A commercial real estate (CRE) loan finances the purchase, refinance, or improvement of income-producing or owner-occupied business property — office, retail, industrial, or multifamily. Unlike a residential mortgage, underwriting centers on the property's income (debt-service coverage) and combined loan-to-value rather than primarily the borrower's personal income.
Commercial real estate loans cover a range of structures — a conventional bank commercial mortgage, an SBA 504 or SBA 7(a) loan for owner-occupied property, or a bridge/construction loan for a value-add or ground-up project — but they share a common underwriting frame that differs from residential lending: the property itself, not just the borrower's income, has to support the debt. The Federal Reserve's Senior Loan Officer Opinion Survey (https://www.federalreserve.gov/releases/sloos/) tracks how commercial banks set CRE lending standards and coverage-covenant requirements each quarter. Two ratios drive approval and pricing. DSCR (net operating income ÷ annual debt service) tests whether the property's cash flow covers the loan payment — most conventional commercial lenders require a minimum of 1.20-1.25, while SBA 7(a) typically accepts 1.15-1.20. Loan-to-value (loan amount ÷ appraised value) tests the equity cushion behind the loan — conventional CRE commonly runs 65-80% LTV. For income-producing property, lenders also read the cap rate (net operating income ÷ property value) alongside DSCR to judge whether the purchase price is supported by the property's actual income. SBA 504 is the purpose-built government-backed structure for owner-occupied commercial real estate: a three-party deal where the borrower puts in 10% down, a conventional bank funds a 50% first mortgage, and a Certified Development Company (CDC) issues a 40% debenture at a fixed rate, giving a long-term, fixed-rate real estate loan with a lower down payment than a typical conventional purchase. It requires the business to occupy at least 51% of the property. SBA 7(a) can also finance real estate as one piece of a broader use-of-funds request (real estate plus working capital or equipment in a single loan) rather than a real-estate-only purchase. For investment (non-owner-occupied) CRE, the lease structure behind the property's income directly affects how a lender reads its cash flow. A NNN lease or ground lease shifts most or all operating expenses to the tenant, producing a cleaner, more predictable NOI than a modified gross lease where the landlord absorbs a negotiated share of taxes, insurance, and maintenance. Lenders financing an acquisition of leased property typically require an estoppel certificate from each tenant (confirming the lease terms and that no default exists) and, when a loan is placed on already-leased property, an SNDA agreement between the tenant, landlord, and lender. CAM reconciliation processes matter too — a property with a history of large CAM true-up disputes can signal expense-recovery risk a lender will factor into its NOI estimate. Construction and value-add CRE loans often carry an interest-only payment period during lease-up or stabilization before converting to a fully amortizing payment.
A commercial real estate loan is underwritten primarily against the property's own income and debt-service coverage, not the borrower's personal income and debt-to-income ratio the way a residential mortgage is. Commercial loans also typically carry shorter fixed-rate periods, balloon structures, or amortization schedules longer than the loan term itself — features rare in standard residential mortgages.
Yes. SBA 504 is purpose-built for owner-occupied commercial real estate — a 10% borrower down payment, 50% bank first mortgage, and 40% CDC debenture at a fixed rate — and requires the business to occupy at least 51% of the property. SBA 7(a) can also finance real estate as part of a broader loan that includes working capital or equipment.
Most conventional commercial lenders require a minimum DSCR of 1.20-1.25, meaning the property's net operating income needs to exceed the annual debt service by at least 20-25%. SBA 7(a) loans typically accept a lower minimum, around 1.15-1.20.
Conventional commercial real estate loans commonly run 65-80% LTV. SBA 504 can reach a higher combined LTV on owner-occupied property because the bank's first mortgage and the CDC's second-position debenture are stacked together, letting the borrower put in as little as 10% equity.
Yes. A triple net or ground lease shifts most operating expenses to the tenant, producing a more predictable net operating income for the lender to underwrite. A gross or modified gross lease leaves the landlord responsible for some or all operating costs, which lenders factor into their NOI estimate and can make the deal harder to qualify at the same purchase price.