Commercial Real Estate Loan Terms Explained
A comprehensive guide to the key financing terms, structures, and metrics every commercial property investor needs to understand before closing a deal.
Why loan terms matter in commercial real estate
Commercial real estate financing works differently from residential mortgages. Loan structures are more complex, terms are shorter, and the property’s income — not the borrower’s personal salary — is the primary basis for underwriting. Understanding these terms is essential for evaluating whether a deal’s financing structure supports your return targets and risk tolerance.
Whether you’re analyzing your first commercial property or your fiftieth, knowing how amortization periods, balloon payments, interest-only structures, and recourse provisions affect your cash flow and exit strategy is the difference between a well-underwritten investment and a liability.
Essential commercial real estate loan terms
Loan-to-Value Ratio (LTV)
Loan Amount ÷ Appraised Value
LTV measures how much of the property's value is financed with debt. Most commercial real estate loans max out at 65% to 80% LTV depending on the lender and asset class. A lower LTV means more equity from the borrower, which reduces lender risk and often results in better terms — lower rates, longer amortization, and less restrictive covenants. SBA loans can go as high as 90% LTV for owner-occupied properties.
Amortization Period
Typically 20–30 years
The amortization period determines the schedule over which the loan principal is repaid through regular payments. A 25-year amortization means the monthly payment is calculated as if the loan would be fully paid off over 25 years. Longer amortization periods result in lower monthly payments and higher DSCR — but you pay more total interest over the life of the loan. Most commercial loans use 20, 25, or 30-year amortization.
Loan Term (Maturity)
Typically 5–10 years
The loan term is how long the loan actually lasts before the remaining balance is due. Unlike residential mortgages where the term and amortization match, commercial loans are almost always shorter than their amortization. A typical structure is a 25-year amortization with a 7-year term — meaning you make payments based on a 25-year schedule, but the remaining balance (the balloon payment) comes due in year 7. At maturity, you either refinance, sell, or pay off the balance.
Balloon Payment
Remaining balance at maturity
The balloon payment is the lump sum due when the loan term expires. If you borrow $5 million on a 25-year amortization with a 7-year term, you'll have paid down only a portion of the principal by year 7 — the remaining balance is due as a balloon. This creates refinancing risk: if interest rates have risen or the property's value has dropped, refinancing at favorable terms may be difficult. Smart investors model this risk during underwriting.
Debt Service Coverage Ratio (DSCR)
NOI ÷ Annual Debt Service
DSCR tells the lender how much cushion exists between the property's income and its mortgage payments. A DSCR of 1.25x means NOI is 25% higher than annual debt service. Most commercial lenders require a minimum DSCR of 1.20x to 1.35x depending on asset class. DSCR is often the binding constraint in CRE lending — it determines the maximum loan amount regardless of LTV.
Interest Rate Structure
Fixed, Variable, or Hybrid
Commercial real estate loans come with fixed rates (locked for the term), variable rates (floating with an index like SOFR plus a spread), or hybrid structures that start fixed and convert to variable. Fixed rates provide payment certainty for cash flow modeling. Variable rates are typically lower initially but expose you to rate increases. Many investors use interest rate caps or swaps to hedge variable rate exposure on larger deals.
Recourse vs. Non-Recourse
Personal liability structure
A recourse loan means the borrower is personally liable for the debt — if the property's value drops below the loan balance, the lender can pursue the borrower's other assets. Non-recourse loans limit the lender's recovery to the property itself, with standard “bad boy” carve-outs for fraud, environmental issues, or voluntary bankruptcy. Non-recourse loans generally require lower LTV, higher DSCR, and more seasoned borrowers. Most CMBS and agency loans are non-recourse; most bank loans are full recourse.
Prepayment Penalty
Cost to pay off early
Most commercial loans include a prepayment penalty that protects the lender's yield if you pay off the loan before maturity. Common structures include yield maintenance (compensating the lender for the present value of lost interest), defeasance (substituting Treasury securities for the loan collateral), and step-down penalties (e.g., 5-4-3-2-1% declining over five years). Understanding prepayment provisions is critical for modeling your exit — selling a property with a steep prepayment penalty can significantly reduce your net proceeds.
Common CRE loan types at a glance
| Loan Type | Typical LTV | Amortization | Term | Recourse |
|---|---|---|---|---|
| Bank / Credit Union | 65% – 75% | 20 – 25 yr | 5 – 10 yr | Full recourse |
| CMBS (Conduit) | 65% – 75% | 25 – 30 yr | 5 – 10 yr | Non-recourse |
| Agency (Fannie/Freddie) | 75% – 80% | 30 yr | 5 – 12 yr | Non-recourse |
| SBA 504 | Up to 90% | 20 – 25 yr | 20 – 25 yr | Recourse (PG) |
| Bridge / Hard Money | 60% – 75% | Interest-only | 1 – 3 yr | Varies |
| Life Insurance Co. | 55% – 65% | 25 – 30 yr | 7 – 15 yr | Non-recourse |
How DealWise AI helps
DealWise AI lets you model any commercial loan structure — adjust the interest rate, amortization period, LTV, and loan term and instantly see how each change affects your monthly payment, DSCR, and overall deal economics.
Key differences from residential mortgages
If your background is in residential real estate, commercial financing can feel like a different world. Residential mortgages are standardized: 15 or 30-year terms, fully amortizing, underwritten primarily on the borrower’s income and credit score. Commercial loans are custom: shorter terms with balloon payments, sized primarily on the property’s income (DSCR and debt yield), and structured with covenants, reserves, and reporting requirements that residential borrowers never encounter.
The biggest conceptual shift is that commercial lenders underwrite the property, not the borrower. Your personal income helps, especially for smaller deals or SBA loans, but the property’s NOI, occupancy, lease terms, and market position drive the loan amount and terms. A borrower with a perfect credit score won’t get a commercial loan if the property’s DSCR doesn’t work.
Another major difference is refinancing risk. With a residential 30-year fixed mortgage, you never have to refinance. With a commercial loan on a 7-year term, you will face a balloon payment — and the financing market at that point may look very different from when you originated. This is why experienced commercial investors model their exit and refinancing scenarios during initial underwriting, not after.
The balloon date is only half the question
Knowing when the balloon lands is not the same as knowing whether it is a problem. The number that decides that is the one almost nobody writes down: how many years to the balloon, compared against how long you intend to hold.
Those two dates produce three situations, and only one of them is the ordinary case.
- The hold ends before the balloon. The loan is retired by the sale. The refinancing market at maturity is somebody else’s problem.
- The hold runs past the balloon. You are refinancing during the hold, not at the exit — on a property you still own, at rates nobody can quote you today. A ten-year business plan financed with a seven-year term has a mandatory refinance in year seven, and it is a step in the plan whether or not the model contains one.
- The balloon is already close at acquisition. Usually assumed debt. The attractive rate you inherited comes with somebody else’s clock.
DealWise flags the gap directly. Under three years to the balloon is a red flag, under five is a concern, and five or more is standard — and separately from those bands, it says whether your hold period runs past the balloon at all.
That separation matters more than it sounds. A seven-year balloon on a ten-year hold scores “standard” on years-to-maturity and still forces a refinance three years before the sale. Severity alone would have called that deal fine. Assuming a loan with two and a half years left scores a red flag on the same scale — the two deals look nothing alike and a single maturity number reports them both as debt.
Two things follow for underwriting. If the hold runs past the balloon, the exit assumptions have to survive a financing event in the middle, so the return depends on a rate nobody has quoted. And a refinance is sized on the property’s income at that future date, not today’s — so the coverage that qualified the original loan is not the coverage that will qualify the next one.
Frequently asked questions
What is a typical interest rate for a commercial real estate loan?
Commercial real estate interest rates vary by lender type, asset class, borrower strength, and market conditions. As a general guide, bank loans typically run 150 to 300 basis points above comparable Treasury yields. CMBS and agency loans are usually priced tighter. Variable rate loans are quoted as a spread over SOFR (e.g., SOFR + 250 basis points). Always model your deal at current market rates and stress-test with a rate increase scenario.
What is the difference between loan term and amortization?
The amortization period determines your payment amount — it's the theoretical schedule over which the loan would be fully repaid. The loan term is how long the loan actually lasts. In commercial real estate, these almost never match. A loan might amortize over 25 years but have a 7-year term, meaning the remaining balance (balloon) is due in year 7. The shorter term creates refinancing risk but allows lenders to reprice the loan periodically.
Should I choose a fixed or variable rate commercial loan?
Fixed rates give you payment certainty — critical for cash flow modeling and meeting DSCR covenants. Variable rates are typically lower at origination but expose you to rising rates. If you're planning to hold the property through the entire loan term, fixed rates reduce risk. If you plan to sell or refinance within a few years, a variable rate with an interest rate cap can lower your carrying costs.
What does recourse mean on a commercial real estate loan?
Recourse means the borrower is personally liable for the loan beyond just the property. If the property's value drops below the outstanding balance and you default, the lender can pursue your personal assets — other real estate, bank accounts, and income — to recover the shortfall. Non-recourse loans limit the lender to the property collateral, with standard exceptions for fraud, misrepresentation, environmental contamination, and voluntary bankruptcy.
How do prepayment penalties work on commercial loans?
Prepayment penalties compensate the lender for lost interest income when you pay off a loan early. The three most common structures are: step-down penalties (a declining percentage — like 5% in year 1, 4% in year 2, etc.), yield maintenance (a formula that pays the lender the present value of remaining interest payments), and defeasance (substituting Treasury bonds for the mortgage collateral). Always factor prepayment costs into your exit analysis.
Final thoughts
Commercial real estate loan terms aren’t just fine print — they’re the structural framework that determines your cash flow, your risk exposure, and your exit options. Understanding LTV, amortization, DSCR, recourse, and prepayment provisions before you submit a loan application puts you in a stronger negotiating position and helps you avoid costly surprises.
DealWise AI lets you model any financing structure and see exactly how each term affects your investment returns — in real time, without rebuilding a spreadsheet.
Related guides
What is DSCR in real estate?
The metric that determines your loan amount.
What is a good DSCR?
DSCR benchmarks by asset class and lender type.
How to calculate DSCR
Step-by-step calculation with worked examples.
Amortization vs interest-only
How loan structure impacts cash flow and DSCR.
Amortization vs interest-only: full comparison guide
The long-form comparison, with a five-year hold modelled both ways.
Commercial loan payment guide
The payment formula, worked examples, and how debt service sets DSCR.
Related calculators
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