The Commercial Loan Defined
A commercial loan is a debt obligation secured by income-producing real property or used to fund business operations. Unlike residential mortgages, commercial loans are evaluated primarily based on the asset's or business's income-generating capacity rather than the borrower's personal income. This distinction shapes every aspect of how commercial loans are structured, underwritten, and serviced.
Commercial real estate loans can finance apartment buildings with 5+ units, office properties, retail centers, industrial facilities, hospitality properties, mixed-use developments, and special-purpose properties. Business commercial loans finance working capital, equipment, expansion, acquisition, and other operational needs.
The Commercial Loan Process Step by Step
Step 1: Pre-Qualification
Before submitting a full application, experienced commercial borrowers present basic deal parameters to potential lenders to gauge interest and receive preliminary terms indications — often called "indications of interest" or "term sheets." This step saves time by identifying mismatches between deal characteristics and lender criteria before extensive due diligence investment.
Key parameters to share at pre-qualification: property type, location, deal size, loan amount requested, intended use, current and projected income, and the borrower's experience and financial profile summary.
Step 2: Term Sheet
If a lender is interested in the deal, they issue a term sheet outlining the proposed loan structure. Key terms to review: loan amount, rate (fixed or floating, benchmark, and spread), LTV and DSCR requirements, loan term and amortization, recourse vs. non-recourse, prepayment structure, and significant conditions.
Term sheets are negotiable. Experienced borrowers review multiple term sheets from multiple lenders before committing. The Group's ethical lending standards apply fully here: a lender who pressures you to sign a term sheet quickly without time for proper review is not operating in good faith.
Step 3: Full Application and Due Diligence
Once a term sheet is accepted, the lender requires full application documentation. For commercial real estate loans this includes: rent rolls and lease abstracts, 2-3 years of operating statements, property tax bills, insurance documentation, existing survey and title report, and the borrower's personal financial statements and tax returns.
The lender simultaneously orders third-party reports: a property appraisal, Phase I environmental assessment, property condition report, and flood certification. These reports take 2-4 weeks to complete and are at the borrower's expense.
Step 4: Underwriting
The lender's underwriting team analyzes all documentation and third-party reports. The primary analysis focuses on the property's net operating income (NOI), the resulting DSCR, the loan-to-value ratio based on the appraisal, and the borrower's creditworthiness and experience. Underwriters may request additional documentation during this phase.
Step 5: Credit Approval and Commitment
The underwriter presents the deal to the credit committee (or individual credit authority holder, for smaller lenders). If approved, the lender issues a commitment letter with final loan terms. Review this document carefully before signing — it is binding and may contain material differences from the original term sheet.
Step 6: Closing
The lender's counsel prepares loan documents. Borrower's counsel reviews. Title insurance is confirmed. Closing conditions are satisfied. Documents are executed and funds disbursed.
Commercial Loan Terms Explained
Loan Term vs. Amortization: Commercial loans have a loan term (when the loan matures and must be repaid or refinanced) and an amortization period (the calculation schedule for monthly payments). A 10-year term with 30-year amortization means monthly payments calculated as if the loan amortizes over 30 years, but a balloon payment is due at year 10. Most borrowers refinance at maturity rather than holding until full amortization.
Rate Structures: Fixed rates are locked for the loan term. Floating rates are tied to a benchmark (typically SOFR in 2026) plus a spread. Hybrid rates are fixed for an initial period, then floating. Fixed rates provide certainty; floating rates carry rate risk but may start lower.
Recourse vs. Non-Recourse: Recourse loans allow the lender to pursue the borrower's personal assets beyond the property in default. Non-recourse loans limit lender recovery to the property. Most bank commercial loans are recourse; CMBS and insurance company loans are often non-recourse with "bad boy" carve-outs for fraud, misrepresentation, and environmental violations.
Prepayment Provisions: Step-down penalties decrease over the loan term. Yield maintenance requires the borrower to compensate the lender for the present value of remaining interest payments. Defeasance replaces the loan collateral with government securities. Understanding prepayment costs is essential before signing any commercial loan commitment.
How Lenders Underwrite Commercial Deals
NOI calculation starts with gross potential rent (all units fully leased at market rates), then subtracts vacancy and credit loss assumptions (typically 5-10% for stabilized multifamily, more for office and retail), then subtracts operating expenses to arrive at NOI. DSCR is NOI divided by annual debt service. Most lenders underwrite to a minimum 1.25x DSCR.
The appraisal determines the value basis for LTV calculation. Lenders apply LTV limits based on property type: 75-80% for stabilized multifamily, 65-75% for office, retail, and industrial, 60-65% for hospitality and special-purpose. Higher risk property types face lower LTV limits.
See the commercial lending overview for comprehensive coverage of all commercial loan types, and the 2026 commercial lending guide for current market context.