The Investor's Commercial Financing Options Companion
Complete guide to commercial real estate financing options. Learn about term loans, bridge financing, DSCR requirements, and choosing the right commercial lender.
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Commercial real estate financing encompasses a diverse range of lending products designed for business and investment properties that don’t qualify for conventional residential mortgages. Understanding available commercial financing options enables investors to match appropriate financing vehicles with their specific project needs, timelines, and qualifications. From traditional term loans to specialized bridge financing, the commercial lending landscape offers solutions for various investment scenarios.
We detail commercial financing options, providing investors with the knowledge to navigate business property lending effectively.
Understanding Commercial Financing
Commercial financing differs fundamentally from residential lending in structure, qualification methods, and available products. Appreciating these differences helps investors approach commercial transactions appropriately.
How Commercial Differs from Residential
Commercial lending operates under different principles than residential mortgage financing:
Property-Focused Underwriting - Commercial loans emphasize property performance over borrower personal income. Debt service coverage ratios based on property income matter more than personal debt-to-income ratios.
Shorter Terms - While residential mortgages may have 25-30 year amortizations with five-year terms, commercial loans often feature shorter amortization periods and terms, sometimes with balloon payments.
Higher Down Payments - Commercial properties typically require 20-35% down payments compared to 5-20% for residential.
More Complex Structures - Commercial loans may involve multiple tranches, various security arrangements, and more complex documentation.
Relationship-Based Lending - Commercial lending often involves ongoing relationships with lenders who understand borrower businesses and portfolios.
| Feature | Residential | Commercial |
|---|---|---|
| Underwriting focus | Borrower income | Property income |
| Typical LTV | 80-95% | 65-80% |
| Term length | 5 years | 3-10 years |
| Rate structure | Fixed or variable | Often variable |
When Commercial Financing Applies
Commercial financing is typically required for:
Multi-family properties with five or more units, Retail, office, and industrial buildings, Mixed-use developments, Land acquisition and development, Large-scale residential projects, and Business premises acquisition.
Some residential investment properties may also require commercial financing based on financing structure rather than property type. Understanding how commercial mortgages differ from residential is essential before pursuing these deals.
Traditional Commercial Term Loans
Term loans represent the conventional approach to commercial property financing.
Standard Commercial Mortgages
Traditional commercial mortgage solutions fund property acquisitions with structures similar to residential mortgages but commercial terms:
Amortization - Typically 15-25 years, shorter than residential standards.
Terms - Often 3-10 years, after which refinancing or balloon payment is required.
Rates - Usually higher than residential rates, often variable or shorter fixed periods.
Qualification - Based primarily on property net operating income and debt service coverage ratios.
These products suit stabilized properties with proven income streams supporting debt service requirements.
Construction Financing
Construction loans fund property development or major renovation projects:
Draw Structure - Funds are released in stages as construction progresses rather than lump-sum at closing.
Interest-Only Periods - Borrowers typically pay interest only during construction phases.
Conversion Options - Some construction loans convert to permanent financing upon project completion.
Higher Rates - Construction risk commands premium pricing.
Monitoring - Lenders actively monitor construction progress and fund releases.
Construction financing requires detailed project plans, budgets, and often developer track records.
DSCR loans let you qualify based on the property’s income, not yours — book a free strategy call with LendCity and we’ll help you figure out if a DSCR loan makes sense for your next deal.
Specialized Commercial Products
Beyond traditional term loans, specialized products serve specific needs.
Commercial Bridge Loans
Bridge loans provide short-term financing bridging gaps between transactions or conditions:
Short Terms - Typically 6-24 months rather than multi-year terms.
Higher Rates - Short-term and higher-risk nature commands premium pricing.
Faster Execution - Bridge lenders often close faster than traditional commercial lenders.
Exit Strategy Required - Lenders require clear plans for loan repayment or refinancing.
Bridge loans suit situations requiring speed or not yet qualifying for conventional financing, such as:
- Acquiring properties before selling existing holdings
- Stabilizing properties before permanent financing
- Taking advantage of time-sensitive opportunities
Equipment Loans
Equipment loans finance business equipment related to commercial properties:
Specific Collateral - Equipment itself serves as loan collateral.
Matched Terms - Loan terms often match expected equipment useful life.
Acquisition Funding - Enables acquiring necessary equipment without depleting operating capital.
Relevant for properties requiring significant equipment like restaurants, manufacturing facilities, or specialized operations.
Working Capital Lines
Business lines of credit support ongoing operating needs:
Revolving Credit - Draw and repay as needed within credit limits.
Operating Support - Funds operations, payroll, inventory, and short-term needs.
Flexibility - Use as needed rather than fixed-purpose term loans.
Working capital facilities support business operations rather than property acquisition but complement property-focused financing.
Leasehold Improvement Loans
These specialized loans fund improvements to leased spaces:
Tenant Improvements - Fund buildouts, renovations, and customizations.
Lease-Aligned Terms - Terms often correlate with lease periods.
Collateral Considerations - Improvements to property not owned creates unique collateral situations.
Relevant for businesses improving leased commercial spaces.
Alternative Financing Sources
Beyond traditional bank lending, alternative sources provide commercial financing.
Credit Union Lending
Credit unions offer commercial lending with different terms:
May offer more flexible qualification criteria, Often provide competitive rates for members, May focus on local community properties, and Relationship-based lending approach.
Private Lenders
Private lenders fill gaps where traditional financing falls short:
Higher Rates - Compensating for higher risk profiles.
More Flexibility - Less rigid qualification requirements.
Faster Decisions - Streamlined approval processes.
Short-Term Focus - Often bridge or transitional financing.
Private lending costs more but solves problems bank financing cannot address.
Vendor Financing
Sellers or vendors sometimes provide financing:
Seller Take-Back Mortgages - Sellers finance portion of purchase price.
Equipment Vendor Financing - Equipment manufacturers or suppliers provide purchase financing.
Negotiated Terms - Terms reflect negotiation rather than standard products.
Vendor financing can enable transactions that conventional financing doesn’t support.
If you want to scale without hitting income qualification walls, DSCR financing is worth exploring — schedule a free strategy session with us to see what rates and terms are available.
Qualification Considerations
Commercial loan qualification differs from residential lending. Understanding debt ratios and how they affect approval gives you an advantage.
Debt Service Coverage
Lenders evaluate whether property income adequately covers debt obligations:
DSCR Calculation - Net operating income divided by annual debt service.
Minimum Requirements - Typically 1.20x to 1.30x minimum, meaning income exceeds debt service by 20-30%.
Stress Testing - Lenders may test against higher interest rate scenarios.
Properties with insufficient DSCR may not qualify regardless of borrower strength. Learning to qualify based on property cash flow is critical for commercial investors.
Property Performance
Lenders analyze property operating history and projections:
Historical income and expense statements, Rent rolls and lease terms, Vacancy patterns and trends, and Capital expenditure needs.
Stabilized properties with proven performance qualify more easily than turnaround or development situations.
Borrower Profile
While property-focused, borrower factors still matter:
Real estate experience and track record, Financial strength and liquidity, credit history, and Entity structure and ownership.
Strong borrowers may access better terms or qualify for challenging properties. Financing multifamily properties in Canada follows similar qualification principles with some additional considerations.
Choosing Appropriate Financing
Matching financing to specific situations optimizes outcomes.
Assessment Process
Evaluate financing needs across dimensions:
- Property type and condition
- Intended use (acquisition, refinance, construction)
- Timeline requirements
- Qualification profile
- Risk tolerance
- Exit strategy
Professional Guidance
Commercial financing complexity warrants professional assistance:
- Commercial mortgage brokers access multiple lending sources
- Real estate attorneys review complex documentation
- Accountants structure entities and evaluate tax implications
Frequently Asked Questions
How is commercial lending different from getting a regular mortgage?
What down payment do I need for commercial property?
Can I get commercial financing with limited experience?
How long does commercial loan approval take?
What interest rates should I expect for commercial loans?
What is a debt service coverage ratio and why does it matter?
When should I consider bridge financing for a commercial property?
Disclaimer: LendCity Mortgages is a licensed mortgage brokerage, and our team includes experienced real estate investors. While we are qualified to provide mortgage-related guidance, the broader financial, tax, and legal information in this article is provided for educational purposes only and does not constitute financial planning, tax, or legal advice. For matters outside mortgage financing, we recommend consulting a Chartered Professional Accountant (CPA), licensed financial planner, or qualified legal advisor.
Written by
LendCity
Published
January 30, 2026
Reading Time
7 min read
DSCR
Debt Service Coverage Ratio - a metric that compares a property's net operating income to its mortgage payments. A DSCR of 1.25 means the property generates 25% more income than needed to cover the debt. Lenders typically require a minimum DSCR of 1.0 to 1.25 for investment property loans.
Commercial Mortgage
Financing for commercial properties like retail, office, or multifamily buildings with 5+ units, with different qualification criteria than residential mortgages.
Cap Rate
Capitalization Rate - the ratio of a property's net operating income (NOI) to its current market value or purchase price. A 6% cap rate means the property generates $60,000 NOI annually on a $1,000,000 value. Used to compare investment properties regardless of financing.
NOI
Net Operating Income - the total income a property generates minus all operating expenses, but before mortgage payments and income taxes. Calculated as gross rental income minus vacancies, property taxes, insurance, maintenance, and property management fees.
LTV
Loan-to-Value ratio - the mortgage amount expressed as a percentage of the property's appraised value or purchase price (whichever is lower). An 80% LTV means you're borrowing 80% and putting 20% down. Lower LTV generally means better rates and terms.
Amortization
The period over which a mortgage is scheduled to be fully paid off through regular payments of principal and interest. In Canada, common amortization periods are 25 or 30 years, though the mortgage term (when you renegotiate) is typically 1-5 years.
Mortgage Term
The length of time your mortgage contract and interest rate are in effect. Typically ranges from 1 to 5 years in Canada, after which you renew or refinance.
Down Payment
The upfront cash payment when purchasing a property. For 1-4 unit investment properties, minimum 20% down is required. 5+ unit multifamily can use CMHC MLI Select with lower down payments, and house hackers can put as little as 5% down on owner-occupied 2-4 plexes.
Coverage Ratio
A measure of a property's ability to cover its debt payments, typically referring to DSCR. Commercial lenders often require a minimum of 1.2, meaning the property's net operating income exceeds debt payments by at least 20%.
Bridge Financing
Short-term financing (90 days to 1 year) that covers the gap between purchasing a new property and selling or refinancing another. Investors use bridge loans to act quickly on deals or fund renovations before long-term financing is in place.
Private Mortgage
A mortgage from a private lender rather than a traditional bank, typically with higher rates but more flexible qualification requirements.
Commercial Lending
Financing for commercial real estate or business purposes, typically qualified based on property income (NOI) rather than personal income. Includes mortgages for multifamily buildings (5+ units), retail, office, and industrial properties.
Cash Flow
The money left over after collecting rent and paying all expenses including mortgage, taxes, insurance, maintenance, and property management.
Multifamily
Properties with multiple dwelling units, from duplexes to large apartment buildings. Often offer better cash flow and economies of scale.
Refinance
Replacing an existing mortgage with a new one, typically to access equity, get a better rate, or change terms. Investors commonly refinance to pull out capital for purchasing additional properties (cash-out refinance) while retaining ownership of the original property.
Interest Rate
The cost of borrowing money, expressed as a percentage. It determines how much you pay on top of the principal borrowed.
Vacancy Rate
The percentage of rental units that are unoccupied over a given period. A critical factor in cash flow analysis, typically estimated at 4-8% for conservative projections.
Underwriting
The process lenders use to evaluate the risk of a mortgage application, including reviewing credit, income, assets, and property value to determine loan approval.
Credit Union
A member-owned financial cooperative that provides banking services including mortgage lending. Credit unions often have more flexible lending policies for real estate investors than major banks, particularly for borrowers who have exceeded conventional lending limits.
Construction Loan
Short-term financing used to fund building a new property. Funds are released in stages (draws) as construction milestones are completed, and interest is charged only on drawn amounts. Construction loans typically convert to permanent financing upon project completion.
Takeout Financing
Permanent long-term mortgage financing that replaces a short-term construction loan after a development project is completed and stabilized. Securing a takeout commitment before construction begins reduces project risk.
Mixed-Use Property
A building that combines residential and commercial uses, such as retail on the ground floor with apartments above. Mixed-use properties can diversify income streams and may qualify for commercial financing terms.
Debt-to-Income Ratio
A lending metric that compares a borrower's total monthly debt payments to their gross monthly income. Lenders use DTI to assess borrowing capacity, with most requiring ratios below 44% for mortgage approval.
Tenant Improvement
Modifications made to a commercial rental space to meet a tenant's specific needs, often funded by the landlord as an incentive. TI allowances are a standard part of commercial lease negotiations.
Hover over terms to see definitions, or visit our glossary for the full list.
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