Commercial Real Estate Financing: How to Fund Your Next Property

Commercial real estate financing is one of the largest capital decisions a business owner will make. Whether you are purchasing your first owner-occupied property, expanding into a second location, or investing in income-producing real estate, understanding the loan structures available to you is critical. The difference between a well-structured deal and a poorly structured one can mean hundreds of thousands of dollars over the life of the loan.

This guide covers the primary CRE financing options, what lenders evaluate during underwriting, how to maximize your leverage, and how to position your deal for approval.

Types of Commercial Real Estate Loans

There is no single "commercial real estate loan." The right structure depends on the property type, your intended use, your financial profile, and how quickly you need to close. Here are the primary options.

SBA 504 Loans

The SBA 504 program is specifically designed for owner-occupied commercial real estate. It offers the lowest down payment (as little as 10%), long fixed-rate terms, and competitive rates because the SBA guarantees a portion of the loan.

The 504 structure splits the financing three ways: a conventional lender covers 50% (first lien), a Certified Development Company (CDC) covers up to 40% (second lien, SBA-guaranteed), and the borrower puts down 10%. This structure gives the conventional lender a conservative first-position loan, which is why banks are willing to participate at favorable rates.

SBA 7(a) Loans for Real Estate

The SBA 7(a) program can also be used for commercial real estate, with up to $5 million in financing and terms up to 25 years. The advantage over 504 is flexibility: 7(a) funds can be used for working capital alongside the property purchase, and the process is often faster.

However, rates are typically variable (prime + spread), and the total loan amount is capped at $5 million compared to the 504's ability to finance larger total project costs.

Conventional Commercial Mortgages

Traditional bank financing for commercial real estate, without SBA involvement. These loans are faster to close (30-45 days), have fewer restrictions, and work for both owner-occupied and investment properties.

The trade-off is a higher down payment and potentially higher rates. But conventional CRE loans do not carry SBA guarantee fees, have fewer paperwork requirements, and can close faster. For experienced investors with strong financials, conventional may be the more efficient path.

Bridge Loans

Short-term financing (6-24 months) used to acquire or reposition a property before securing permanent financing. Bridge loans are faster (can close in 1-2 weeks), but carry higher rates (8-14%) and are designed to be refinanced, not held long-term.

Common use cases include purchasing a property at auction, funding renovations before stabilization, or closing quickly when a conventional loan cannot meet the seller's timeline.

What Lenders Evaluate in CRE Deals

Commercial real estate underwriting focuses on both the borrower and the property. Unlike residential mortgages, CRE loans are underwritten with significant weight on the property's ability to generate income or support the borrower's business.

Debt Service Coverage Ratio (DSCR)

DSCR is the single most important metric in CRE lending. It measures whether the property (or business) generates enough income to cover the loan payments.

DSCR = Net Operating Income / Annual Debt Service

Most lenders require a minimum DSCR of 1.20x to 1.35x, meaning the property or business needs to generate 20-35% more income than the annual loan payment. Higher DSCR means lower risk for the lender and better terms for you.

Loan-to-Value Ratio (LTV)

LTV measures the loan amount relative to the property's appraised value. Lower LTV means more equity, which means less risk.

• SBA 504: Up to 90% LTV (10% down)
• SBA 7(a): Up to 90% LTV
• Conventional: Typically 70-80% LTV
• Bridge: 65-75% LTV

Property Type and Location

Lenders have different appetites for different property types. Here is a general hierarchy from easiest to hardest to finance:

1. Multi-family (5+ units): Easiest. Stable cash flow, established underwriting models.
2. Office and retail (occupied): Moderate. Depends on tenant quality and lease terms.
3. Industrial and warehouse: Growing demand. Lenders are increasingly favorable.
4. Mixed-use: Moderate to difficult. Depends on the commercial/residential split.
5. Special-use (restaurants, gas stations, car washes): More difficult. Limited alternative uses make lenders cautious.
6. Land and construction: Hardest. Highest risk, requires specialized lenders.

Location matters significantly. Lenders evaluate market fundamentals: population trends, employment data, vacancy rates, and comparable sales. A strong property in a weak market will face tougher underwriting than a modest property in a growing metro area.

Borrower Financials

Even though CRE loans lean heavily on the property, your personal financials still matter, especially for owner-occupied and SBA-backed loans.

• Personal credit score: 680+ preferred for SBA; 700+ for the best conventional terms
• Liquidity: Lenders want to see 6-12 months of reserves after closing
• Net worth: Should ideally be at or above the loan amount
• Experience: Prior real estate or industry experience strengthens the application
• Personal guarantee: Required for most CRE loans under $5M

Required Documentation

CRE loan applications require documentation on both the borrower and the property. Having these ready before you engage a lender saves significant time.

Borrower Documents

• Personal and business tax returns (2-3 years)
• Personal financial statement
• Business financial statements (P&L, balance sheet)
• Business bank statements (3-6 months)
• Business debt schedule
• Resume or CV (for owner experience)

Property Documents

• Purchase agreement or letter of intent
• Property appraisal (lender will order this)
• Environmental assessment (Phase I, sometimes Phase II)
• Rent roll and lease copies (for income-producing properties)
• Operating statements for the property (2-3 years if available)
• Property condition report

How to Maximize Your Leverage

Structuring a CRE deal well can mean the difference between a 10% down payment and a 30% down payment. Here are strategies to maximize your leverage:

1. Use SBA programs: If the property is 51%+ owner-occupied, the SBA 504 or 7(a) program lets you put as little as 10% down vs. 20-30% conventional.
2. Seller financing: Some sellers will carry a second-position note, effectively reducing your out-of-pocket requirement.
3. Negotiate seller concessions: Credits for repairs, closing costs, or prepaid expenses reduce cash needed at closing.
4. Demonstrate strong DSCR: If your business generates significantly more income than the debt service requires, lenders may approve higher LTV.
5. Cross-collateralize: If you own other real estate with equity, some lenders will accept it as additional collateral to offset a smaller down payment.

The CRE Loan Process

Why Work with a Broker for CRE?

Commercial real estate deals are complex. Different lenders specialize in different property types, geographic markets, loan sizes, and structures. A lender that aggressively finances multi-family in the Southeast may have no interest in a mixed-use property in the Midwest.

Halford Capital works with established CRE lenders, including national banks and private credit institutions with dedicated commercial real estate divisions. We match your deal to the lender whose criteria align with your property type, market, and financial profile, so you are not wasting time with lenders who were never going to approve your deal.

Whether you are looking at an SBA 504 with 10% down or a conventional mortgage for an investment property, start your application and we will connect you with the right lender for your deal.