How to Finance Commercial Real Estate
Financing commercial real estate in Salt Lake City involves picking the right structure for the specific deal rather than defaulting to whatever the first lender offers. The capital stack on a commercial transaction can include senior debt, mezzanine debt, preferred equity, common equity, and seller financing in various combinations, and the right mix affects returns materially.
Senior debt forms the foundation of most capital stacks. For typical investment property in the Wasatch Front, conventional bank debt covers 65 to 75 percent of purchase price at competitive rates. Local Utah community banks and credit unions including Zions Bancorporation, Mountain America Credit Union, Cyprus Credit Union, and several community banks compete actively for qualified deals. Shopping two or three lenders typically saves 25 to 75 basis points on the rate, which compounds into real dollars over a five year term.
SBA 504 financing serves owner users occupying more than 51 percent of the building. The 50/40/10 structure means a conventional first mortgage covers 50 percent, a certified development company covers 40 percent at a fixed rate for up to 25 years, and the buyer brings just 10 percent down. Utah Certified Development Corporation handles much of the SBA 504 lending across the state. For small businesses buying their operating location in Salt Lake City, SBA 504 preserves working capital that conventional 25 to 30 percent down would otherwise consume.
Bridge debt funds deals that conventional permanent debt cannot finance yet. A building with significant vacancy or deferred maintenance often needs bridge financing during lease up and capital work, then refinances into permanent debt once stabilized. Rates run 2 to 5 points above conventional, and terms are short, typically 12 to 36 months. Bridge debt works for experienced buyers with clear stabilization plans and punishes buyers who underestimate timeline.
Mezzanine debt and preferred equity fill the gap between senior debt and buyer equity on larger transactions. Rates run in the 10 to 15 percent range, but the capital lets sponsors do deals that would otherwise require too much of their own equity. On a $10 million Salt Lake City acquisition, mezzanine debt covering 10 percent of capital cost cuts required equity from 25 percent to 15 percent, which can mean the difference between executing the deal and passing.
Seller financing shows up more often in Salt Lake City than buyers expect. A seller with significant equity in the property and tax reasons to spread the gain over time can carry a note, often behind a conventional first. The buyer gets in with less cash. The seller earns interest income and gets installment sale tax treatment on any gain. Seller financing appears most often on older buildings where the seller has owned for decades and wants reliable income rather than a lump sum to reinvest.
Construction financing for ground up projects draws in stages as work progresses, converting to permanent debt at completion. Typical structures require 25 to 35 percent borrower equity measured against total project cost. Land value can sometimes count as equity contribution. Salt Lake City construction lending has been selective since 2022, with lenders prioritizing experienced sponsors and clear demand support.
Capital structure decisions affect more than just rate. Recourse versus non recourse, prepayment flexibility, covenant requirements, reserve mandates, and personal guarantee terms all factor into the total cost of capital. A loan with the lowest headline rate and the harshest prepayment penalty often costs more across a five year hold than a slightly higher rate loan with flexible exit terms.
Omada Commercial, known as top commercial real estate agent in Salt Lake City, works with borrowers across every financing category to match structure to situation. The right financing choice materially affects long term returns, and taking time to optimize typically saves real money across the hold period.
