Commercial real estate (CRE) is property used for business purposes or to generate income—offices, retail, industrial/warehouse, multifamily (5+ units), hotels, and special-purpose buildings. CRE financing differs from a home mortgage because lenders underwrite the property’s income first, using DSCR, LTV, and debt yield, alongside your credit and experience.
What Is Commercial Real Estate (CRE)?
Commercial real estate (CRE) is any property used for business activity or held primarily to produce income, rather than as a personal residence. The acronym “CRE” is used constantly in lending and investing, and it simply means commercial real estate. A property is generally considered commercial when it is income-producing (leased to tenants), owner-occupied by a business, or, in the case of apartments, has five or more units—the dividing line most lenders use between residential and commercial multifamily.
The main CRE property types
- Office — single-tenant or multi-tenant office buildings, medical offices, and professional suites.
- Retail — strip centers, shopping centers, single-tenant net-lease (e.g., a pharmacy), and storefronts.
- Industrial — warehouses, distribution, flex space, and light manufacturing.
- Multifamily — apartment buildings with five or more units (smaller buildings are usually treated as residential).
- Hospitality — hotels, motels, and short-term lodging, which lenders view as operating businesses.
- Special purpose — self-storage, gas stations, car washes, healthcare facilities, and similar single-use assets.
The property type matters because it drives the loan structure, leverage, and rate. See, for example, how lenders treat industrial & warehouse properties, retail strip centers, and medical office buildings differently.
CRE vs. residential real estate
The practical difference is what gets underwritten. A home loan is approved mainly on the borrower’s personal income and credit. A commercial loan is approved mainly on the property’s ability to pay for itself. Other differences follow from that: CRE loans typically have shorter terms (often 5–10 years) with longer amortization (20–25 years), sometimes a balloon payment, larger down payments, and more documentation (rent roll, operating statements, leases).
How CRE financing works: the main loan types
There is no single “commercial loan.” The right structure depends on the property, your goals, and whether you occupy the space. The most common options:
- Conventional commercial mortgage — bank or credit-union financing for investment or owner-occupied property. See commercial real estate loan options.
- SBA 504 & 7(a) — government-backed loans for owner-occupied property, often with lower down payments. Compare SBA 504 vs. conventional.
- Bridge loans — short-term financing for acquisitions, value-add, or timing gaps. See commercial bridge loans.
- DSCR / investor loans — qualified largely on the property’s cash flow. See DSCR rental loans.
- Cash-out refinance — pull equity out of property you already own. See commercial cash-out refinance.
How CRE underwriting works (the three key ratios)
Commercial underwriting comes down to a simple question: can this property safely repay this loan? Lenders answer it with three ratios, all built from the property’s net operating income (NOI)—its annual income after operating expenses but before loan payments.
1. DSCR (Debt Service Coverage Ratio)
DSCR = NOI ÷ annual debt service. It asks whether income covers the loan payments. A DSCR of 1.25x means the property earns 25% more than its annual payments. Most lenders want roughly 1.20x–1.30x or higher. Example: $150,000 NOI ÷ $120,000 annual payments = 1.25x.
2. LTV (Loan-to-Value)
LTV = loan amount ÷ appraised value. It measures leverage. Commercial lenders typically cap LTV around 65%–80% depending on property type and whether it’s owner-occupied or investment. Example: a $1,400,000 loan on a $2,000,000 property = 70% LTV. (More on this in how much down payment commercial property requires.)
3. Debt Yield
Debt yield = NOI ÷ loan amount. It tells the lender the cash return it would earn if it had to take the property back, independent of rate or amortization. Many lenders target roughly 8%–10%+. Example: $150,000 NOI ÷ $1,400,000 loan = 10.7%.
Beyond the ratios, underwriters review the borrower’s credit and experience, the lease/rent roll quality, property condition, and market. For the full lender checklist, see what lenders look for in a CRE loan and commercial real estate loan requirements.
Quick CRE glossary
- NOI (Net Operating Income): annual income after operating expenses, before debt service and income tax. The basis for every ratio above.
- Cap rate: NOI ÷ value. An unlevered yield used to estimate value from income.
- Amortization: the schedule over which the balance is paid down (often longer than the loan term, creating a balloon).
- Balloon: the remaining balance due at the end of a term that is shorter than the amortization.
- Recourse vs. non-recourse: whether the lender can pursue the borrower personally beyond the property if the loan defaults.
- Rent roll: a schedule of tenants, lease terms, and rents used to verify income.
Next steps
If you own or want to buy commercial property, the fastest way to see real numbers is to compare lender programs side by side based on the property type, your down payment, and the income. Get matched to explore CRE financing options, or estimate a payment with the loan calculator.