like a credit card: The business can draw funds, repay, and borrow again, paying interest only on the amount used.
In real estate, commercial lines of credit can be used to finance smaller renovations, cover operating costs, and handle unexpected expenses. To qualify, businesses must demonstrate strong business financials and creditworthiness.
8. Blanket loans
A blanket loan is one commercial mortgage that covers multiple properties, often used to finance entire portfolios or development projects. This lets borrowers pay closing costs just once, while lenders benefit by spreading their risk across different assets.
Keep in mind that if you default on one property, the lender may seize it (and potentially others) to recoup their losses. However, most blanket loans include a release clause, which lets you sell individual properties without triggering a refinance of the remaining ones. This gives you the flexibility to offload parts of your portfolio as needed.
Government-backed commercial real estate loan options
You should also explore government-backed commercial real estate loan options:
SBA 7(a) loans
SBA 7(a) loans are business loans up to $5 million partially guaranteed by the Small Business Administration (SBA). They can be used to acquire, refinance, or improve real estate and buildings (among other things). To qualify, you must be a small U.S. business as defined by the SBA, operate for profit, and demonstrate a reasonable ability to repay the loan.
| Pros of SBA 7(a) loans | Cons of SBA 7(a) loans |
| Down payments as low as 10% | Strict eligibility requirements |
| Loan terms up to 25 years | Lengthy approval process |
| Flexible loan uses | Personal guarantee required |
SBA 504 loans
SBA 504 loans are another type of loan partially guaranteed by the SBA. They’re long-term, fixed-rate loans of up to $5.5 million designed to promote business growth and job creation. Borrowers can use them to finance buildings, land, streets, utilities, parking lots, and more. To qualify, you must operate a for-profit U.S. company, have a tangible net worth of less than $20 million, and have an average net income of less than $6.5 million after federal taxes.
| Pros of SBA 504 loans | Cons of SBA 504 loans |
| Down payments as low as 10% | Limited loan uses |
| Loan terms up to 25 years | More complex loan structure that involves a Certified Development Company (CDC) |
| Competitive interest rates | Less flexible than SBA 7(a) loans |
USDA business and industry loans
USDA business and industry (B&I) loans are business loans partially guaranteed by the United States Department of Agriculture (USDA). They’re designed to help businesses grow and create jobs in rural areas. You can use them to buy and develop land, buildings, and infrastructure for commercial or industrial properties (among other things). To qualify, you must be a for-profit or non-profit U.S. business funding a project in a rural area with no more than 50,000 inhabitants.
| Pros of USDA (B&I) loans | Cons of USDA (B&I) loans |
| Loan sizes up to $25 million | Only available in rural areas |
| Up to 30-year loan terms | Strict eligibility requirements |
| Competitive interest rates | Lengthy approval process |
How to choose the right commercial real estate loan
With so many commercial real estate loan options available, it can be hard to know which one to choose. Here’s what to consider:
Matching loan type to asset class and investment goals
Your commercial loan should be suited to the asset type you want to finance and your investment goals. For example, term or CMBS loans are ideal for stabilized properties with steady cash flow. Meanwhile, bridge or hard money loans are best for value-add or adaptive reuse projects, and construction loans are best for development projects.
Lender requirements: credit, cash flow, LTV
Once you’ve settled on a CRE loan type, compare commercial lenders based on their qualification criteria. For example, many lenders require a minimum credit score or experience level. Some also require the property to meet a minimum debt-service coverage ratio (DSCR) or the loan not to exceed a maximum loan-to-value (LTV) ratio.
From there, you can compare lenders’ loan terms, including interest rates, fees, and amortization structures. Read the fine print to avoid any surprises later.
When to consider refinancing
Even if you already have a CRE loan, you may want to consider refinancing. For example, if commercial real estate interest rates drop, refinancing could help you lock in a lower rate. Similarly, if a commercial property has stabilized or appreciated, refinancing could lead to better loan terms. Or if you have a balloon payment due, refinancing can help you pay off the old loan.
Who are the lenders in CRE financing?
Here are the four main types of commercial real estate lenders:
- Traditional banks. These are large, established financial institutions that offer competitive interest rates and typically require strong credit and thorough documentation to qualify for a loan.
- Credit unions and regional lenders. These smaller, community-focused lenders often provide more personalized service and may have more flexible underwriting criteria than big banks.
- Private lenders and hard money lenders. These lenders offer faster commercial real estate financing with fewer loan requirements but usually charge higher interest rates and fees, often focusing on short-term or riskier loans.
- Non-bank financial institutions and fintech platforms. These modern lenders use technology to streamline the borrowing process and may offer innovative commercial loan products, often catering to borrowers who don’t qualify for traditional financing.
Risks and challenges in commercial real estate loans
Of course, getting a CRE loan has its risks and challenges. Consider the following:
| Risks and challenges | Description |
| Market volatility and valuation fluctuations | Changes in the real estate market can cause property values to drop unexpectedly, affecting LTV ratios and borrower equity. |
| Rising interest rates | Increasing rates can lead to higher borrowing costs, reducing cash flow and potentially making loan payments unaffordable. |
| Loan default and foreclosure risks | If you can’t meet your loan obligations, lenders may initiate foreclosure, resulting in financial loss and credit damage. |
| Refinance risk and maturity mismatches | You may struggle to refinance loans at maturity if market conditions have worsened or if property values have dropped, leading to potential funding gaps. |
Commercial real estate loan eligibility and application essentials
Before you take out a CRE loan, here’s what’s involved in applying and qualifying for one:
- Credit and financial requirements. Most lenders assess your business’s credit history, credit score, and overall financial health to determine your ability to repay the loan.
- Income and asset verification. You’ll need to provide proof of stable income and sufficient assets to support the loan and cover potential shortfalls.
- Property valuation and legal clearances. Since it serves as collateral, the commercial property must be appraised to confirm its value. Furthermore, the property must meet all legal requirements, such as title verification and zoning approvals.
- Required documentation. Applying for a commercial loan typically involves submitting financial statements, tax returns, business plans, and other detailed paperwork.
Conclusion
Ultimately, understanding different commercial real estate loan options helps you choose the best fit for your investment goals. With the right commercial loan and lender, you can confidently finance your next project and set yourself up for success in 2025 and beyond.While you’re at it, consider signing up for Agora’s comprehensive investment management platform to streamline fundraising, investor relations, and fund distributions.
