Conventional

Conventional Commercial Loans

Conventional commercial loans are flexible mortgage solutions provided by banks, credit unions, or savings institutions. They can finance a wide range of commercial properties and are commonly used as first-lien financing. Both novice and experienced property owners can utilize these loans.

Conventional Bank Loan Highlights

Eligible Properties:

Multifamily
Office
Retail
Warehouse/Industrial
Hospitality
Medical/Healthcare
Self-Storage

Loan Amount Range:

Minimum $1,000,000

Interest Rate:

Fixed rates vary; floating rates from 2.30% over LIBOR (see current LIBOR rates)

Loan Term:

3–15 years

Amortization:

10–30 years

Maximum LTV:

80%

Minimum DSCR:

1.20x

Minimum Debt Yield:

7–8%

Recourse:

Can be non-recourse, limited-recourse, or full recourse

Prepayment Options:

No prepay penalty, step-down, or flat-rate options

Advantages of Conventional Loans

Finance Distressed Properties: Loans are underwritten based on both the property and the borrower’s personal guaranty, allowing financing of properties with unique challenges.

Accessible to Inexperienced Borrowers: Borrowers with strong financial positions can rely on personal guarantees rather than prior experience.

Flexible Loan Sizes: Available for smaller or less expensive properties that don’t require large loan amounts.

Faster Underwriting: Typically faster than government-backed loans requiring federal agency approval.

Disadvantages of Conventional Loans

Strict Requirements: Borrowers usually need good credit, substantial net worth, and liquidity to meet personal guaranty requirements.

Personal Liability: Full- and partial-recourse loans hold borrowers personally responsible if the loan defaults.

Fixed Interest Limitations: Fixed-rate periods are often shorter than those offered by commercial mortgage-backed security (CMBS) loans.

Conventional commercial loans provide flexible, bank-based financing for a wide variety of properties, making them ideal for borrowers seeking speed and adaptability, though personal guarantees and credit requirements must be carefully considered.

Commercial Bank Loans FAQ’s

What Are Conventional Bank Loans?

Conventional commercial loans act as a primary lien against a financed property, and the time frame is usually medium- to long-term. In many ways, these loans offer a straightforward way to finance commercial buildings.

The conventional nature of these loans means that the loans don’t have special considerations. For example, they aren’t backed by a government agency (e.g. the Federal Housing Administration, the U.S. Department of Agriculture or Veterans Affairs). Other outstanding circumstances typically don’t apply.

What Commercial Properties Are Conventional Commercial Real Estate Loans Well Suited For?

Despite their conventional nature, conventional commercial real estate loans are quite flexible and can be used to finance many different property types. Owners of multi-family, single-family rental portfolios, retail, office, hotels, and industrial properties may use these loans. Moreover, the loans are well-suited for inexperienced borrowers because they’re fairly simple and straightforward.

In some cases, conventional loans are also used to finance distressed commercial properties. This is possible because the loans often have a personal guaranty (see Features section).

What Terms Do Conventional Commercial Real Estate Loans Offer?

Although conventional commercial real estate bank loans are fairly straightforward, their terms can vary since no government agency oversees these loans. Terms may vary depending on property type and the lending institution. The following generally holds true for these loans.

Most conventional loans come with loan-to-value ratios up to 75 to 80 percent.

While the official duration of these loans is often 5 to 10 years, property owners commonly refinance before a loan fully matures. The interest rate is frequently only fixed for a few years, after which a balloon payment or variable rate might kick in. It’s when the fixed rate expires that property owners commonly refinance.

The amount borrowed through conventional loans encompasses a wide range. In particular, these loans can be underwritten for smaller loan amounts than what other loan options offer.

What Features Do Conventional Commercial Loans Come With?

Conventional commercial loans come with many features, but there are three prominent ones that borrowers should be aware of:

Personal Guaranty: The vast majority of conventional loans require a personal guaranty, and borrowers must have the net worth and creditworthiness to qualify for a loan. The personal net worth of a borrower frequently (but not always) should be at least equal to the borrowed amount. Depending on the exact nature of the personal guarantee required, these loans may be either full-recourse, partial recourse, or non-recourse. (A personal guaranty might not be required in select situations, in which case the loan would be non-recourse.)

Prepayment Penalty: Most conventional loans come with a prepayment penalty, which may be structured as a flat rate, or step-down (declining) penalty. Step-down penalties are most common on shorter loans. Longer-term conventional loans are more likely to have a step-down or flat-rate penalty.

Loan Assumption: Many conventional loans are usually assumable for a fee, which most often comes into play when a financed property is sold. Assumption allows a buyer to replace the seller as the guarantor of the original loan when purchasing a financed property. It can help eliminate prepayment penalties, and may also give a buyer access to a more favorable loan than would otherwise be available at the time of purchase.