Commercial Real Estate Loan Types: Choosing the Right Financing for Your Property

Commercial real estate financing is not a single product. It is a category containing fundamentally different instruments, each engineered for a specific combination of property type, borrower profile, hold period, and exit strategy. Selecting the wrong loan type does not just cost basis points; it can misalign your debt structure with your business plan and create refinancing risk, prepayment exposure, or cash flow constraints that compound over the life of the investment.

The seven primary CRE loan types each occupy a distinct position in the capital stack. Understanding where each fits, and more importantly where each breaks down, is the difference between a financing structure that supports your strategy and one that constrains it.

This guide examines each loan type on its merits: qualification requirements, typical terms, structural characteristics, and the specific scenarios where each type represents the optimal choice. If you are evaluating multiple options, start with the property's purpose and your intended hold period, then work backward to the loan type that fits.

Conventional commercial mortgages are originated by banks, credit unions, and institutional lenders without government backing. They represent the broadest category of CRE financing and typically offer the most competitive terms for stabilized, income-producing properties with strong borrower profiles.

Typical Terms

• Loan amounts: $500,000 to $25,000,000+
• LTV ratios: 65% to 80%, depending on property type and lender
• Interest rates: Typically 1.5% to 3.5% above the benchmark rate
• Amortization: 20 to 25 years with 5 to 10 year balloon terms
• DSCR minimum: 1.20x to 1.35x

Conventional loans work best for borrowers who can document strong financials, have existing banking relationships, and are acquiring or refinancing stabilized properties. The debt service coverage ratio is the primary underwriting metric, and loan-to-value constraints determine how much equity injection you will need at closing.

Best For

Owner-occupied commercial buildings, stabilized multifamily, anchored retail, and industrial properties with documented operating history. If your property has at least 12 months of stable income and you plan to hold for five or more years, conventional financing should be your starting point. See CRE loan requirements for qualification benchmarks.

The SBA 504 program is specifically designed for owner-occupied Commercial Real Estate, offering below-market fixed rates and low down payments that conventional lenders cannot match. The program uses a unique two-loan structure: a first mortgage from a conventional lender (typically 50% of the project cost) and a second mortgage from a Certified Development Company backed by an SBA-guaranteed debenture (up to 40%), with the borrower contributing as little as 10% down.

Typical Terms

• Maximum debenture: $5,500,000 (up to $5,500,000 for manufacturing or energy projects)
• Total project size: No statutory cap on total project cost
• Down payment: 10% standard, 15% for startups or special-use properties
• Interest rates: Fixed for the full 20 or 25 year term on the SBA portion
• Eligible expenses: Land, building, major equipment, soft costs, and eligible improvements

The 504's primary advantage is the fixed-rate, long-term structure on the SBA portion, which eliminates refinancing risk on 40% of the capital stack. Review eligible expenses carefully, as the program covers more than most borrowers expect.

Best For

Businesses purchasing or constructing their own operating facility. The owner-occupancy requirement (51% for existing buildings, 60% for new construction ) limits the program to operating businesses, not pure investors. Manufacturers and healthcare operators frequently benefit from the expanded debenture limits available for qualifying projects.

These three loan types serve distinct niches that conventional and SBA programs do not cover: large-scale securitized financing, transitional capital, and speed-driven executions.

CMBS (Commercial Mortgage-Backed Securities)

CMBS loans are originated by conduit lenders and pooled into securities sold to bond investors. Because the loan is designed to be securitized, underwriting focuses primarily on the property's income rather than the borrower's balance sheet.

• Loan amounts: $2,000,000 to $500,000,000+
• LTV ratios: Up to 75%
• Terms: 5, 7, or 10 year terms with 25 to 30 year amortization
• Rates: Competitive fixed rates, typically 1.0% to 2.5% above comparable Treasuries
• Prepayment: Defeasance or yield maintenance; no standard prepayment without penalty

CMBS loans offer non-recourse financing (no personal guarantees beyond standard carve-outs) and are ideal for stabilized investment properties where the borrower plans to hold through the full loan term. The tradeoff: inflexible servicing, strict loan covenants, and significant prepayment penalties if you need to exit early.

Bridge Loans

Bridge loans provide transitional financing for properties that do not yet qualify for permanent debt. Common scenarios include lease-up periods, renovations, repositioning, and acquisitions requiring fast closing.

• Loan amounts: $1,000,000 to $50,000,000+
• LTV ratios: 65% to 80% of as-is or as-stabilized value
• Terms: 12 to 36 months with extension options
• Rates: Typically 7% to 12%, depending on risk profile

Bridge financing is explicitly transitional. Your exit strategy must be defined before closing, whether that is permanent refinancing, sale, or stabilization to qualify for conventional terms. Review current bridge loan rate structures and understand how bridge loans apply to CRE transactions specifically.

Hard Money Loans

Hard money loans are asset-based, short-term instruments funded by private lenders. They prioritize collateral value over borrower creditworthiness, enabling transactions that institutional lenders will not touch.

• LTV ratios: 50% to 70% of as-is value
• Terms: 6 to 24 months
• Rates: 10% to 18%, plus 1 to 5 points in origination fees
• Closing speed: 5 to 14 business days

Hard money is not cheap capital, but it is fast and flexible. It exists for situations where speed or borrower circumstances eliminate conventional options. For a direct comparison of these two transitional products, see bridge loans vs. hard money loans.

Construction and mezzanine loans occupy specialized positions in the capital stack and are frequently used in combination with other CRE loan types.

Construction Loans

Construction loans fund ground-up development or major renovation projects. Unlike permanent financing, these loans disburse in draws tied to construction milestones verified by third-party inspectors.

• Loan-to-cost (LTC) ratios: 65% to 80% of total project cost
• Terms: 12 to 36 months (construction period plus stabilization)
• Rates: Variable, typically prime plus 1.0% to 3.0%
• Interest structure: Interest-only during construction on disbursed amounts
• Recourse: Full recourse with completion guarantees in most cases

The interest-only structure during the construction period keeps debt service manageable while no income is being generated. Construction contractors and developers should understand that lenders evaluate the project budget, contractor qualifications, and pre-leasing or pre-sale activity as heavily as borrower financials.

Most construction loans require a permanent financing commitment ("take-out") before closing. Your collateral valuation will be based on the projected stabilized value, but draw schedules are tied to actual construction progress.

Mezzanine Financing

Mezzanine debt fills the gap between senior debt and equity in the capital stack. It is subordinate to the first mortgage, secured by a pledge of ownership interests rather than a lien on the property, and priced to reflect its higher risk position.

• Typical position: 70% to 90% of total capitalization (combined with senior debt)
• Rates: 12% to 20%
• Terms: Co-terminus with or slightly shorter than the senior loan
• Structure: Often includes current-pay interest plus a participation or equity kicker

Mezzanine financing reduces the equity requirement, which improves return on equity when the deal performs. The tradeoff is a significantly higher blended cost of capital and intercreditor agreement requirements that constrain operational flexibility. Real estate investors pursuing value-add strategies frequently layer mezzanine debt to maximize leverage on acquisitions where the business plan supports the higher debt load.

The right loan type is a function of four variables: property status (stabilized vs. transitional), intended use (owner-occupied vs. investment), hold period, and borrower profile. The following framework maps common scenarios to the appropriate financing structure.

Decision Framework

• Stabilized, owner-occupied, long hold: SBA 504 (if under program limits) or conventional fixed-rate. The 504's below-market second mortgage makes it the default choice when eligibility criteria are met.
• Stabilized, investment property, long hold: CMBS for non-recourse and competitive fixed rates, or conventional for flexibility. Weigh prepayment penalties against rate and recourse preferences.
• Value-add or repositioning: Bridge loan for the transitional period, then permanent refinancing into conventional or CMBS. Define your exit before signing the bridge term sheet.
• Ground-up development: Construction loan with a permanent take-out commitment. Budget a realistic contingency reserve; cost overruns are the primary risk in construction financing.
• Speed-critical acquisition: Hard money to close, then refinance into permanent debt within 6 to 12 months. Only viable when the spread between acquisition cost and stabilized value justifies the carrying cost.
• Highly leveraged investment: Senior debt plus mezzanine financing. Run sensitivity analysis on the blended rate; if the project cannot service the combined debt at a 1.10x DSCR under a stress scenario, the leverage is too high.

Before committing to any loan type, understand the rate environment. Review current CRE loan rate benchmarks and the down payment requirements for each product. Then use the framework in evaluating loan offers to compare specific proposals across loan types on a standardized basis.

Many CRE transactions use more than one loan type over the property's lifecycle. A construction loan converts to permanent financing. A bridge loan refinances into a CMBS execution. Understanding when to refinance and how fixed vs. variable rate structures affect your hold-period economics is as important as selecting the initial loan type.