Why Loan Type Selection Matters
Choosing the wrong loan type for a commercial real estate transaction doesn't just cost money — it can kill the deal entirely. A property that doesn't qualify for conventional financing may be a perfect candidate for a bridge loan. A business owner who can't get a bank to approve a commercial mortgage might qualify easily through an SBA 504 program. Understanding the full landscape of available loan types is foundational to successful CRE investing and business real estate ownership.
Conventional Commercial Mortgages
Conventional commercial mortgages are offered by banks, credit unions, and commercial mortgage companies. They are best suited for stabilized, income-producing properties with strong occupancy and borrowers with solid credit and verifiable income. Terms typically range from 5 to 25 years, with amortization periods of 20 to 30 years and a balloon payment at maturity. Rates are typically tied to the 5- or 10-year Treasury or SOFR.
Conventional lenders look for a minimum DSCR of 1.20 to 1.25, LTV of 65–75%, and a borrower with demonstrated experience in the property type. These loans offer the lowest rates and longest terms of any commercial financing option, but they have the most rigorous underwriting requirements.
SBA 7(a) and 504 Loans
The Small Business Administration offers two primary loan programs for owner-occupied commercial real estate. The SBA 7(a) program provides loans up to $5 million for a broad range of business purposes, including real estate acquisition. The SBA 504 program is specifically designed for owner-occupied commercial real estate and equipment, with loan amounts up to $5.5 million (and higher for certain projects) and fixed rates for 10, 20, or 25 years.
SBA 504 loans are structured as a first mortgage from a conventional lender (typically 50% of project cost), a second mortgage from a Certified Development Company (CDC) representing 40%, and a 10% down payment from the borrower. This structure allows business owners to acquire commercial property with as little as 10% down — significantly less than the 25–35% typically required for conventional commercial financing.
Bridge Loans
Bridge loans are short-term financing solutions for properties in transition — acquisitions, value-add projects, lease-up situations, and repositioning plays. They bridge the gap between a property's current state and its stabilized value, at which point the borrower refinances into permanent financing. Terms are typically 12 to 36 months, with interest-only payments and a balloon at maturity.
Bridge lenders underwrite the business plan as much as the current property value. A strong exit strategy — a clear path to stabilization and a realistic refinance scenario — is essential for bridge loan approval.
DSCR Loans
DSCR (Debt Service Coverage Ratio) loans qualify borrowers based on the property's rental income rather than personal income. They are designed for investment properties — single-family rentals, small multifamily, and increasingly short-term rentals — and are particularly useful for self-employed investors or those with complex tax situations. See our dedicated DSCR guide for a full breakdown.
Construction Loans
Construction loans finance the ground-up development or substantial rehabilitation of commercial properties. They are structured as short-term, interest-only facilities that draw down in stages as construction milestones are met. Upon completion, the construction loan is either paid off through a sale or refinanced into permanent financing.
Construction lenders underwrite the project budget, the developer's experience, the market feasibility of the completed project, and the borrower's financial strength. Typical LTC (loan-to-cost) ratios range from 65–75%, requiring the developer to contribute 25–35% of total project cost in equity.
Mezzanine Financing and Preferred Equity
Mezzanine financing and preferred equity are subordinate capital structures that sit between the senior debt and the common equity in a deal's capital stack. They allow developers and investors to reduce their equity contribution and increase overall leverage, but at a higher cost — typically 10–15%+ for mezzanine debt and 12–18%+ for preferred equity.
These structures are most common in larger transactions where the developer wants to preserve equity for multiple deals simultaneously or where the senior lender's LTV cap leaves a gap between available debt and required equity.
Matching the Loan to the Deal
The right loan type depends on the property type, its current condition and occupancy, the borrower's profile, and the intended hold period. At Salt Cove Real Estate Trust, we evaluate every transaction across the full spectrum of available financing options to identify the structure that best fits the deal — not just the first option that qualifies.