The debt behind every deal, in plain English — who lends, how loans are sized, the terms that matter, and how a financing process actually runs.
Commercial real estate financing is the debt used to acquire, develop, or refinance income-producing property. Unlike a home mortgage, a commercial loan is underwritten primarily on the property’s income, not the borrower’s personal earnings — and that one difference changes how loans are sized, priced, and structured. This guide covers the building blocks: who lends, how loans are sized, the terms that matter, and how the process runs.
What makes commercial debt different
A residential mortgage qualifies you on your income and credit. A commercial loan qualifies the asset: how much net operating income it produces, how stable that income is, and what the property is worth. The borrower’s experience and balance sheet still matter, but the deal lives or dies on the property’s cash flow — and that drives everything below.
Who provides commercial real estate debt
Different lenders suit different deals. The main sources:
- Banks and credit unions — relationship lenders, competitive rates, often recourse, flexible on smaller and local deals.
- Life insurance companies — low rates, long fixed terms, conservative leverage; best for stabilized, high-quality assets.
- Agencies (Fannie Mae, Freddie Mac, HUD) — for multifamily, with attractive terms and high leverage.
- Debt funds and bridge lenders — higher rate, higher leverage, fast and flexible, built for transitional or value-add deals.
- CMBS (conduit) lenders — fixed-rate, non-recourse, sized to standard metrics, sold into securitization.
Each prices and structures differently, which is exactly why running a competitive process matters. See CRE loan types explained for a full breakdown.
How a loan is sized
Lenders size a loan against three independent tests and lend the lowest result:
- DSCR — net operating income divided by annual debt service. Learn more
- Debt yield — net operating income divided by loan amount. Learn more
- LTV — loan divided by appraised value. Learn more
Whichever produces the smallest loan is your binding constraint, and knowing which one limits your deal tells you what actually moves proceeds. The full mechanics are in how lenders size CRE loans, and you can run your numbers in the Loan Sizing Calculator.
The terms that matter
A commercial loan is more than a rate — the structure can matter as much as the price:
- Interest rate — fixed or floating (a spread over an index like SOFR or a Treasury).
- Amortization — the schedule used to calculate the payment, often 25–30 years even when the loan term is shorter.
- Term — when the loan matures, commonly 5, 7, or 10 years, usually with a balloon payment.
- Interest-only — a period of interest-only payments, which boosts early cash flow. IO vs. amortizing
- Recourse vs. non-recourse — whether the lender can pursue the borrower personally beyond the collateral.
- Reserves and holdbacks — for taxes, insurance, capital, or interest during lease-up.
- Prepayment terms — yield maintenance, defeasance, or step-down penalties.
These all show up in the term sheet. How to read a term sheet walks through each line.
How the process runs
A well-run debt process follows a clear path:
- 1. Underwrite the asset — establish the lender’s view of NOI, value, and the supportable loan.
- 2. Package and position — present the property, business plan, and sponsor the way lenders need to see them.
- 3. Run a competitive process — take the deal to the right lenders and compare real terms, not just rates.
- 4. Negotiate and close — work the term sheet through to closing, managing diligence and conditions.
Doing this well is the difference between the first quote you get and the best terms the market will offer. It’s also where an independent advisor earns their keep — see advisor vs. commercial mortgage broker.
How Mercury helps
Mercury is an independent advisor on the debt side of commercial real estate. We underwrite your deal the way a lender will, identify the binding constraint, package the request, and run a competitive process across our lender network to maximize proceeds and certainty of close, where we’re licensed or exempt. Start with the tools, then discuss your financing scenario.
Frequently asked questions
How is commercial real estate financing different from a residential mortgage?
Commercial loans are underwritten primarily on the property’s income and value, not the borrower’s personal income. Sizing is driven by DSCR, debt yield, and LTV.
What credit score do I need for a commercial real estate loan?
There’s no single threshold the way there is for consumer mortgages. Lenders weigh the property’s cash flow, the sponsor’s experience and net worth, and the deal structure. Strong assets and sponsors matter more than a single score.
What is the typical term and amortization?
Terms are commonly 5, 7, or 10 years with a balloon, while the payment is often calculated on a 25–30 year amortization. Many loans include an interest-only period.