Commercial Mortgage Guide: Financing Office, Retail, and Multi-Family Properties

[Commercial [real estate financing](/blog/balloon-mortgage-explained)](/blog/commercial-real-estate-financing) operates in a completely different world than residential mortgages. The rules, underwriting criteria, loan structures, and even basic terminology differ significantly. Understanding commercial mortgages is essential whether you're buying your first small office building, a retail strip center, or scaling into larger multi-family properties.

This comprehensive guide covers everything you need to know about commercial mortgages: loan types, qualification requirements, typical terms, pricing, and strategies to secure optimal financing for your commercial real estate investments.

What is a Commercial Mortgage?

A commercial mortgage finances income-producing property that isn't a 1-4 unit residential building. Commercial mortgages fund:

Property Types:

• Multi-family: 5+ unit apartment buildings
• Office buildings: Single or multi-tenant
• Retail: Shopping centers, strip malls, standalone retail
• Industrial: Warehouses, manufacturing facilities, distribution centers
• Mixed-use: Combination of residential and commercial (retail + apartments)
• Special purpose: Hotels, self-storage, gas stations, car washes
• Land development: For commercial use

Key distinction: Commercial mortgages are underwritten primarily based on property cash flow, not borrower income. The property must "pay for itself."

How Commercial Mortgages Differ from Residential

Understanding these fundamental differences prevents costly misunderstandings:

1. Underwriting Focus

Residential: Borrower's personal income, credit, and employment Commercial: Property's income, expenses, and net operating income (NOI)

While your financial strength matters, the property's performance is paramount.

2. Loan-to-Value Ratios

Residential: 75-97% LTV common Commercial: 65-80% LTV typical (20-35% down payment required)

Lower LTV means larger down payments and more equity at risk.

3. Loan Terms

Residential: 15-30 year fixed rates common Commercial: Shorter terms (5-25 years) with balloon payments

Common structure: 25-year amortization with 10-year balloon

• Monthly payments calculated on 25-year schedule
• Balance due in full after 10 years
• Must refinance or pay off

4. Interest Rates

Residential: Currently 6.5-8% (2026) Commercial: Currently 7-11% depending on property type and risk

Commercial rates are typically 0.5-3% higher than residential.

5. Fees and Costs

Residential: 2-3% in closing costs Commercial: 3-5% in closing costs, plus origination points (1-3%)

Example: $2M commercial mortgage

• Closing costs: $60,000-100,000
• Origination points (2%): $40,000
• Total: $100,000-$140,000 to close

6. Prepayment Penalties

Residential: Often none or minimal Commercial: Almost always significant

Common structures:

• Yield maintenance: Pay lender for interest they'd have earned
• Defeasance: Expensive, complex early payoff mechanism
• Step-down: 5-4-3-2-1% over 5 years
• Fixed: 3-5% of balance

7. Personal Liability

Residential: Non-recourse (can't pursue you beyond foreclosure, with exceptions) Commercial: Often full recourse (personally liable for any deficiency)

Some commercial loans are non-recourse but at higher rates or lower LTV.

Types of Commercial Mortgages

Multiple commercial loan products serve different needs:

1. Traditional Commercial Mortgages

Standard bank loans for stabilized, income-producing properties.

Characteristics:

• LTV: 65-80%
• Rates: 7-9.5% (2026)
• Terms: 5-10 year balloons, 20-25 year amortization
• Qualification: Based on DSCR ([Debt Service Coverage Ratio](/blog/best-dscr-lenders-2026))
• Best for: Stabilized properties with 2+ years operating history

Minimum DSCR: Typically 1.25-1.35

DSCR = Net Operating Income ÷ Annual Debt Service

Example:

• NOI: $150,000/year
• Annual debt service: $120,000
• DSCR: 150,000 ÷ 120,000 = 1.25 ✓

2. SBA 504 Loans

Government-backed program for owner-occupied commercial property (business owns and operates from the property).

Structure:

• 50% conventional first mortgage (bank)
• 40% SBA-guaranteed [second mortgage](/blog/best-heloc-lenders-2026) (CDC)
• 10% borrower down payment

Benefits:

• Low down payment (10% vs. typical 20-35%)
• Fixed rates for full term (10, 20, or 25 years)
• Below-market rates (currently 6.5-7.5%)
• No prepayment penalties on CDC portion after year 5

Limitations:

• Must be owner-occupied (51%+ of building)
• Business must occupy within 6 months
• Cannot be for passive investment
• Tangible net worth and income limitations

Best for: Small business owners buying their first building

(See our dedicated SBA 504 Loan Guide for details)

3. SBA 7(a) Loans

Alternative SBA program, more flexible than 504:

Characteristics:

• Up to 90% financing (10% down)
• Up to $5M loan amount
• Can finance business acquisition + real estate
• Faster approval than 504
• Higher rates than 504 (currently 7.5-10%)

Best for: Businesses buying both real estate and the operating business

4. Bridge Loans

Short-term financing (6-36 months) for properties needing repositioning:

Uses:

• Acquisition before permanent financing available
• Properties needing lease-up or repositioning
• Value-add renovations
• Quick closings (competitive situations)

Characteristics:

• Interest rates: 9-14%
• LTV: 65-75%
• Points: 1-3 upfront
• Terms: 12-24 months typical
• Interest-only payments common

Exit strategy required: Must show plan to refinance to permanent financing or sell.

5. CMBS Loans (Commercial Mortgage-Backed Securities)

Large loans ($2M-$100M+) packaged and sold as securities:

Benefits:

• Competitive rates (often lowest for large loans)
• Non-recourse available
• Higher LTV possible (up to 80%)
• Longer fixed-rate periods (7-10 years)

Drawbacks:

• Inflexible: Very difficult to modify or pay off early
• Expensive prepayment penalties (yield maintenance or defeasance)
• Complex process (60-90 day closings)
• Minimum loan sizes ($2M-$5M+)

Best for: Large, stabilized properties with long-term hold intent (10+ years)

6. Portfolio Lenders

Local and regional banks keeping loans in-house:

Benefits:

• Most flexible underwriting
• Relationship-based pricing and terms
• Faster approvals (30-45 days)
• Local market knowledge

Characteristics:

• Rates: 7.5-10%
• Terms negotiable based on relationship
• May accept lower DSCR (1.15-1.20)
• Smaller loan amounts ($500K-$10M typical)

Best for: Local investors with community bank relationships

7. Hard Money / Private Lenders

Asset-based lending focused on property value:

Characteristics:

• Rates: 10-15%
• Points: 2-5 upfront
• LTV: 60-70%
• Terms: 6-24 months
• Fast closing: 7-14 days possible
• Flexible on property condition and borrower credit

Best for: Quick acquisitions, value-add properties, borrowers who can't qualify conventionally

Commercial Mortgage Qualification

Commercial lenders evaluate multiple factors:

1. Property Performance (Primary Factor)

Net Operating Income (NOI): Most critical metric. Formula:

NOI = Gross Rental Income - Operating Expenses

Operating expenses include:

• Property taxes
• Insurance
• Property management (even if you self-manage)
• Maintenance and repairs
• Utilities (if owner-paid)
• HOA fees

Operating expenses DON'T include:

• Mortgage payments
• Depreciation
• Capital improvements
• Income taxes

Example:

• Gross rental income: $300,000
• Property taxes: $25,000
• Insurance: $8,000
• Management (8%): $24,000
• Maintenance/repairs: $18,000
• Utilities: $12,000
• NOI: $300,000 - $87,000 = $213,000

2. Debt Service Coverage Ratio (DSCR)

Critical underwriting metric. Formula:

DSCR = NOI ÷ Annual Debt Service

Lender requirements:

• Minimum: 1.20 DSCR
• Preferred: 1.25-1.35 DSCR
• Strong: 1.40+ DSCR

Example: NOI: $213,000 Loan amount: $1.5M at 8%, 25-year amortization Annual debt service: $138,840 DSCR: 213,000 ÷ 138,840 = 1.53 ✓ Excellent

Lower DSCR possible with:

• Exceptional property quality
• Strong borrower financials
• Low LTV (more equity)
• Long operating history

3. Occupancy

Stabilized properties: 85-90%+ occupancy preferred Lease-up properties: Must show pro forma to stabilization Single-tenant: Require strong tenant credit and long-term lease

Multi-tenant buildings: Lenders prefer:

• No single tenant over 30-40% of income (diversification)
• Lease terms of 3-5+ years remaining
• Tenant quality (credit-worthy businesses)

4. Property Condition and Location

Appraisal: Professional appraisal required (costs $2,000-$10,000+) Environmental assessment: Phase I required (costs $1,500-$3,000) Property inspection: Lender may require engineering report

Location factors:

• Market fundamentals (growth, demographics)
• Comparable sales and rental rates
• Traffic counts (retail)
• Access and visibility

5. Borrower Financial Strength

While secondary to property performance, lenders evaluate:

Liquidity: 6-12 months debt service in reserves Net worth: Often want net worth > loan amount Experience: Real estate experience and management capability Credit: 680+ minimum, 720+ preferred Other properties: Performance of existing portfolio

Business structure: Many commercial mortgages require:

• Property held in LLC or corporation
• Business tax returns (2 years)
• Operating agreements and formation documents

6. Personal Guarantee

Most commercial loans require personal guarantees from:

• All members owning 20%+ of borrowing entity
• Sometimes from spouses as well

What it means: You're personally liable if the property doesn't cover the debt.

Non-recourse loans: Available but typically require:

• Very strong DSCR (1.40+)
• Lower LTV (70% or less)
• Exceptional property quality
• Rate premium (0.5-1% higher)

Commercial Mortgage Process and Timeline

Timeline: 45-90 days (varies significantly by loan type)

Phase 1: Pre-Qualification (Week 1-2)

• Initial lender discussions
• Provide property financials and personal financial statement
• Preliminary underwriting
• Receive term sheet or letter of interest

Phase 2: Application and Due Diligence (Week 2-4)

• Submit full application package
• Order appraisal ($2,000-$10,000)
• Order Phase I environmental ($1,500-$3,000)
• Title work and survey
• Lender site visit

Phase 3: Underwriting (Week 4-8)

• Review all due diligence reports
• Verify rent rolls and leases
• Analyze financial statements
• Credit checks and background
• Loan committee review and approval

Phase 4: Documentation and Closing (Week 8-12)

• Prepare loan documents
• Attorney review (both sides)
• Final walk-through
• Closing and funding

Faster tracks:

• Portfolio lenders: 30-45 days
• Bridge loans: 14-30 days
• Hard money: 7-14 days

Slower tracks:

• CMBS loans: 60-90 days
• SBA loans: 60-120 days

Commercial Mortgage Costs (2026)

Budget for these expenses:

Upfront Costs

Origination fee: 1-3% of loan amount

• $2M loan at 2% = $40,000

Appraisal: $2,000-$10,000+

• Simple retail: $2,500-4,000
• Large multi-family: $5,000-10,000+
• Complex or specialized: $10,000-25,000

Environmental Phase I: $1,500-$3,000 Environmental Phase II (if needed): $5,000-$20,000+

Legal fees: $3,000-$10,000+

• Simple transaction: $3,000-5,000
• Complex structure: $5,000-10,000+

Title insurance and escrow: 0.5-1% of loan

Survey: $500-$2,500

Property inspection/engineering: $1,000-$5,000

Application fees: $500-$2,000

Total closing costs: Typically 3-5% of loan amount

Ongoing Costs

Interest: 7-11% (varies by loan type, property, borrower)

Property taxes: Varies by location (1-3% of property value annually typical)

Insurance: $2,000-$15,000+ annually depending on property size/type

Property management: 5-10% of gross rental income

Maintenance reserves: Some lenders require escrow for future repairs

Commercial Mortgage Rates (2026)

Current rate environment (early 2026):

By Property Type

Multi-family (5+ units): 7.0-8.5%

• Lowest rates (considered least risky)
• Strong demand and performance history

Office buildings: 7.5-9.5%

• Rates vary significantly based on:
  • Location and class (A, B, C)
  • Single vs. multi-tenant
  • Lease terms and tenant quality
• Post-pandemic office market challenges = higher rates

Retail: 7.5-9.0%

• Strip centers: Lower rates (strong tenants)
• Single-tenant: Depends heavily on tenant creditworthiness
• Regional malls: Higher rates or difficult to finance

Industrial/Warehouse: 7.0-8.5%

• Strong demand = competitive rates
• E-commerce growth driving values
• Long-term leases common

Self-storage: 7.5-9.0%

• Specialized but popular with lenders familiar with asset class

Hotels: 8.5-11%

• Higher risk (no long-term leases)
• Management-intensive
• Revenue volatility

By Loan Type

SBA 504: 6.5-7.5% (below-market government program) Traditional bank: 7.5-9.0% CMBS: 7.0-8.5% (best rates for large, stabilized properties) Bridge loans: 9-14% Hard money: 11-15%

Rate Factors

Rates decrease with:

• Lower LTV (more equity)
• Higher DSCR (stronger cash flow)
• Longer operating history (proven performance)
• Better property quality (class A locations)
• Stronger borrower (experience, net worth, credit)
• Larger loan amounts (economies of scale)

Strategies for Better Commercial Loan Terms

1. Show Strong Operating History

Minimum: 2 years operating statements Preferred: 3-5 years showing:

• Consistent or growing income
• Stable or improving occupancy
• Professional management
• Good tenant retention

If new acquisition: Provide trailing 12-month history from seller

2. Increase Down Payment

Every 5% of additional down payment can reduce rates by 0.125-0.25%:

• 80% LTV: 8.5% rate
• 75% LTV: 8.25% rate
• 70% LTV: 8.0% rate

Analysis: Is the rate reduction worth the additional equity?

Example: $2M purchase

• 75% LTV: $1.5M loan, $500K down
• 70% LTV: $1.4M loan, $600K down

Extra $100K down saves 0.25% rate = $3,500/year in interest ROI on extra equity: 3,500 ÷ 100,000 = 3.5% return

May not be optimal—that $100K might generate better returns deployed elsewhere.

3. Build Banking Relationships

Portfolio lenders offer best terms to relationship clients:

Consolidate business banking:

• Operating accounts
• Deposit rent collections
• Maintain substantial balances ($100K-$500K+)

Result: Rate reductions of 0.25-0.75% plus better terms

4. Shop Multiple Lenders

Different lenders specialize in different property types and structures:

Minimum: Get quotes from 3-5 lenders:

• 1-2 national lenders
• 2-3 local/regional banks or credit unions
• 1-2 mortgage brokers with lender networks

Use competing offers to negotiate better terms.

5. Accept Recourse for Better Terms

Non-recourse: Property-only collateral Recourse: Personal liability

Accepting recourse (personal guarantee) can:

• Reduce rates by 0.25-0.75%
• Increase maximum LTV by 5-10%
• Improve other terms

Risk assessment: Only accept recourse on properties with strong, stable cash flow and where you have confidence in long-term performance.

6. Longer Interest-Only Period

Negotiate interest-only periods (1-5 years) to:

• Reduce initial payments
• Improve cash-on-cash return
• Free capital for improvements or other investments

Example: $1.5M loan at 8%, 25-year amortization

• P&I payment: $11,570/month
• Interest-only payment: $10,000/month
• Savings: $1,570/month during I-O period

7. Negotiate Prepayment Penalty Terms

Even if you can't eliminate prepayment penalties, negotiate:

Favorable structures:

• Step-down (5-4-3-2-1%) rather than yield maintenance
• Penalties only in first 3-5 years
• No penalty for partial paydowns
• No penalty if refinancing with same lender

Assuming clause: Negotiate right to have qualified buyer assume your loan (valuable exit strategy)

Special Considerations by Property Type

Multi-Family (5+ Units)

Lender appetite: Strong (most favored property type)

Key underwriting factors:

• Occupancy (90%+ preferred)
• Rent rolls and lease terms
• Unit mix and condition
• Market fundamentals (supply/demand)
• Management in place

Financing advantages:

• Best rates (7-8.5% typical)
• Higher LTV available (75-80%)
• Many lender options
• Fannie Mae and Freddie Mac programs (5+ units)

Fannie/Freddie programs:

• Non-recourse available
• Up to 80% LTV
• 10-year fixed rates
• Minimum $1M loan size
• Competitive rates (currently 7-8%)

Office Buildings

Lender concerns: Work-from-home impact on demand

Critical factors:

• Tenant quality and creditworthiness
• Lease terms (length remaining)
• Single vs. multi-tenant (diversification preferred)
• Building class and location
• Parking ratio

Owner-occupied: SBA 504 loans excellent option (see above)

Single-tenant: Essentially financing the tenant's credit:

• Strong tenant (investment grade): Better rates
• Weak tenant: Difficult to finance or high rates
• Minimum 10-15 years lease term preferred

Retail Properties

Strong financing:

• National credit tenants (Starbucks, CVS, etc.)
• Long-term leases (10-20 years)
• NNN leases (tenant pays all expenses)

Weaker financing:

• Local tenants with short leases
• Strip centers with high vacancy
• Malls (very difficult post-2020)

Key factor: Tenant mix and lease structure

Industrial/Warehouse

Strong demand from lenders due to:

• E-commerce growth
• Supply chain reshoring
• Long-term lease structures common
• Lower maintenance than other property types

Typical rates: 7-8.5% LTV: Up to 75-80%

Self-Storage

Specialized asset class:

• Not all lenders comfortable with it
• Those who specialize offer competitive terms
• No leases (month-to-month occupancy)
• Underwritten on trailing 12-month performance
• Management-intensive

Lenders: Seek lenders specializing in self-storage for best terms

Tax Implications

Commercial mortgages have important tax considerations:

Interest Deductibility

All business/[investment mortgage](/blog/best-investment-property-lenders-2026) interest is fully deductible against property income.

Exception: Personal residence interest has limitations (not relevant for commercial property).

Depreciation

Commercial property depreciation schedules:

Non-residential (office, retail, industrial): 39-year straight-line Residential rental (apartments, multi-family): 27.5-year straight-line

Example: $2M building purchase ($1.6M building, $400K land)

• $1.6M ÷ 39 years = $41,026/year depreciation (non-residential)
• $1.6M ÷ 27.5 years = $58,182/year depreciation (residential multi-family)

[Cost segregation](/blog/depreciation-real-estate-guide) studies: Accelerate depreciation by identifying components with shorter lives (5-15 years):

• HVAC systems
• Flooring and finishes
• Landscaping
• Parking lots
• Lighting and electrical

Cost: $5,000-$15,000 but can generate $50,000-$500,000+ in first-year deductions.

Section 1031 Exchange

[Defer capital gains](/blog/1031-exchange-vs-opportunity-zones) by exchanging into another investment property:

• Must be like-kind (any real estate for any real estate)
• Strict timelines (45 days to identify, 180 days to close)
• Must use [qualified intermediary](/blog/1031-exchange-rules-2026)
• Can exchange up (more valuable property) to defer all gains

Commercial-to-commercial exchanges common for portfolio growth without tax hit.

Common Commercial Mortgage Mistakes

1. Underestimating Operating Expenses

Mistake: Using actual expenses when property is mismanaged or owner self-manages.

Reality: Lenders underwrite to market expenses, including:

• Market-rate property management (even if you won't use it)
• Adequate maintenance reserves
• All typical operating costs

Result: Lower loan amount than expected.

Solution: Request lender's underwriting assumptions early; adjust expectations accordingly.

2. Poor Due Diligence

Mistake: Not thoroughly reviewing rent rolls, leases, and operating statements before closing.

Consequences:

• Discover leases expiring sooner than expected
• Find deferred maintenance issues
• Realize previous owner inflated income

Solution: Hire professional inspector, review all leases personally, and verify rent rolls against bank deposits.

3. Ignoring Balloon Payment Risk

Mistake: Taking 5-year balloon loan without refinance plan.

Risk: In 5 years:

• Rates could be much higher
• Property value may have declined
• Your financial situation may have changed
• Credit markets may be tight

Solution:

• Choose longer balloon periods when possible (10+ years)
• Maintain low LTV (easier to refinance)
• Build relationship with multiple lenders (backup options)
• Consider refinancing 6-12 months before balloon due

4. Insufficient Reserves

Mistake: Using all available capital for down payment.

Problem: Commercial properties have:

• Tenant improvement costs when tenants leave
• Leasing commissions
• Major capital expenses (roof, HVAC, parking lot)
• Potential extended vacancies

Solution: Maintain minimum 12 months debt service in reserves (24+ months preferred).

5. Wrong Loan Type for Strategy

Mistake: Using short-term bridge loan for long-term hold, or restrictive CMBS loan for property you might sell.

Solution: Match loan type to investment strategy:

• Long-term hold: Conventional with longest possible fixed period
• Value-add 2-3 years: Bridge loan, refinance when stabilized
• Uncertain timeline: Avoid heavy prepayment penalties

Frequently Asked Questions

What credit score do I need for a commercial mortgage?

Minimum: 660-680 for most lenders. Preferred: 700-720+. However, commercial mortgages focus more on property performance (DSCR) than personal credit. Strong property cash flow can overcome lower credit scores.

Can I get a commercial mortgage for my first property?

Yes, but expect stricter terms: higher rates (0.5-1% premium), larger down payment (30-35%), and lower LTV. Consider starting with SBA 504 (if owner-occupied) for better first-time borrower terms.

How much do I need for a down payment?

Typical: 20-35%. Standard: 25-30% for most commercial loans. SBA programs: As low as 10%. Larger down payments (30-35%) get better rates and terms.

What is a good DSCR for commercial property?

Minimum: 1.20. Standard: 1.25-1.30. Strong: 1.35+. Higher DSCR improves loan terms and may allow higher LTV or lower rates.

Can I finance commercial property through an LLC?

Yes, and often required by lenders. However, you'll typically need to personally guarantee the loan even though the LLC is the borrower. Benefits: liability protection, estate planning, multiple partner structure.

Do commercial mortgages have PMI like residential loans?

No. Commercial loans don't have PMI. Instead, they require larger down payments (20-35%) to mitigate lender risk. Lower LTV is built into the loan structure rather than requiring insurance.

How long does it take to get a commercial mortgage?

Typical: 45-60 days. Fast: 30-45 days (portfolio lenders). Slow: 60-120 days (SBA, CMBS). Very fast: 7-14 days (hard money). Allow more time for larger or more complex properties.

Can I use rental income to qualify for a commercial loan?

Yes—in fact, that's the primary qualification factor. Commercial loans are underwritten based on the property's Net Operating Income (NOI) and DSCR, not your personal income. Your personal income is secondary.

What happens if my tenant leaves before my balloon payment is due?

Major risk with commercial mortgages. Refinancing is difficult with vacant property. Solutions: Start refinancing process 12-18 months early (while property still leased), maintain strong reserves to carry property during vacancy, or have tenant replacement plan.

Are there fixed-rate commercial mortgages?

Yes, but often for shorter periods than residential. Common structures: 5 or 7-year fixed, then adjustable or balloon. SBA 504 loans offer true fixed rates for full 10, 20, or 25-year term. CMBS loans may offer 7-10 year fixed rates.

Ready to Finance Your Commercial Property?

Commercial mortgages open doors to larger, more profitable real estate investments—but require understanding fundamentally different underwriting, terms, and strategies than residential financing. Whether you're buying your first small multi-family building or expanding into retail or office properties, proper financing structure sets the foundation for success.

Success in commercial real estate financing comes from matching the right loan product to your property type and investment strategy, while building lender relationships that provide long-term access to capital.

Get Started with Commercial Mortgage Financing →

We help investors navigate commercial mortgage options, connect with specialized lenders for your property type, and structure financing that aligns with your investment goals. From small multi-family to large commercial portfolios, we'll help you secure optimal terms and avoid common pitfalls.

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