What Is a Commercial Real Estate Loan?

How do commercial real estate loans work?

Commercial real estate loans are mortgages that are secured by physical property, including office buildings, restaurants, shopping centers or other commercial buildings. They are used to purchase or improve commercial property for the purpose of producing income.

Michael Morris, a commercial real estate agent and owner of Pursuit of Passive Income, a personal finance website, shared the most common ways these loans are used:

• Property acquisition: “Commercial real estate loans are commonly used to purchase properties such as office buildings, retail spaces, industrial warehouses, hotels, apartment complexes and other income-generating properties.”
• Development and construction: “Developers and investors often rely on commercial real estate loans to finance the construction or renovation of commercial properties. These loans can cover the costs of land acquisition, construction materials, labor, permits and other expenses associated with the development process.”
• Expansion or upgrades: “Existing businesses may seek commercial real estate loans to expand their operations by acquiring additional space, renovating existing properties or upgrading facilities to accommodate growth.”

What property types are eligible for commercial real estate loans?

Commercial real estate loans apply to properties used for business or investment purposes, not personal living space. Lenders focus on a property’s income potential, cash flow stability and business use when deciding whether it qualifies.

Common property types eligible for commercial financing include:

• Office buildings: These properties include single offices, multitenant buildings and medical offices. Lenders look at lease terms, tenant mix and market demand for office space.
• Retail properties: Shopping centers, stand-alone stores and mixed-use retail spaces typically qualify. Lenders evaluate foot traffic, tenant performance and the strength of surrounding businesses.
• Industrial properties: Warehouses, manufacturing facilities and distribution centers often meet eligibility requirements. Underwriting usually weighs location, logistical advantages and long-term tenant needs.
• Multifamily properties with more than four units: Apartment buildings and larger housing complexes qualify as commercial. Lenders review occupancy rates, rent rolls and local rental demand. (Properties with up to four units fall under residential lending rules.)
• Special-use properties: Hotels, self-storage facilities, restaurants, gas stations and other niche buildings can qualify, though underwriting is often stricter. Lenders typically consider operational risk, specialized equipment and market stability.

Types of commercial real estate loans

There are several types of commercial real estate loans to choose from, depending on your needs and business qualifications.

Here are the most popular commercial real estate loans and what they are used for.

Conventional loans

Many private lenders and banks offer conventional commercial loans for purchases of business property.

“These loans are similar to residential mortgages but specifically designed for commercial properties,” said Morris. “Borrowers receive a lump sum of money that is repaid over a fixed period, typically five to 25 years, through monthly installments. The loan is typically secured by the property being financed.”

SBA 7(a) loans

The Small Business Administration (SBA) offers commercial real estate loans, with the most popular being the 7(a) loan. Businesses can borrow up to $5 million for real estate purchases, but loans can also be used for the purchase of equipment, machinery, furniture, fixtures, supplies or materials, short- and long-term working capital and other use cases.

SBA 7(a) loans are known to have some of the lowest interest rates and favorable repayment terms, with terms up to 25 years in length. They’re often chosen for their flexibility, since funds can support a wide range of business needs beyond real estate.

Eligible borrowers must meet SBA size standards, operate as a for-profit business in the U.S. and show they can repay the loan.

SBA 504 loans

SBA 504 loans also support commercial real estate purchases but work differently. A 504 loan is structured as a partnership between a traditional lender and a Certified Development Company (CDC), allowing borrowers to make a relatively low down payment.

These loans are intended for owner-occupied real estate or long-term fixed assets. To qualify, the business must use at least 51% of the property for its own operations and meet SBA size and job-creation or public-policy goals.

Both SBA loan types offer long-term, affordable financing, but 7(a) loans focus on flexibility while 504 loans are built specifically for real estate and major fixed-asset projects.

» READ MORE: What are common small business loan terms?

Commercial bridge loans

Bridge loans are designed to help “bridge the gap” in financing to help businesses acquire a property before they have financing in place.

“Bridge loans provide short-term financing to bridge a gap between the purchase of a new property and the sale of an existing property or the arrival of permanent financing,” said Morris. “These loans are useful for borrowers who need immediate funding or want to seize investment opportunities quickly. Bridge loans often have higher interest rates and shorter terms.”

Constructions loans

Construction loans are typically used by businesses to improve a property or fund the construction of a new building.

“The loan disbursements are typically made in stages, known as draws, based on the completion of specific project milestones,” said Morris. “Once the construction is complete, the loan may be converted into a traditional commercial mortgage or refinanced.”

Mezzanine loans

Mezzanine loans are similar to a second mortgage on a home.

“Mezzanine loans are a form of financing that fills the gap between the borrower's equity and the senior debt (the primary loan),” said Morris. “These loans are often used to fund larger projects or provide additional capital. Mezzanine loans are secured by the equity in the property and can have higher interest rates and additional fees.”

Permanent loans

Permanent loans, also called take-out loans, are long-term mortgages used to replace short-term construction or bridge financing once a property is built, stabilized and producing income.

Lenders underwrite these loans based on the property’s occupancy, cash flow and long-term performance. Borrowers choose permanent financing to lock in predictable payments, lower interest rates and longer repayment terms after completing a project.

These loans provide stability and allow investors or business owners to transition from risky, high-cost construction debt to more affordable, long-term financing.

Hard money loans

Hard money loans are short-term, asset-based loans secured mainly by the value of the property rather than the borrower’s credit or financials. They’re typically funded by private lenders and used when a borrower needs fast approval or can’t meet traditional underwriting standards.

Pros include quick funding and flexible requirements, but the trade-offs are higher interest rates, larger fees and short repayment windows. Hard money loans can work for time-sensitive deals or distressed properties, but they’re generally considered a costly, temporary financing option until longer-term financing becomes available.

Commercial real estate loan interest rates and factors

Commercial real estate loan interest rates are usually higher than residential mortgage rates because business properties carry more risk. Most commercial rates fall between 6% and 12%, depending on the loan type, lender requirements and the property’s financial performance.

SBA and bank loans tend to offer the lowest rates, while bridge and hard money loans fall on the higher end.

Typical loan terms

Commercial loans often have shorter terms than residential mortgages. Instead of 15 or 30 years, borrowers commonly see:

• Five-, seven- or 10-year loan terms
• 20- to 25-year amortization schedules

Amortization vs. loan term

Many commercial loans amortize over a longer period than the actual loan term. Monthly payments are based on a 20- or 25-year schedule, which helps keep payments manageable, but the loan itself may mature much sooner.

Balloon payments

Because the loan doesn’t fully amortize, many commercial loans end with a balloon payment, or a large lump sum due at the end of the term. Borrowers typically plan to:

• Refinance
• Sell the property
• Move into permanent financing

What affects your rate

Lenders weigh several factors when setting rates and terms, including:

• Property income and cash flow
• Current occupancy and tenant stability
• Market conditions
• Borrower credit and financial strength
• Down payment size and loan-to-value ratio

Commercial vs. residential real estate loans

Commercial real estate loans operate differently from residential mortgages because lenders evaluate the property’s income and business use, not just the borrower’s personal finances. The table below highlights the core differences.

How to qualify for a commercial real estate loan

To qualify for a commercial real estate loan, you need to be well suited to carry the debt and have your business finances in order. The application process can be lengthy and you’ll need to bring a lot of cash to the table, as most commercial lenders require a large down payment.

Hire a good supporting team to help you make the best decision for your business, which may include a licensed tax professional and business lawyer.

“Qualifying for a commercial real estate loan typically involves a thorough evaluation of both the property being financed and the borrower's financial capacity,” said Morris.

There are a few key criteria:

• Creditworthiness: Your personal and business credit must be in good standing. “A higher credit score demonstrates responsible financial management and increases the likelihood of approval,” said Morris.
• Financial stability: Lenders “analyze factors such as business revenues, cash flow, profitability and debt-to-income ratio,” said Morris. This includes evaluating your debt service coverage ratio (DSCR), which is your business’s available cash flow to cover debt. To calculate, divide your net operating income by your debt payments. A high ratio indicates a strong ability to pay back debts and will help you qualify.
• Loan-to-value ratio: Most commercial real estate loans require a higher down payment than a residential mortgage. “Having a substantial down payment, typically ranging from 15% to 35% of the property's value, shows your commitment and reduces the lender's risk,” said Morris. This usually results in a loan-to-value ratio (LTV) of 65% to 85%.
• Documentation: “Prepare all necessary documents, including financial statements, tax returns, bank statements, lease agreements (if applicable) and legal documents related to the property,” said Morris. “Providing accurate and organized documentation helps streamline the loan application process and instills confidence in lenders.” The documentation required varies by lender, so make sure to get a checklist of documents needed to complete your loan application.

Lenders may also dive deeper into your business financials and the condition and type of property you are looking to purchase. All of these details can factor into the loan amount and interest rate you qualify for.

» MORE: Personal loan for business: what you should know

Pros and cons of commercial real estate loans

Commercial real estate loans can allow businesses to expand their footprint and purchase expensive commercial buildings with favorable loan terms. But they often require a large down payment, and interest rates can be higher than a standard mortgage.