How to Finance Commercial Property

Financing commercial property involves more complexity and more options than residential real estate. The right financing structure depends on the deal type: owner-occupied building, investment property, ground-up construction, or a refinance of existing debt. Each of these deal types has a different set of lending programs available, and the terms, rates, and qualification requirements vary significantly. Understanding the landscape before you start the process helps you target the right program and avoid wasting time with lenders who are not a good fit for your deal.

For owner-occupied commercial properties, SBA 504 and SBA 7(a) loans offer the most favorable terms with down payments as low as 10% and terms up to 25 years. These programs are specifically designed for small businesses purchasing their own facilities and offer below-market rates due to the SBA guarantee. The SBA 504 program uses a unique structure involving a conventional lender, a Certified Development Company, and the borrower's equity. The SBA 7(a) program is more flexible and can be used for mixed-use properties where the business occupies at least 51% of the space. Both programs require that the business meet SBA size standards and demonstrate the ability to repay from operating cash flow.

Investment properties that generate rental income can be financed through conventional bank loans, CMBS programs, or agency lending through Fannie Mae and Freddie Mac for multifamily. The choice of program depends on property size, type, stabilization level, and the borrower's preference for recourse vs. non-recourse lending. DSCR loans offer a streamlined option for investors who prefer to qualify based on property income rather than personal tax documentation, making them popular with borrowers who have complex tax returns or multiple entities. For larger multifamily properties with 50 or more units, agency lending provides the most competitive rates and longest terms in the market.

Value-add and transitional properties that are not yet stabilized typically require bridge financing to fund the acquisition and business plan execution, followed by a refinance into permanent debt once the property is stabilized. This two-step approach is the standard path for investors acquiring properties that need renovation, lease-up, or repositioning. The bridge loan provides flexible, short-term capital during the execution period, and the permanent loan provides the long-term, lower-rate financing once the property is generating sufficient income. Working with a broker who understands both sides of this process helps borrowers plan the full capital strategy from acquisition through stabilization.

Frequently Asked Questions