Your first commercial property loan: what to expect
Income-producing property is underwritten on the building's numbers, not yours.
Biscayne Lending 2 min read
A commercial loan finances a property that makes money: an apartment building of five or more units, a shop with flats above, an office, a warehouse. If you have only bought houses before, four things change.
1. The building's income is the qualification
The number that matters is net operating income — rent and other income, minus the cost of running the building.
$240,000 collected a year. Taxes, insurance, management, repairs and owner-paid utilities come to $90,000. NOI is $150,000.
Note what is not subtracted: the loan payment. NOI is the property's earnings before financing, because the whole point is to test whether those earnings can carry a loan.
2. Two tests, and the loan is the lower
- Coverage: NOI ÷ the annual loan payments, usually a minimum of 1.20–1.25.
- Loan-to-value: usually 65–75%.
Whichever allows less, that is your loan. On a strong building the value test binds; on a weakly-leased one the coverage test does.
3. It takes longer and costs more to get to the closing table
| Residential | Commercial | |
|---|---|---|
| Time to close | 3–6 weeks | 45–90 days, sometimes longer |
| Appraisal | $500–$900 | $2,000 and up |
| Extra reports | Rare | Environmental, sometimes engineering |
| Legal | Usually included | Often billed separately |
| Leases | Not applicable | Read and underwritten individually |
Typical ranges. Third-party costs are paid by the borrower and are generally non-refundable once ordered.
Budget for those reports before you are emotionally committed to the building.
4. You are underwritten too, just differently
Commercial lenders commonly want to see net worth at least equal to the loan, and around 10% of the loan in liquid funds after closing. They will ask for a personal financial statement, and they will check that its numbers match your statements.
They will also ask what you have run before. A first-time owner of a twelve-unit building is a different risk from someone on their fourth.
What to have ready
- The rent roll — who is in each unit, paying what, on what lease, until when
- The operating statement for the last twelve months
- Your personal financial statement
- Your experience with this property type
The first-timer's mistake
Quoting residential timelines and leverage to a seller. "I'll close in three weeks at 80%" is not a commercial loan, and saying it costs you credibility with the one person whose patience you need. Say sixty days and 70%, then be pleasantly surprised.
Send us the building's numbers and we will tell you what the coverage and value tests allow before you spend money on reports.
What next
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General information, not legal, tax or financial advice. Loan terms come only from a lender, in writing, after underwriting. Licensing and compliance rules differ by loan type and state.