Commercial Mortgage Basics for Business Owners

Lenders look at the loan from two directions, and the lower answer usually wins.

• Loan-to-value (LTV) compares the loan with the property's value. Federal real estate lending standards tell banks to set their own internal limits and list a supervisory limit of 85 percent for improved property (eCFR text read November 2026; rules can change). The OCC's handbook adds that these limits are not a safe harbor, and that higher-risk properties should carry more equity.
• Debt service coverage ratio (DSCR) is net operating income divided by annual debt service, as the handbook defines it. For an owner-occupied building, the handbook says analysis should concentrate on the ability of the owner's cash flow to service the debt. It also says owner-occupants with uneven earnings may warrant a higher ratio.

That second test is why your company's financial statements matter as much as the building. Strong collateral will not necessarily rescue weak cash flow. Ask each lender how it calculates coverage, which years it uses and whether it counts owner compensation and other debts.

These are two different clocks, and it is easy to confuse them.

• Amortization is the schedule used to calculate your payment, as if the loan would be fully repaid over that period.
• Term, or tenor, is when the loan actually comes due.
• A balloon is the unpaid balance due at the end of a term that is shorter than the amortization.

The OCC handbook gives a clear illustration: a $1,000,000 loan with a five-year term and a 25-year amortization has monthly payments of $6,443. After five years, $899,000 is still owed. Five years of payments reduced the debt by only about $101,000.

That balance must be repaid, usually by refinancing, on whatever terms and at whatever property value exist then. The handbook warns that long amortization or interest-only terms can increase balloon or full repayment risk at maturity. On a term shorter than your plans, you carry that risk even if your business is performing well.

Before you compare rates, line up the term with how long you expect to own the building. A lower rate with an earlier maturity may not be the cheaper loan.

The handbook also says prudent lenders generally consider 30 years a reasonable maximum amortization for income-producing commercial real estate, with office, retail and industrial property generally in the middle of a 15 to 30 year range, around 25 years. It calls these general parameters only, and your lender's policy is what counts.

Rates may be fixed for the whole term, fixed for part of it and then reset, or floating over an index. We do not quote rates here because they change constantly and depend on your deal.

What you can compare without a rate sheet is the structure. Ask how often the rate can change, which index it follows and whether there is a floor or a cap. Then ask your finance team what your payment would do if rates rose, and whether your coverage ratio would still pass.

Selling, expanding or refinancing can all mean paying off the loan before maturity. A loan may charge for that, and the handbook points to the reason: without prepayment penalties, a bank is exposed when rates fall and borrowers prepay and refinance at a lower rate.

Conventional prepayment terms are negotiated, so read them with your attorney. SBA loans have their own rules. SOP 50 10 8.1 (effective October 1, 2026, and subject to change) applies a subsidy recoupment fee on 7(a) loans with maturities of 15 years or more when a borrower voluntarily prepays over 25 percent in a year during the first three years: 5, 3 and 1 percent of the prepayment by year. 504 loans carry a prepayment premium set in the note.

• ✓What is the formula for the prepayment charge, and how does it change over time?
• ✓Can we make partial prepayments without a charge? How much?
• ✓Is any part of the charge waived if we sell the building or refinance with this lender?
• ✓Can a buyer assume the loan if we sell, and on what conditions?

A guarantee gives the lender a claim beyond the building. Business owners should expect the question even if the company is strong.

The handbook describes the range. Some guarantees are limited, for example to interest only or to part of the principal, or they step down or release when conditions are met. Nonrecourse loans let the lender look only to the collateral, but usually come with carve-outs for bad acts such as fraud, voluntary bankruptcy and environmental issues, and some carve-outs can make the loan full recourse.

SBA loans are more rigid. SOP 50 10 8.1 requires any individual with direct or indirect ownership of 20 percent or more of the applicant to give an unlimited full guaranty. On a conventional loan, the terms are negotiated. Ask about limits, burn-offs and who must sign, and have your attorney explain the carve-outs in plain language.

The loan does not end at closing. Your loan documents may require regular financial statements, minimum liquidity or net worth, limits on more debt, and limits on distributions to owners. The handbook lists items such as these among the covenants banks may use, and a breach can have consequences even if every payment is on time, so ask what each one triggers.

Your attorney should read the default and cross-default terms, especially if your operating lines are at the same bank. Also ask how the loan treats leasing part of the building to others, and what happens if ownership of your company changes.

1. Ask each lender for a written term sheet with the same assumed price and loan amount.
2. Put amount, LTV, term, amortization, rate structure, fees and prepayment side by side.
3. Calculate the balance due at maturity and your payment under a higher-rate test.
4. Compare guarantees, covenants and required deposits at the bank.
5. Check the conditions before funding: appraisal, environmental, survey and title requirements.
6. Ask how long approval and closing take, then match your purchase contract to that timing.

Tenant Advisory Group is a broker, not a lender, and does not make loans. On a purchase, our role is to keep the property side of the deal, including the contingency periods and closing date, in step with the financing you choose. Your lender and attorney should confirm all loan terms.