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Commercial financing, in plain English
The terms you'll run into when financing a commercial deal, defined clearly.
The terms you'll run into when financing a commercial deal, defined clearly.
Short-term, interest-only financing used to close on a commercial property quickly while permanent financing is arranged. Terms typically run 6 to 36 months.
The loan amount as a percentage of the property's value. Commercial bridge loans typically fund at 65 to 75 percent LTV.
An upfront fee charged by the lender to arrange the loan, typically 1 to 3 points on a bridge loan, where one point equals one percent of the loan amount.
The plan to pay off a bridge loan, usually by refinancing into permanent financing or selling the property.
A payment that covers only the interest on the loan, not principal, which keeps monthly costs lower during a short bridge term.
Long-term financing, often a bank or SBA loan, that replaces short-term bridge financing once a property is stabilized.
A loan partially guaranteed by the Small Business Administration, often used for owner-occupied commercial property, with long terms and competitive rates.
A commercial property where the business that owns it also operates from it, which can open up SBA and conventional financing options.
A property that doesn't fit standard bank lending guidelines, such as mixed-use buildings, churches, RV parks, or assisted living facilities.
Cash a lender wants to see available after closing, as evidence the borrower can carry the property through unexpected costs.
The point at which a property reaches steady occupancy and income, which usually makes it eligible for permanent financing.
A property that combines more than one use, such as retail on the ground floor with residential or office above.
The large lump-sum balance due at the end of a partially amortized commercial loan. A 5/25 loan, for example, has payments based on 25-year amortization but comes fully due at year five. Refinancing before the balloon matures is the standard plan.
Net operating income divided by annual debt payments. A DSCR of 1.25 means the property produces 25 percent more income than its debt costs. Most permanent lenders want roughly 1.20 to 1.25 or higher; below 1.0 the property does not cover its own payments.
A property's income minus its operating expenses, before debt payments and taxes on income. NOI is the number most commercial lending math is built on, including DSCR and value estimates.
Net operating income divided by property value, expressed as a percentage. A $200,000 NOI at a 7 percent cap rate implies a value around $2.86 million. Lower cap rates mean higher valuations for the same income.
A short document from a lender outlining the proposed loan: amount, rate, points, term, and key conditions. It is not a commitment, but it is the first concrete picture of the deal and the right stage to negotiate structure.
A fee for paying a loan off before a set date. Many commercial loans carry one, and many balloon loans waive it in the final months before maturity, a window designed for the refinance. Know your loan's schedule before planning an early payoff.
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