Guide to Commercial Real Estate Loan Rates

David Cohn
April 6, 2021
Commercial loans

We often get asked this question: What are the typical rates on commercial real estate loans? The answer really depends on the type of loan and lender you choose. In this blog, we’ll talk about what kind of interest rates you can expect based on several factors.

But First, Commercial Real Estate Loan Overview.

A commercial real estate (CRE) loan—often called a business mortgage loan—is a type of financing product designed specifically for buying or renovating commercial properties and spaces, whether new or existing.

The interest rates on commercial real estate loans range between 3.5% to 20% depending on several factors, including (1) the type of property being financed, (2) the type of lender, and (3) the borrower’s creditworthiness.

SBA lenders and traditional banks charge the lowest rates for CRE loans, but processing times take longer, and not everyone is qualified. Hard money lenders charge the highest rates, but they typically have fewer requirements and can finance a project within days.

To help you compare commercial real estate loan rates, we have compiled different types of loans and summarized the average interest rate for each in 2021.

Average CRE rates based on the loan type

Interest rates really depend on the type of loan you ultimately choose. It can be as low as just a little over 2% to as high as 18% (based on 2021 figures).

Government-backed CRE loans such as USDA loans and SBA loans generally have the lowest interest rates. They also have higher loan-to-value ratios, which means you don’t need to make a big down payment. Refer to the table below for general guidance.

Traditional CRE loans have a lengthy application process and require a lot of documentation to complete. They are also quite stringent when it comes to credit scores, with only prime (or near-prime) borrowers qualifying for them.

If your credit score does not meet the minimum requirements, some banks will still lend you money provided that you offset their risk by making a bigger down payment and agreeing to pay higher interest rates. You also can work with alternative lenders in the subprime lending market or look for hard money loans and bridge loans.

Also Read: Difference Between Commercial Bridge Loan & Hard Money Loan

Average CRE loan interest rates for commercial investment properties

An “investment” commercial property loan allows you to buy a CRE asset to resell or renovate for profit. It’s possible to get interest rates of as low as 3.727% on these types of loans. Do note, however, that you have to put more money down because LTV ratios on investment property loans are lower than LTV ratios in owner-occupied property loans.

The average LTV for this loan type in 2021 ranges from 66% to 73%. To illustrate, if you buy a building that is worth $10 million, the lender may only agree to lend you $7.3 million (or 73%). This means that you have to make a down payment of $2.7 million.

If you’re looking for low-interest rates, some of your best options are commercial mortgage companies, credit unions, and regional banks, as shown in the table below.

Having a FICO score of 620 and up—plus a solid investment pitch—can increase your loan approval chances. You also have to demonstrate that you have sufficient funds for a down payment and that you have successfully managed investment properties in the past.

It’s also possible to get more favorable rates and terms if you are prepared to pay a substantial down payment. The key is to shop around and do not be afraid to negotiate.

Experts also recommend trying local mortgage lenders and local banks. These financial institutions usually have more interest in putting money in their local communities compared to national lenders.

Average CRE loan rates for building investment properties

Expect to pay higher rates if you want to build rather than purchase a commercial investment property. As of 2021, commercial construction loan rates range from 6.724% to about 8.15%. This is because lenders consider construction a riskier endeavor compared to buying a finished building, so they charge higher rates to offset the risk.

That said, LTV ratios on construction loans are typically higher than LTV ratios on standard investment property loans, so you don’t need a huge down payment.

The maturity on construction loans is also shorter—between 18 to 26 months. Borrowers are expected to pay the loan back when the building is completed. Most construction loans are structured to pay only for the interest during the term and then pay a large final balloon payment in the end.

Commercial Real Estate Loan Rates – How it Works?  

You can use a commercial property loan to fund the purchase, upgrade, or improvement of almost all kinds of commercial real estate, including offices, retail shops, warehouses, etc. It’s important to understand key terms to ensure that you’re getting the best rates and the most favorable deal. Here are four concepts you need to know:

1. Loan-to-value or LTV ratio

The LTV ratio shows the size of the loan compared to the property’s value. Lenders typically offer LTVs of 50% to 90%. SBA lenders tend to require the least down payment, while hard money lenders usually have a larger down payment because they’re taking on more risk.

Let’s say you want to buy a property that is worth $1 million. If the lender can offer an LTV of up to 80%, they can lend you $800,000. You need to come up with the remaining $200,000 as a down payment.

2. Fixed vs. variable CRE loan rates

Interest rates can either be variable or fixed for the duration of the loan.

Variable interest rates fluctuate based on certain market trends. They may reset every month or every 3 years depending on the schedule agreed on in the loan contract.

Choosing a fixed-rate loan will give you peace of mind and allow you to budget your funds more strategically. However, not everyone qualifies for a fixed interest rate. If you lack certain qualifications, lenders may only be willing to give you a variable rate.

The type of rate you get also depends on the nature of the loan you are applying for. For example, SBA 504 interest rates are fixed, while SBA 7(a) interest rates vary.

3. Loan structure

The structure of the CRE loans is another important factor that affects interest rates.

Some loans are fully amortizing—which means that borrowers make a series of payments for the entire term to pay off the loan. The initial payments go towards paying off the interest, with more and more money going towards the principal over time.

Meanwhile, some loans are structured with a balloon payment in the end. Borrowers make lower monthly payments throughout the loan term and then pay one lump sum to clear the remaining balance in the end. Those who cannot afford to pay the balloon payment have the option to renegotiate or refinance their loan.

After-repair value (ARV)

Many lenders look at the ARV when reviewing applications for a fix and flip commercial loans or financing CRE properties requiring renovation. ARV refers to the property’s value once it has been fixed. Some lenders lend up to 70% of a property’s ARV.

To illustrate, if a building will be worth $2 million after renovation, the borrower can get a maximum loan amount of $1.4 million and bring $600,000 to the table as a down payment.

LTV ratios are usually higher than ARV ratios.

Factors Affecting CRE Loan Interest Rates

Commercial property interest rates are generally lower than unsecured business loan rates because the property secures the loan, serving as collateral. But just as interest rates on other types of business financing rise and fall, interest rates on commercial real estate loans can also fluctuate depending on three main factors:

1. Property Type & Location

How do you plan to use the commercial real estate you want to buy? This can have a huge impact on the interest rate. If you intend to construct a building from the ground up, be prepared to pay higher interest rates because lenders see such activities as riskier.

The location also has a lot to do with how high or how low your interest rates will be. The lender will look at the property’s overall condition, too.

2. Your Credit Score (business and personal)

Lenders look at the creditworthiness of the business and the borrower when determining interest rates. Borrowers with higher credit scores typically qualify for lower rates.

And because CRE loans usually involve millions, lenders tend to have higher standards for creditworthiness. You have to demonstrate that you have managed your personal and business funds responsibly in the past.

You need a credit score of at least 700 if you want to qualify for an SBA loan or a bank loan. Those with lower credit scores can access funding through hard money lenders. It makes sense to do what you can to improve your credit score in the months leading up to your application.

Lenders will also look at your business credit score, which is a reflection of how responsibly your company has been paying its bills and how long you’ve been operating profitably.

3. Fees

Most lenders charge extra fees (usually bundled into the loan). These fees include loan application costs, legal fees, property appraisal fees, survey fees, and loan origination costs.

Some lenders will require borrowers to pay these fees before they fully disburse the borrowed amount. Fees are expressed as points, with a 1 point corresponding to 1% of the total loan amount.

Do you intend to pay the loan off early? Make sure you are aware of any penalties that the lender might impose on prepayment.

4. Term Length & Loan Amount

The term and loan amount can also affect the interest rates on a commercial property loan. Hard money loans with shorter terms usually have higher interest rates because they take on more risk. That said, borrowers pay a larger amount in total interest on long-term loans even if the rates are lower.

How to Access Affordable CRE Loan Rates?

The underwriting process on commercial property loans is often long and complicated. The good news is that you can do certain things to get funding quicker.

The key is to give commercial mortgage underwriters all the information they need to evaluate your application. They will want to look at your business financials, personal finances, and the specifications of the commercial property.

Be ready to submit pertinent financial documents in the last 3 to 5 years. This may include asset statements, accounting reports, tax returns, profit and loss statements, etc. Lenders will also ask for the following information:

  • Exact property address
  • Commercial property type (e.g., office space, shopping center, etc.)
  • The property’s size/square footage
  • Percentage of property that is occupied by the owner (because some lenders require the commercial property to be 50% owner-occupied, at least)
  • Overall property condition and what repairs are needed
  • The estimated value of the commercial property (usually needs to be professionally appraised; relates to the loan size)

It’s also important to be responsive when the lender asks for more documents. This will help them review your commercial property deal and approve it quickly.

The bottom line

Investing in commercial real estate—whether you want to use it for your own business or intend to sell/rent it out for a profit—involves a large financial transaction. Securing a low commercial mortgage interest rate can certainly help you save a lot of money over the loan term.

Don’t rush. Take some time to shop around. And don’t be afraid to negotiate, especially if you have multiple offers.

Experts recommend starting with banks and lenders that you already have established relationships. You can also start with local and regional banks, mortgage lenders, and credit unions because they are more likely to understand the local market than national lenders.

Finally, please read the contract carefully before signing it. Look at the fine print on the loan offer. Does it require personal guarantees or require you to pay for environmental reports are building inspections? Does it have clauses that could void it if violated?

These are not necessarily deal-breakers, but you need to be aware of them so that you’re not caught off guard. It’s a good idea to consult with a legal advisor or lawyer who can walk you through the finer points of the offer and ensure that your interests are protected.

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