How Do I Get a Commercial Mortgage?

A commercial mortgage provides financing for income-generating properties or business operations, secured by real estate assets. This financing differs from residential mortgages by focusing on properties intended for commercial use or investment. Obtaining a commercial mortgage requires understanding loan products and preparing financial and property documentation. Funds can facilitate property acquisition, refinance existing debt, or support property development and expansion.

Types of Commercial Mortgages

Conventional commercial mortgages are offered by banks and credit unions, financing a wide range of property types like office buildings, retail spaces, and industrial facilities. These loans feature fixed or variable interest rates and amortization periods up to 25 years, with a loan-to-value (LTV) ratio ranging from 65% to 80%. Borrowers seek these loans for established businesses and properties with strong financial histories.

Small Business Administration (SBA) loans, like the SBA 7(a) and SBA 504 programs, are partially guaranteed by the U.S. government. This reduces risk for lenders and makes financing accessible for small businesses. The SBA 7(a) loan is versatile, used for real estate acquisition, working capital, and equipment purchases, with maximum loan amounts in the millions of dollars. The SBA 504 loan supports the purchase of owner-occupied commercial real estate or machinery and equipment, combining a bank loan with a debenture issued by a Certified Development Company (CDC).

Bridge loans offer short-term financing, ranging from six months to three years, to bridge the gap between immediate funding needs and securing permanent financing. These loans are used for property acquisitions requiring quick closing, or for properties undergoing renovation or stabilization before qualifying for a conventional mortgage. Due to their short duration, bridge loans carry higher interest rates and fees compared to long-term options.

Hard money loans are asset-backed, short-term financing from private investors or companies, with lending decisions based on collateral property value rather than borrower creditworthiness. These loans are used by borrowers who may not qualify for traditional financing due to credit issues, or for properties requiring significant rehabilitation. While offering quick capital access, hard money loans feature higher interest rates, often between 10% and 18%, and shorter repayment terms, usually 1 to 3 years.

Conduit loans, also known as Commercial Mortgage-Backed Securities (CMBS), are originated by commercial banks, then pooled and sold to investors as bonds. This securitized structure allows for larger loan amounts and more flexible terms than traditional bank loans. They are often non-recourse, meaning the lender’s claim is limited to the collateral property. CMBS loans are suitable for stable, income-producing properties and feature standardized underwriting criteria and defeasance or yield maintenance prepayment penalties.

Mezzanine financing is a hybrid of debt and equity, positioned between senior debt and equity in a company’s capital structure. It is used for complex real estate transactions or large-scale developments requiring additional capital beyond a senior mortgage. Mezzanine loans carry higher interest rates than senior debt and may include an equity component, such as warrants or conversion rights, offering lenders a share in the project’s upside potential.

Preparing Your Application

A commercial mortgage application requires preparing borrower and property-specific documentation to demonstrate financial viability and property eligibility. Lenders assess creditworthiness through personal and business credit scores and historical payment behavior, requiring a strong credit history from all principals. A FICO score above 680 is preferred for conventional loans.

Business financial statements, including profit and loss statements, balance sheets, and cash flow statements, are required for the past three to five fiscal years. These documents provide insight into the business’s revenue, expenses, assets, liabilities, and liquidity, demonstrating its ability to generate sufficient income to cover debt service. Business tax returns, such as Form 1120 or Form 1065, are also required to verify reported income and expenses.

Personal financial statements, including a statement of net worth and details on liquid assets, assess the borrower’s financial health and capacity to contribute equity. Personal tax returns for the past two to three years are requested to confirm individual income and financial obligations. For new businesses or specific projects, a detailed business plan and financial projections outlining future revenue, expenses, and market analysis are required to demonstrate feasibility.

The experience and qualifications of the management team are evaluated to ensure capable leadership in property management or business operations. Lenders seek evidence of relevant industry experience and a track record of successful ventures. This assessment helps mitigate risks associated with the borrower’s ability to execute their business strategy.

Property eligibility is determined by its type and intended use, such as retail, office, industrial, or multi-family. For income-producing properties, detailed financial performance records, including rent rolls, operating expenses, and existing lease agreements, project future income and evaluate the property’s cash flow. Lenders use this information to calculate the property’s Net Operating Income (NOI) and Debt Service Coverage Ratio (DSCR), which needs to be at least 1.20x.

An appraisal is required to determine the property’s market value, serving as a basis for the loan-to-value calculation and ensuring the loan amount is secured. Environmental reports, such as a Phase I Environmental Site Assessment, may be mandated to identify potential environmental hazards on the property. These reports protect both the lender and borrower from liabilities associated with environmental contamination.

Property legal documents, including the current title, a recent survey, and details of any existing liens, confirm clear ownership and identify any encumbrances. These documents ensure the property serves as clean collateral for the mortgage. A down payment or equity contribution is a standard requirement, ranging from 10% to 30% of the property’s purchase price or appraised value, demonstrating the borrower’s financial commitment.

The Commercial Mortgage Application Process

The commercial mortgage application process begins with an initial inquiry and pre-qualification. Borrowers contact potential lenders with an overview of their financial situation and property details. During this stage, a lender provides an initial assessment of the borrower’s eligibility and the likely terms of a potential loan, based on high-level financial information. This pre-qualification helps determine if the proposed financing aligns with the lender’s criteria and the borrower’s needs.

Following pre-qualification, the formal application submission involves providing the complete package of financial and property documentation to the chosen lender. This submission allows the lender to conduct an in-depth review of the borrower’s creditworthiness, business financials, and the property’s income-generating potential.

Underwriting is the lender’s detailed review process, where financial analysts scrutinize all submitted documents, including tax returns, financial statements, and rent rolls. This phase involves a risk assessment of both the borrower and the property, evaluating factors such as the Debt Service Coverage Ratio (DSCR), loan-to-value (LTV) ratio, and the borrower’s ability to repay the loan. Due diligence verifies the accuracy of the information provided and assesses the feasibility of the loan.

As part of due diligence, the lender orders appraisals to establish the property’s market value, which determines the maximum loan amount. Third-party reports, such as environmental assessments (e.g., Phase I ESA) and property condition assessments, are commissioned to identify any physical or environmental risks associated with the collateral. These reports support the lender’s risk mitigation strategy and influence the loan terms.

Upon completion of underwriting and third-party reports, the lender issues a commitment letter outlining the definitive terms and conditions of the loan. This letter specifies the loan amount, interest rate, repayment schedule, closing costs, and any covenants or conditions that must be met before closing. The borrower must review and accept this letter, signifying agreement to the proposed loan terms.

The final stage is closing, where all legal documentation is signed, and loan funds are disbursed. This involves executing promissory notes, mortgages or deeds of trust, and other necessary agreements. Title insurance is secured to protect both the lender and borrower against any defects in the property’s title. Once all conditions are met and documents are executed, funds are transferred, and the property transaction is completed.

Selecting a Lender

Traditional banks, including large commercial institutions and regional banks, are common sources for commercial mortgages, offering a variety of loan products and competitive interest rates. These lenders prefer established businesses with strong financial histories and may provide relationship-based lending, offering additional banking services. Their underwriting processes can be comprehensive, taking several weeks to months to complete.

Credit unions provide commercial lending services, focusing on local businesses and offering personalized service. While they may have more flexible underwriting criteria than larger banks, their loan amounts might be smaller, and their lending capacity more limited. Credit unions are an option for small to medium-sized businesses seeking a community-oriented approach to financing.

Online lenders and non-bank lenders, including fintech companies and private lenders, offer alternative financing solutions, characterized by quicker application and approval processes. These lenders may cater to specific niches or borrowers who might not qualify for traditional bank loans, offering more flexible terms or higher loan-to-value ratios. Their interest rates and fees can be higher to compensate for increased risk or speed of funding.

Commercial mortgage brokers serve as intermediaries, connecting borrowers with a wide array of lenders, including banks, credit unions, and private capital sources. They assist in packaging the application, negotiating terms, and navigating the commercial mortgage market. Utilizing a broker can streamline the process and secure more favorable terms by leveraging their network and expertise.

SBA Preferred Lenders are financial institutions authorized by the Small Business Administration to offer SBA-backed loans with streamlined approval processes. These lenders have a proven track record of processing and servicing SBA loans, making them a direct point of contact for businesses seeking government-guaranteed financing. Engaging with an SBA Preferred Lender simplifies access to SBA 7(a) or 504 loan programs.

When selecting a lender, several factors warrant consideration beyond the interest rate. The size of the loan and the specific property type influence which lenders are best suited, as some specialize in particular asset classes or loan amounts. The borrower’s financial situation, including credit history and equity availability, guides the choice, as different lenders have varying risk appetites. The speed of funding required is another factor, with online lenders providing quicker access to capital than traditional banks.