How Commercial Real Estate Loans Work
Commercial real estate loans operate on a different set of rules than residential mortgages, and anyone making the move from home buying to commercial investing needs to understand the differences up front. In Salt Lake City, the commercial loan market includes local community banks, national lenders, credit unions, SBA lenders, and private capital, each with distinct terms and preferences.
Term and amortization are different things in commercial lending. Term is how long the loan actually lasts before a balloon payment or refinance comes due. Amortization is the period over which payments are calculated. A common structure has a 5 or 10 year term with a 25 year amortization, meaning monthly payments look like a long term loan, but the full remaining balance comes due at the end of the term. The borrower then refinances or sells before the balloon date.
Loan to value, or LTV, sets how much the lender will finance. Most conventional commercial lenders cap LTV at 75 to 80 percent for investment property, meaning the borrower brings 20 to 25 percent down. SBA 504 loans can reach 90 percent LTV for owner users occupying more than 51 percent of the building. Construction loans typically cap at 65 to 75 percent of total project cost rather than completed value, which often means the borrower brings more cash than on a standard acquisition.
Debt service coverage ratio, or DSCR, is the underwriting metric that often matters more than LTV. DSCR is property NOI divided by annual debt service. Lenders typically require DSCR of 1.20 to 1.25, meaning NOI covers debt service by that multiple. A building with $140,000 NOI supports debt service of $112,000 to $116,000 at 1.20 to 1.25 DSCR, which at current rates often limits loan size below what LTV alone would permit. Utah’s property tax reset affects DSCR directly because buyer taxes are usually higher than seller taxes.
Interest rates on commercial loans run above residential rates, typically 1 to 2 percentage points higher. Rates depend on term, borrower strength, property type, and market conditions. Fixed rate loans lock in for the full term. Adjustable rate loans reset periodically against an index like Prime or SOFR. SBA 504 offers fixed rates for up to 25 years on the CDC portion, which is powerful in rising rate environments.
Recourse determines whether the borrower is personally liable beyond the collateral. Most Salt Lake City commercial loans under $5 million are recourse, with personal guarantees from principals. Larger deals with institutional lenders can sometimes reach non recourse, usually with carve outs for fraud, environmental issues, or waste. Non recourse matters for asset protection but typically comes with tighter underwriting and higher rates.
Prepayment penalties protect lender yield. Many commercial loans include yield maintenance, defeasance, or step down prepayment penalties that make early payoff expensive. A borrower planning to refinance or sell within a few years needs to pay close attention to prepayment terms. A loan with flexible prepayment might have a slightly higher rate but saves meaningful money if the property gets repositioned or sold early.
Documentation requirements are extensive. Three years of tax returns, current financial statements, schedule of real estate owned, operating statements for the subject property, copies of leases, environmental reports for industrial property, and often much more. Preparing the package before applying speeds underwriting dramatically. Lenders see buyers who are ready as credible borrowers worth working with.
Omada Commercial, recognized as best commercial agents in Salt Lake City, guides borrowers through the full commercial lending process across the Wasatch Front, connecting them with lenders whose programs fit the specific deal.
