Table of Contents

  • Factors That Affect Your Commercial Real Estate Loan Rate
  • Commercial Real Estate Loan Types and Their Interest Rates
  • How Commercial Real Estate Loan Rates are Calculated
  • Which Documents You’ll Need to Get Affordable Commercial Real Estate Loan Rates
  • Commercial Real Estate Interest Rates Summarized

Today, commercial real estate loan rates are low compared to previous eras, with interest rates hovering between 10 and 20 percent for the average borrower. Depending on your creditworthiness, however, commercial mortgage rates currently range anywhere from 5 to 30 percent. Since the difference could mean hundreds of thousands of dollars added to your bottom line, it’s important to know what goes into calculating them.

In this guide, we’ll go over how the financing type, amount, repayment length and utilization combine with your credit score and other factors to give you an estimate of what rates and terms you can expect in your commercial property loan.

Factors That Affect Your Commercial Real Estate Loan Rate

Just like a residential mortgage, loans for commercial real estate are based on multiple criteria. Your creditworthiness, the principal size and term, the current economy and other factors can affect quoted interest rates. Learning what lenders are looking for and how it applies to your situation gives you a basis to find the right lender that will provide you with optimal financing terms.

Credit Score

Like any other commercial business loan, your business and personal credit histories go a long way in determining what commercial real estate lending partners will work with you, and at what interest rate. Showing a long-standing ability to incur and pay off debt is attractive to lenders. Without it, you’ll likely qualify for funding with higher interest and shorter terms.

Banks and government-backed programs require strong credit scores (sometimes over 700). It’s possible for other lenders to work with you if you have a lower score, but the interest rate will get considerably higher. It’s possible that you may not be able to obtain any financing at all, depending on the state of your credit score. If you’re worried about being denied or given a high interest rate, make an effort to try to raise your credit score before applying for a commercial real estate loan. 

Loan Details

The initial principal amount and length of your repayment term will be important in determining your interest rate. Generally, longer-term commercial loans will have lower interest figures attached to them, while short-term ones go up over 10 percent in some cases. 

Borrowers who receive longer repayment lengths are usually more creditworthy. Similarly, those who can qualify for larger principal amounts will be approved for lower interest rates.

Most lower-value, short-term options are offered to less-qualified owners at an increased price. Since the lender is taking on more risk working with these borrowers, they charge higher rates to help make it worth their time.

Loan-to-Value Ratio (LTV)

The loan-to-value ratio reflects the amount of the loan compared to the value of the commercial property. For example, a lender offering a 75 percent LTV is willing to lend three-quarters of the total value of the building you’re buying. This means that, if you’re looking to purchase a $400,000 property, they’ll cover $300,000. You’d then have to come up with the other $100,000 as a down payment to match the purchase price.

LTV is used to determine how risky the investment is for the lender. A higher ratio means the lender has more invested in the property, thus increasing their risk in case of default. Providing a higher down payment will mitigate this risk and lead to lower interest rates on your loan. 

Depending on which type of commercial real estate loan you qualify for and the lender’s unique terms, you can receive an LTV between 50 and 90 percent.

After-Repair Value Ratio (ARV)

After-repair-value is what the perceived value of the commercial property will be after necessary renovations. Developers looking to rehab properties or business owners renovating an office building to fit their needs are examples of common scenarios where ARV comes into play. This calculation would be used to determine how much money is possible to borrow when buying real estate that needs any type of construction on the building.

Say your lender offered you an ARV of 60%. If, after the work is completed, the value of the property was estimated to be $500,000, they’d finance $300,000 and you would need to come up with $200,000 for a down payment. 

Like with LTV, lowering your ARV will help to drop your interest rate. If you don’t display positive creditworthiness, however, you can end up with a high rate and still have a low ARV.

Current Market Rates

Current interest rates for commercial real estate mortgages are based on prime lending rates. These figures are tied to the economy and have been low and steady since 2008’s recession, and that bodes well for you since lenders use the most current data to determine what you’ll pay. 

For example, if you signed a contract today, a bank will take the current rate and add 1.5 to 3.5 percent based on your credentials as a borrower. 

Small Business Tip: Although they’re low today, prime rates fluctuate with the stock market and are subject to change at any time. Make sure to check in before applying to avoid surprises.

Lenders like the Small Business Administration and private investors also use prime rates to determine how high to set the interest in your commercial real estate loan. Again, the increase that they apply will be in accordance to your creditworthiness and the financing terms you’re applying for.

Question mark on top of a pile of interest rates for commercial real estate loans.

Commercial Real Estate Loan Types and Their Interest Rates

Based on the factors we examined in the previous section, it can either be very easy or quite challenging to find a commercial real estate loan with low interest rates. Years ago, it was tough for a borrower with less than fair credit to get favorable terms, if they could find a lender to work with them at all.

Through the emergence of online marketplaces, such as Fast Capital 360, there are more ways than ever to finance commercial real estate for your small business. Some commercial property loans, however, are harder to obtain than others.

Traditional Bank Loans

Banks are the gold-standard of commercial real estate lending. They offer low rates and high borrowing amounts, helping you cover the purchase of more expensive property. If you need a smaller amount—under $250,000—it may be harder to find a bank to work with you. Banks aren’t usually interested in these opportunities, as there isn’t as much of a monetary benefit with lower principals.

 

Banks also will offer up to 80 percent LTV for qualified borrowers, meaning you would only be charged with coming up with 20 percent of the real estate’s cost on your own. 

Since they’re so beneficial to small business owners, however, they’re typically reserved exclusively for the most qualified applicants. It’s common for banks to require a credit score above 700, multiple years in business and large annual revenues in order to be considered. 

Generally, banks offer the most competitive interest rates you can get on commercial loans. For real estate, you can expect to pay between 5 and 7 percent.

Most bank loans will come with variable rates, resetting at intervals of between 1 to 5 years. We will get into how variable interest rates work a little later.

SBA Loans

The Small Business Administration offers multiple programs that help owners, like you, finance commercial property. They’re put in place to open up access to funding for small businesses that don’t qualify with banks. What the SBA does is “guarantee” a portion of a loan provided by a bank as a means of mitigating the lender’s risk and help you get funding. 

This doesn’t mean they’re easy to obtain, however. You’ll need a credit score over 650, and must show a positive and lengthy business history as well as a strong business plan moving forward to be considered.

If you don’t have much to put up for a down payment, these can be great options for you. The LTV ratio that the SBA offers can be as high as 90 percent, depending on the program you receive funding through.

When it comes to commercial real estate loans, there are two options:7(a) and CDC/504. Each has its own conditions and rates, but both are comparable to what you can get through a bank.

SBA 7(a) Loans

The 7(a) program is the most popular of all SBA initiatives. There are many types of funding options under the 7(a) umbrella, each encompassing a variety of business uses, including commercial real estate. Guarantees on these funding options can be up to 90 percent based on the type, size and what you’re using the funding for.

The SBA sets interest for 7(a) funding to the current prime rate. Rates can be fixed or variable depending on your qualifications, and will get higher as your principal amount rises. This makes them an attractive option for those who need smaller loans, but gets pricey if you need to borrow over $1 million. 

Generally, you can expect to pay between 7 and 10 percent when funding through this program. 

CDC/ 504 Loans

Unlike their 7(a) counterpart, SBA 504 loans are put together strictly for fixed assets like equipment and real estate.

This program differs from others because it’s essentially fulfilled by two separate lenders. A Certified Development Company, or CDC, works with the SBA to provide 40 percent of the real estate’s total cost while a bank covers 50 percent or more. A 10 percent down payment is required by the borrower, although some may have to put down up to 15 or 20 percent.

This means that the LTV is usually at 90 percent, making it easier for businesses with less cash on hand to obtain the commercial property they need.

The CDC-backed portions of 504 loans have interest fixed at a slight increase over the current Treasury rate. While those can always change, you can currently expect to pay around 4 to 5 percent after the markup.

For the bank’s contribution, however, there is no set cap and you’ll have to negotiate the rates and fees independent of the CDC. Generally, though, you’ll be able to receive an interest rate comparable to other commercial bank mortgages.

Since rates don’t inflate like they do in the 7(a) program, CDC/504 loans are a great option for those in the market for commercial real estate with seven-figure price tags.

Online Marketplace Loans

If your small business is unable to meet the strict criteria for bank and SBA loans, online lending marketplaces such as Fast Capital 360 may be your next best option for buying real estate.

These companies facilitate your application and match you with the right lender inside their network. Doing so creates a simple, streamlined process that can potentially get you funding within hours.

More importantly, it takes the hassle out of shopping around yourself to find the best rates and terms possible for your commercial real estate loan. Based on your creditworthiness, these agreements generally come with an interest rate in the 8- to 12-percent range, making them a perfect alternative for many small business owners.

Commercial “Bridge” Financing

Short-term “bridge” loans are commonly issued by private investors and alternative lenders. Essentially, they’re any type of funding product outside of the traditional bank and SBA loans with longer repayment lengths, such as commercial lines of credit or Merchant Cash Advances

With these, you’ll have a very-abbreviated term length, sometimes as low as six months. No matter the length you’re offered, private lenders usually charge high up-front fees and rates, further driving up your costs. You should expect to pay over 10 percent (and possibly up into the teens) when working with these lenders.

Hard Money Loans

Many types of short-term loans are unsuitable for commercial real estate. They don’t typically offer high enough principal amounts, making them more common for commercial truck financing or other vehicle and equipment funding. You’ll have to either bring in a larger down payment or find a private investor who will give you what you need, at a steep price.

Since most borrowers in this market don’t have the immediate cash on hand they need, many are turning to private companies or investors to help finance their new property.

Rates for these types of “hard money” commercial real estate loans are higher than any other, due to the fact that the lenders are incurring a great amount of risk working with less-qualified borrowers. You can expect to pay upwards of 20 percent interest if you need to turn to a private lender. 

Sometimes these contracts leave large “balloon payments” at the end of the term that are commonly refinanced, which we’ll review in greater detail in the next section.

Business owner calculating a commercial real estate loan rate.

How Commercial Real Estate Loan Rates are Calculated

Aside from the type of funding you’re applying for, the way interest accumulates can change what you pay in total. While your lending partner can negotiate unique terms with you, there are a few common ways interest is worked into a contract:

Fixed vs. Floating (Variable) Rates

It’s important to consider if your interest payments will change over time before agreeing to any loan contract. Given the typical costs associated with commercial real estate, even a small change can mean tens of thousands taken off your bottom line. 

When your commercial mortgage contract includes a fixed rate, that percentage will yield your interest until the maturity date. No matter what happens inside or outside of your control, your rate will be locked in.

This can help make budgeting and forecasting for the future easier, but many borrowers will not qualify for them. Only the CDC portion of an SBA 504 loan is guaranteed to come with a fixed interest rate.

Variable—sometimes referred to as “floating” or, in this case, an adjustable-rate mortgage (ARM)—interest changes with the current market rates. These are very common with commercial real estate loans because lenders want to cover themselves over the longer life of repayment.

When you come to terms with your lender, you’ll agree upon terms—generally every 1-5 years, depending on your case—when the rate will reset. Interest will then be calculated off the new percentage until the next interval. Be wary of this when agreeing to a contract, because changes in the economy can either help or hurt your monthly payment going forward.

Full-amortization

Most common fixed-rate mortgages are paid off using an amortization schedule. Interest and fees associated with these loans are rolled into the principal amount and paid off in equal payments until the end of the term.

Interest is front-loaded, meaning your payment will consist of less of the principal amount at the beginning of your repayment term. As the loan matures, the ratio flips and you’ll begin paying down more of the principal balance.

Small Business Tip: Most amortized loans allow you to make extra, targeted payments on the principal balance. Adding just a hundred extra dollars or more per month toward your principal can save you years of payments and thousands in interest. But beware, some lenders may charge “prepayment” fees that decrease over time, protecting them from missing out on too much of the profit they expected to gain.

Balloon Payments

Common in commercial lending, the amortization period in this structure is longer than the total repayment term. Doing so leaves a large payment at the end of the term. Most borrowers plan in advance to either refinance their mortgage as the final balloon payment nears, or sell their property before the loan’s maturity date.

Some lenders offer interest-only or “bullet” loans, which only require you to pay the interest during repayment. This can be attractive to borrowers who need to jump on a property before it’s off the market, need a commercial construction loan to build up value in a tract of land or those who can use the lower monthly payment to put money back into their business in the short-term.

Doing so leaves the entirety of the original principal to be repaid at maturity. If you can refinance, you’ll be stuck paying interest twice on the principal amount. If you can’t, you’ll be stuck finding a way to pay off a huge lump sum.

Which Documents You’ll Need to Get Affordable Commercial Real Estate Loan Rates

During the application and underwriting process, you’ll be asked to provide documentation and other information to help your lender assess the risk in funding your real estate purchase. 

To get the best possible interest rate, it’s important to make sure you have everything prepared, ensuring your lender will have the clearest possible picture of your business. If the lender has any doubt in your ability to pay off the debt, it can lead them to raise rates or deny you completely.

Before applying, make sure to have the following ready:

  • Property info (building type, appraised value, location, square footage, etc.)
  • Bank statements
  • Personal and business tax returns
  • Income statements and balance sheets
  • Profit and loss statements
  • Any licenses and permits your business or the property require

When it comes to the financial statements, provide the lender with 3 to 5 years of documentation where possible. If they request more information, make sure to be punctual and precise in getting them whatever they need.

Commercial Real Estate Interest Rates Summarized

While it’s possible to estimate what the current commercial real estate mortgage rate is in relation to your potential loan, every case is unique. 

According to the National Association of Realtors, the average for these transactions is between 5 and 7 percent. This number, however, is based on bank and SBA rates.  

If you’re unable to qualify for these preferred lending programs, there are alternative options. Of course, though they do come at an additional cost. To avoid having to pay more now, some business owners prefer renting office space until their credit profile has improved. Make sure to do your research to find out what you’ll qualify for and if you would be better off waiting before trying to buy commercial property.

If you’re ready to buy, you now have everything you need to know to ensure you can find the best interest rate for your commercial real estate loan. Apply for yours today.