Investors

What are the terms, fees, and risks of commercial real estate loans?

By Steve Lockhart

The short answer

Commercial loans usually run on shorter terms than residential mortgages, often five to ten years, with payments amortized over a longer period and a remaining balance due at maturity.

Full answer

Commercial loans usually run on shorter terms than residential mortgages, often five to ten years, with payments amortized over a longer period and a remaining balance due at maturity. Lenders expect a lower loan-to-value ratio than on a home, so commercial buyers typically need a larger equity position, and underwriting leans on the property's income, the debt service coverage, the borrower's experience, and the local market. The structure rewards a property that produces steady income and a borrower who can show the numbers.

The biggest structural question is recourse versus non-recourse. On a recourse loan, you personally guarantee repayment, so the lender can pursue your other assets if the property falls short. On a non-recourse loan, the lender's recovery is limited to the property itself, which sounds safer, but lenders carry less exposure by underwriting more strictly and charging more for it. Fees are also heavier than on a home loan: origination, appraisal, environmental, legal, and underwriting costs, sometimes with a prepayment penalty built in, so the all-in cost matters more than the quoted rate.

The risks follow the structure. A balloon payment at maturity means you need a refinance or an exit plan; a dip in occupancy or rent can strain the coverage ratio; and a personal guarantee can survive the property if the loan is recourse. Rates and terms vary by lender, market, and property, and none of them are current fact for your deal without a live quote. I am not a lender, and I can help you build the income and exit model that the loan documents will sit on top of.

A note from Steve: nothing on this page is investment, legal, or tax advice. Markets move, and every property is different. Run your own numbers on the specific deal, and talk to your CPA and attorney before you commit.

Go a little deeper

Frequently asked

Questions investors often follow up on

What does recourse mean on a commercial loan?

Recourse means the borrower is personally liable for the debt, so if the property defaults and the lender takes it, the lender can still pursue the borrower's other assets for the shortfall. Non-recourse limits the lender to the property, but typically costs more and comes with carve-out provisions, so the distinction belongs in the loan comparison, not just in the brochure.

Why do commercial loans have lower loan-to-value ratios?

Because the collateral is riskier: a commercial property's income can change with occupancy, market conditions, and tenant turnover in ways a lender cannot fully control. A larger equity requirement gives the lender a cushion, and it also means the buyer carries more of the downside, which is part of why commercial underwriting demands a real business plan.

What fees should I expect on a commercial loan?

Commonly origination, appraisal, environmental review, legal, and underwriting fees, plus a prepayment penalty that can kick in if you refinance or sell early. Lenders quote these differently, so the comparison that matters is the total cost of each loan, not the rate alone.

The Lockhart Method

Your Home | My Strategy | Proven Results

My strategy: we build the property's income and exit model first, then compare commercial loan terms on total cost, structure, and recourse, not on the quoted rate alone. You should know the payment, the balloon, the fees, and who holds the risk before you sign, and we leave room in the income for the market's quiet years.

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