How do you compare different types of commercial real estate loans and their rates?

1 Loan-to-value ratio

The loan-to-value ratio (LTV) is the percentage of the property's value that the lender is willing to finance. The higher the LTV, the more leverage you have, but also the more risk you take on. Lenders usually offer lower interest rates for lower LTV loans, as they have less exposure to default or loss. The typical LTV range for commercial real estate loans is 65% to 80%, depending on the property type, location, and condition.

2 Debt service coverage ratio

The debt service coverage ratio (DSCR) is the ratio of your net operating income (NOI) to your annual debt payments. The NOI is the income generated by the property after paying all operating expenses, but before paying taxes, depreciation, and interest. The DSCR measures your ability to repay the loan from the property's cash flow. The higher the DSCR, the more comfortable the lender is with your loan, and the lower the interest rate they may offer. The minimum DSCR for commercial real estate loans is usually 1.25, meaning your NOI must be at least 25% higher than your debt payments.

3 Amortization period

The amortization period is the length of time it takes to pay off the loan principal and interest. The longer the amortization period, the lower the monthly payments, but the higher the total interest cost. The shorter the amortization period, the higher the monthly payments, but the lower the total interest cost. The typical amortization period for commercial real estate loans is 15 to 25 years, depending on the loan type and the lender's preference.

6 Loan type

The loan type you choose for your commercial real estate property depends on your goals and the features of the property. Conventional loans from banks and credit unions typically offer fixed or variable rates, long or short terms, and moderate or high LTVs and DSCRs. SBA loans, backed by the Small Business Administration, provide low down payments, long terms, and low interest rates for owner-occupied properties or businesses that meet certain criteria. Bridge loans are short-term loans for transitional properties that need renovation, stabilization, or repositioning before qualifying for permanent financing. Hard money loans are short-term loans from private lenders that offer high LTVs, low DSCRs, and fast approvals for distressed or opportunistic properties that have equity potential but lack cash flow or creditworthiness. CMBS loans are pooled with other loans and securitized into bonds that are sold to investors. They offer low interest rates, long terms, and high LTVs but have strict underwriting standards and complex prepayment penalties.