What are CRE Loans?

Loans

Published June 20, 2024

Expert verified

Written by Arthur Williams

Whether you’re a developer starting a new subdivision or an office building owner seeking refinancing, a commercial real estate loan may be essential. Unlike residential real estate, which involves homes and apartments, commercial real estate encompasses properties used for business purposes, such as hotels, office parks, or shopping centers. Borrowers for these loans are typically business owners, including small business owners, developers, or investors. Commercial real estate loans differ from residential mortgages in their underwriting, structure, interest rates, and fees, and they come in several varieties.

What are CRE loans?

Commercial real estate loans, often referred to as CRE loans, are used to buy, construct, rehabilitate, or refinance properties like office buildings, multi-unit rental properties, medical facilities, warehouses, hotels, or vacant land intended for development. These loans can also finance the purchase and development of land for residential construction.

Unlike residential mortgages, which are based on the value of a primary residence, commercial loans are underwritten based on the property’s income potential—such as rental income from tenants—and associated expenses.

Chris Moreno, CEO of GoKapital in Miami, explains, “Ideal candidates for a commercial real estate loan include property owners looking to refinance to lower their interest rates or access capital through a cash-out refinance. Additionally, business owners who lease their space might benefit from financing to purchase their property instead.”

Commercial real estate loan types

Commercial real estate (CRE) loans come in several types, each designed to meet different financing needs. Here’s an overview of common CRE loan options:

Loan type	What to know
Conventional commercial real estate loan	Offered by banks, credit unions, and other lenders, with terms ranging from 5 to 30 years. Interest rates can be as low as 3%, and down payments typically range from 10% to 20%.
Commercial bridge loan	Provides temporary financing until longer-term options are secured. Terms usually last 6 months to 3 years, with down payments often between 10% and 20%.
SBA 7(a) loan	Available through lenders partnering with the Small Business Administration (SBA), offering up to $5 million over a maximum term of 25 years. Down payments usually range from 10% to 20%.
SBA 504 loan	Includes two components: a Certified Development Company (CDC) loan for up to 40% of the total amount and a bank loan for up to 50%. The maximum combined loan is $5.5 million, with terms from 10 to 25 years and down payments as low as 10%.
CMBS or conduit loan	Part of a pool of loans bundled into commercial mortgage-backed securities (CMBS) and sold on the secondary market. Terms typically span 5 to 10 years with a 30-year amortization, requiring down payments of 25% to 30%.
Hard money loan	Similar to a bridge loan but usually provided by private lenders. It’s often used for short-term financing needs.
USDA CRE loan	Aimed at supporting commercial property development in rural areas, offered by approved lenders in partnership with the USDA. Terms can extend up to 30 years, with down payments often around 10%.

Commercial real estate loans are categorized by asset types, which can include apartment buildings, office spaces, medical facilities, and industrial properties, as well as multi-unit versus single-tenant assets.

“Each type is assessed differently by lenders,” explains Barry Saywitz, president of the Saywitz Company, a commercial real estate brokerage in Newport Beach, California. “The value of the asset is determined through an appraisal process, which considers factors such as the quality of the tenant, their creditworthiness, payment history, rental rates, and the condition of the building along with its associated expenses.”

CRE loans for investment properties

Commercial real estate loans are well-suited for financing a range of investment properties, but it’s crucial to grasp the underlying rules.

“The investment property must be capable of generating income, and the strength of the sponsor or owner will be a key factor in evaluating the loan,” explains Rohit Mathur, CEO of the commercial lending company Bridge in New York City and Charlotte.

As with all loans, lenders will assess the likelihood of repayment for investment properties, says Adam Kenney, chief product officer at Numerated, a Boston-based commercial lending platform.

“What sets a CRE loan apart is that the property itself is often evaluated as much, if not more, than the business holding the loan,” Kenney notes. “The property’s ability to consistently produce positive cash flow is typically the primary factor in determining the loan’s repayment potential.”

Interest rates for commercial loans vary based on the property type and expected income. Buyers may need to provide a larger down payment compared to residential homebuyers, as commercial lenders generally require lower loan-to-value ratios. Like residential loans, commercial loan rates fluctuate based on various factors and market conditions.

Commercial loan vs. residential loan

Commercial loan

Purpose: Used for business and development properties.
Underwriting: Relies on the financial plan of the business.
Term: Generally shorter payoff periods.
Interest Rates: May have a fixed rate for a period (e.g., five years) with a longer term (e.g., 15 years) and amortization over a different period (e.g., 20 years). For instance, the interest rate may adjust every five years, and a balloon payment could be required at the end of the term, with the option to repay or renew the loan, according to James Sandagato, senior vice president at Cornerstone Bank.

Residential loan

Purpose: Used for purchasing or refinancing personal residences.
Underwriting: Based on the personal finances of the borrower.
Term: Typically longer payoff periods.

Commercial loans, like residential mortgages, can be used to purchase or refinance property. However, commercial loans often come with shorter terms compared to residential mortgages. For example, a commercial loan might have a fixed rate for five years with a 15-year term and amortization over 20 years. “The interest rate would adjust every five years, and the balance would be due at the end of the 15-year term, known as a balloon note,” explains Sandagato. “The balance could be repaid at the end of the term or the loan can be renewed based on new rates, terms, and conditions.”

Unlike residential loans, which focus on the borrower’s income and creditworthiness, commercial loan lenders primarily evaluate the property’s potential income to determine repayment capacity. “A commercial lender looks at the debt service coverage ratio from the income generated by the property,” says Suzanne Hollander, a real estate attorney and professor at Florida International University.

Riley Manke, a director at Walker & Dunlop, notes that residential loans are heavily influenced by the borrower’s credit score and debt-to-income ratio, whereas commercial real estate (CRE) underwriting assesses the borrower’s net worth, liquidity, and experience with the property type.

Additionally, commercial real estate loans typically involve higher fees, closing costs, and down payments compared to residential mortgages, with down payments ranging from 20 to 45 percent.

The appraisal process for commercial properties is also more complex, involving an evaluation of potential rental income, comparable sales, and replacement costs, which generally takes longer than the residential appraisal process that focuses mainly on comparable sales.

Finally, interest rates for commercial mortgages may be higher if obtained through private lenders, especially if a quick closing or less-than-perfect credit is involved, says Moreno.

How to get a commercial real estate loan

The process of seeking and applying for financing for a commercial property involves several crucial steps:

Assess the Financials: Carefully review both the commercial property’s financials and your own. “Lenders will evaluate not just your personal credit history and financials but also thoroughly examine the asset itself,” says Moreno.
Determine and Shop for the Right Loan: Identify the type of commercial loan you need and compare options. If your credit profile and financials are strong, you may find favorable terms from traditional banks. “Typically, borrowers source lenders directly by approaching individual banks and exploring their options,” adds Mathur.
Complete the Loan Application: Gather and submit required documentation, which includes personal and business tax returns, a personal financial statement, a personal balance sheet, and historical income and expenses for the property. “This may also involve the property seller’s Schedule E from their federal tax return or a financial statement prepared by the seller,” says Sandagato. Be prepared to provide a current tenant roster, details of the space they occupy, tenancy start dates, lease details, and lease agreements.
Undergo Loan Processing and Underwriting: The lender will use the information you’ve provided to evaluate the property’s ability to service the debt. “Lenders typically look for a debt service coverage ratio of 1.2 to 1, meaning that for every $1 in mortgage debt, there should be $1.20 in cash flow to support it,” explains Sandagato.
Close on the Loan: The closing process for a commercial loan can take longer than for a residential mortgage. “Keep in mind that lenders view commercial property loans as riskier than residential ones, so thorough due diligence is required,” says Hollander.