A commercial real estate loan is a mortgage on income property that a lender sizes from the building's income, writes for a term shorter than its amortization, and collects in full when the term ends. Commercial real estate lending is the business of making those loans to investors, developers and companies that own their premises.
Three features set the loan apart from a home mortgage:
- The property repays the loan. The lender underwrites the building's income first and the borrower second.
- The term is shorter than the amortization. The payments follow a long schedule, and the loan comes due well before that schedule ends.
- The borrower is usually a company. A single-purpose entity owns the building and signs the note, and the lender decides how far the owners stand behind it.
The loan type follows the stage of the property:
| Loan type | What it finances | Usual shape |
|---|---|---|
| Term loan, also called a permanent loan | A leased, stabilized building | A term of several years, amortizing payments, fixed or floating rate |
| Bridge loan | A building on its way to stable income | Short term, often interest only |
| Construction loan | A new building or a major renovation | Drawn as the work advances, then replaced by a term loan |
| SBA 504 or 7(a) loan | A building that a US small business occupies | Long maturity, low down payment |
| Insured multifamily loan | An apartment building | Long amortization, on the insurer's terms |
Banks, life insurance companies, securitized lenders and government-backed programs each make these loans. The pillar guide shows who lends on commercial property and how much each group holds.
A commercial real estate loan has two lengths. The term is the time until the loan comes due. The amortization period is the time over which the payments would retire the whole balance.
Terms depend on the lender. The US Office of the Comptroller of the Currency (OCC) supervises national banks and publishes the handbook its examiners use. It notes that loans from life insurance companies and commercial mortgage-backed securities (CMBS) lenders "usually feature loan terms of 10 years or more with fixed rates and are commonly nonrecourse" (OCC handbook). Bank loans often run shorter.
Amortization depends on the building. For income-producing properties, the OCC tells examiners that "a range of 15 to 30 years is appropriate in most cases". It places stabilized multifamily dwellings at up to 30 years, hotels at generally not more than 20 years, and office, retail and industrial properties at generally 25 years.
The gap between the two lengths leaves a balloon payment: the balance still owed when the term ends. The borrower repays it by refinancing or by selling the building.
A bridge loan is short-term financing that carries a property from purchase or construction to stable income. The OCC defines it as a loan that "provides short-term financing to allow newly constructed or acquired commercial properties to reach stabilization". It adds that bridge loans "are usually written for a period of up to three years".
A buyer uses one for a half-empty building. The bridge lender funds the purchase and the leasing work, and a term loan repays the bridge once the rents are in place. Bridge loans cost more than term loans and often carry interest-only payments. The exit is the risk: when a building leases slowly, the bridge loan matures before a term lender will replace it.
Lenders underwrite a commercial real estate loan by testing the property's income against the debt in three ways: loan-to-value, debt service coverage and debt yield. They then review the borrower who stands behind the loan. Each test gives a maximum loan, and the lowest maximum sets the amount.
Underwriting starts from net operating income (NOI): rent and other income, less vacancy and operating expenses, before any loan payment. The valuation guide explains how cap rates and NOI turn income into value. Our guide to underwriting in real estate covers the same work on a home loan.
Lenders test each loan three ways because commercial real estate loans have failed in waves.
Source: Board of Governors of the Federal Reserve System, delinquency rate on commercial real estate loans (excluding farmland), booked in domestic offices, all commercial banks, quarterly, seasonally adjusted, via FRED (series DRCRELEXFACBS), first quarter of 1991 to second quarter of 2026.
At the start of 1991, borrowers were behind on about one dollar in eight of the commercial real estate loans at US banks (FRED). The rate fell near 1% by 2006 and climbed back above 8% by 2010. Each test below guards against a different way a loan fails.
DSCR stands for debt service coverage ratio: net operating income divided by the year's loan payments. The OCC describes it as "calculated by dividing the NOI by the annual debt service requirements". A DSCR of 1.25 means the building earns 25% more than its payments.
The minimum moves with risk. The OCC writes that properties with volatile cash flows, "such as hotels or owner-occupants with uneven earnings, may warrant a higher ratio".
Interest-only payments raise the ratio on paper, and regulators look past that. Even when a loan permits interest-only payments, the OCC expects the property to meet the coverage test "as though the loan were amortizing".
Debt yield is net operating income divided by the loan amount, shown as a percentage. The OCC calls it "a measurement of risk that is independent of the interest rate, amortization period, and capitalization rate".
That independence is its purpose. A low interest rate helps almost any loan pass the coverage test, and a low cap rate helps almost any loan pass the loan-to-value test. Debt yield ignores both, so it holds steady when rates fall. A lender with a 9% minimum debt yield lends at most $11.11 for each dollar of NOI, whatever the rate.
The down payment is the price less the loan, so the three tests decide it. Loan-to-value (LTV) is the loan divided by the appraised value. US bank regulators publish supervisory LTV limits, and the OCC adds that those limits "do not establish a safe harbor". Each lender sets its own lower limit by property type.
Take a building appraised at $8,000,000 that earns NOI of $520,000. Every limit here is an assumption for the arithmetic:
| Test | Lender's limit | Maximum loan |
|---|---|---|
| Loan-to-value | 75% of value | $6,000,000 |
| Debt yield | 9% minimum | $5,777,778 |
| Debt service coverage | 1.25 at 6.5% over 25 years | $5,134,227 |
The coverage test gives the lowest figure, so the loan is $5,134,227, or 64% of value. A buyer paying the appraised price puts down $2,865,773, about 36%. The LTV limit alone suggested 25%.
The interest rate moves the answer. The same building, at three rates:
| Interest rate | Loan the coverage test allows | Test that sets the loan |
|---|---|---|
| 5.0% | $5,930,082 | Debt yield, at $5,777,778 |
| 6.5% | $5,134,227 | Debt service coverage |
| 8.0% | $4,491,570 | Debt service coverage |
A rise from 6.5% to 8.0% cuts the loan by $642,657 with no change in the building. On a 10-year term, the 6.5% loan still owes $3,979,609 at maturity. Try your own figures in the commercial mortgage calculator.
Commercial real estate loan rates equal a benchmark rate plus a spread that the lender sets for the property, the borrower and the structure of the loan. Lenders quote each loan individually, so two buildings on the same street can draw different rates on the same day.
Fixed-rate loans take their benchmark from government bond yields of a similar length: US Treasury yields in the United States and Government of Canada bond yields in Canada. The US Small Business Administration (SBA) says the rate on its 504 loan is "pegged to an increment above the current market rate for 10-year U.S. Treasury issues" (SBA, 504 loans). The 10-year Treasury yield averaged 4.99% in September 2026 (FRED, 10-year Treasury yield).
Floating-rate loans are common in bridge and construction lending. Their rate moves with a short-term benchmark, such as the Secured Overnight Financing Rate in the United States or the lender's prime rate.
A lender quotes a lower spread when the loan carries less risk. Four things drive it:
- Leverage. A lower LTV, a higher DSCR and a higher debt yield.
- Property. A fully leased building with long leases prices below a hotel or a vacant one.
- Structure. A longer fixed term, an interest-only period and nonrecourse terms each add to the spread.
- Borrower. Net worth, cash on hand and a record with similar buildings.
Rates also feed back into value. The OCC warns that "rising interest rates may lead to higher capitalization rates and lower property values without any change to the actual property's fundamentals". A borrower who refinances after rates rise can face a lower appraisal and a smaller loan at once. The investing guide shows how leverage changes returns when that happens.
You get a commercial real estate loan in five steps: assemble the property's financial package, approach lenders that finance its property type, compare term sheets, go through underwriting and the appraisal, and close.
- Assemble the package. Gather the rent roll, recent operating statements, the purchase contract and the owners' financial statements.
- Choose the lender type. Banks, credit unions, life insurers, CMBS lenders and government-backed programs each favour certain properties and loan sizes. A commercial mortgage broker can run the search.
- Compare term sheets. A term sheet states the amount, rate, term, amortization, fees, recourse and prepayment terms. Weigh all seven.
- Go through underwriting. The lender orders the appraisal and the building reports, and verifies the income. How long underwriting takes depends on the file.
- Close. Lawyers settle the loan documents, the title work and the lease assignments.
The OCC lists the documents a bank typically keeps in the loan file. They include "signed financial statements for borrowers and guarantors, and operating statements and rent rolls for the property". The leasing guide covers what lenders check in a commercial lease.
You qualify on two levels. The property qualifies through the three tests above. The borrower qualifies on four points:
- Net worth and liquidity, measured against the loan amount.
- Experience with the property type.
- Credit history, both the company's and the owners'.
- A guarantee, where the lender asks for one.
A building that a business occupies is underwritten on the cash flow of that business. In the United States, the SBA 504 program serves that case. The SBA states that "the maximum loan amount for a 504 loan is $5.5 million" and that "10-, 20- and 25-year maturity terms are available".
Canadian borrowers apply to chartered banks, credit unions, life insurers and private lenders, and to two federal bodies. The Business Development Bank of Canada (BDC) lends directly to businesses. Depending on the project, its commercial real estate loan offers "financing of up to 100% of the project cost" and interest-only payments "for up to the first 36 months" (BDC, commercial real estate loan).
For apartment buildings, Canada Mortgage and Housing Corporation (CMHC) insures the loan and an approved lender funds it. Its MLI Select product scores a project on affordability, energy efficiency and accessibility. A project with enough points can borrow "up to 95%" of value and amortize over "up to 50 years" (CMHC, MLI Select).
The commercial real estate learning centre collects the rest of this series.