Commercial Loan Basics
Commercial loan basics start with understanding how commercial financing differs from residential financing. Commercial loans are typically shorter in term, require larger down payments, rely on the property’s income, and include prepayment structures that can be expensive if a borrower sells or refinances early. In Salt Lake City, borrowers have more lender choices than ever, but each choice comes with its own tradeoffs between rate, term, flexibility, and execution speed.
Loan terms usually run five, seven, or ten years with amortization over 20 to 25 years, which creates a balloon payment at maturity. Rates can be fixed for the full term, fixed for part of the term and then float, or fully floating. Down payments on investment property generally run 25 to 35 percent depending on property type and borrower strength. Owner user properties qualify for SBA 504 and SBA 7(a) programs with down payments as low as 10 percent, which matters to many Salt Lake City small business buyers. Debt service coverage ratio, or DSCR, drives loan sizing, with most Wasatch Front lenders looking for 1.20 to 1.30 or better. A common mistake is assuming the property qualifies at the seller’s asking price without running DSCR against realistic post sale property taxes. Another mistake is ignoring recourse, since many commercial loans include personal guarantees that expose the borrower beyond the property itself.
Prepayment structures deserve careful review. Step down prepayment penalties reduce each year of the loan and usually fit borrowers who plan to hold. Yield maintenance and defeasance are more complex and often costly, designed to make the lender whole if the loan pays off early. In a rising rate environment, yield maintenance can actually be cheaper than expected, while in a falling rate environment, it can be brutal. Rate locks, extension options, and carve outs for sale to family members or partners are all negotiable on many loans, especially through local and regional banks active on the Wasatch Front.
Reserves and covenants round out the structure. Many lenders require the borrower to hold several months of payments in a reserve account. Some require separate reserves for tax, insurance, roof, HVAC, and tenant improvements. Covenants may require minimum DSCR during the loan, minimum occupancy, or notice requirements when leases sign or expire. Borrowers who skim the term sheet often find themselves in technical default years later without realizing the covenant was there the whole time. Careful review of the commitment letter and loan documents is essential, and a commercial attorney can catch issues that general practice attorneys sometimes miss.
The best commercial agents in Salt Lake City introduce clients to the right loan for the right deal. Omada Commercial works with SBA specialists, local and regional banks, credit unions, and life insurance companies that lend on Salt Lake County commercial property. As top commercial realtors in Salt Lake City, the Omada Commercial team helps buyers compare real terms from multiple lenders, not just one relationship bank, and flags structural items like prepayment penalties, recourse, and reserve requirements before they become surprises. The team also coordinates with the lender’s appraiser, environmental consultant, and underwriting team so the loan closes on schedule. Buyers trust Omada Commercial because the team understands how loan structure affects long term return, not just the headline rate, and that perspective often saves more money than a quarter point discount on rate alone.
