What Is a Commercial Real Estate (CRE) Loan?

A commercial real estate loan is a mortgage secured by a lien on commercial property as opposed to residential property. Commercial real estate (CRE) refers to any income-producing real estate that is used for business purposes; for example, offices, retail, hotels, and apartments.

Key Takeaways

  • A CRE loan is a mortgage secured by a lien on a commercial property.
  • CRE loans are generally made to investors such as corporations or organizations that own and operate commercial real estate.
  • CRE loans are offered by banks, independent lenders, insurance companies, pension funds, private investors, and other capital sources, such as the U.S. Small Business Administration's 504 Loan Program.
  • Lenders consider the nature of the collateral (the property being purchased), the creditworthiness of the borrower, and financial ratios when evaluating commercial real estate loans.
  • CRE loans tend to be more expensive than residential loans.

A CRE loan might be sought by small businesses seeking to purchase, expand, or renovate their sites. CRE loans are generally made to investors such as corporations, developers, partnerships, funds, trusts, and real estate investment trusts or REITs.

In other words, business entities formed for the specific purpose of owning and operating commercial real estate. The business entity purchases commercial property, leases out space, and then collects rent from the businesses that operate within the property. The financing for the venture, including the acquisition, development, and construction of these properties, is accomplished through commercial real estate loans.

How a Commercial Real Estate (CRE) Loan Works

As with residential property, banks, independent lenders, pension funds, insurance companies, private investors, and other capital sources, such as the U.S. Small Business Administration’s 504 Loan Program are actively involved in providing CRE loans. Like residential lenders, commercial lenders assume different levels of risk and have different terms they are willing to offer to borrowers.

The most popular residential loan is the 30-year fixed-rate mortgage, CRE loans are typically shorter. The terms range from five years (or less) to 20 years, and the amortization period is often longer than the loan term. For example, a lender might provide a CRE loan with a term of seven years and a 30-year amortization. The borrower makes monthly payments during the seven years. The monthly payments are determined as if the loan were being paid off over 30 years followed by one final “balloon” payment composed of the entire remaining balance on the loan.

Lenders consider the nature of the collateral (the property being purchased); the creditworthiness of the entity (or principals/owners), including three to five years of financial statements and income tax returns; and financial ratios such as the loan-to-value ratio and the debt-service coverage ratio when evaluating CRE loans.

CRE loans tend to be more expensive than residential loans. Down payments typically range from 20% to 30% of the purchase price. Interest rates also tend to be steeper: around 10% to 20% for most borrowers. Loans backed by the Small Business Administration (SBA) (see below), which are some of the cheapest, ranged from 7.75% to 10.25% as of January 2019 depending on the size and the length of the loan.

CRE loans are intended to finance real estate used strictly for business purposes and to generate income.

Types of Commercial Real Estate (CRE) Loans

Here are the most common types of CRE loans:

  • Permanent Loans are first mortgages on a commercial property. A permanent loan must have some amortization and a term of at least five years written into the contract.
  • SBA Loans are written by traditional and non-traditional lenders but are guaranteed by the SBA. There are several different SBA loans that cater to different types of borrowers, the most popular being the 7(a) loan.
  • Bridge Loans provide a short-term first mortgage loan on a commercial property typically with a six-month to three-year term. Bridge loans are typically obtained when a borrower is waiting for longer-term financing or attempting to refinance an existing obligation.