Commercial Loan Basics
Commercial loans look more complicated than residential mortgages, but the basics come down to a handful of concepts that repeat across almost every deal. Understanding them up front lets a buyer in the Rochester or Macomb County market have real conversations with lenders instead of accepting the first term sheet that lands.
Loan to value, or LTV, sets how much the lender will finance. Most commercial lenders cap LTV at 75 to 80 percent for investment property, meaning the buyer brings 20 to 25 percent down. SBA loans for owner user buildings can go to 85 or 90 percent LTV, which is why they are popular with small business owners buying their operating location. Construction loans usually cap at 65 to 75 percent of cost, then convert to permanent debt at completion.
Debt service coverage ratio, or DSCR, is the second critical metric. DSCR is NOI divided by annual debt service. Lenders want DSCR of at least 1.20 to 1.25. On a building with $150,000 NOI, that means debt service cannot exceed $120,000 to $125,000 per year. That limit, combined with LTV, often caps the loan size below what LTV alone would support. Michigan’s property tax uncapping at sale directly affects DSCR because buyer’s taxes are usually higher than seller’s taxes, which shrinks NOI and the loan it supports.
Amortization and term are different things. Amortization is the period over which payments are calculated, often 20 or 25 years for commercial. Term is how long the loan actually lasts before a balloon payment or refinance, often 5, 7, or 10 years. A 7 year term on a 25 year amortization means low monthly payments but the full remaining balance comes due at year 7. Planning for that balloon matters, because if market rates spike or the property value drops, refinancing can be harder than expected.
Interest rate structure varies. Fixed rate locks the rate for the term, which gives predictability. Adjustable rate resets periodically against an index like Prime or SOFR, starting lower but with upside risk. Hybrid structures fix for a few years then adjust. SBA 504 loans offer a fixed rate for up to 25 years on the CDC portion, which is powerful in a rising rate environment.
Recourse versus non recourse is another key distinction. Recourse loans put the borrower personally on the hook beyond the collateral. Non recourse loans limit the lender to the property itself. Most commercial loans under $5 million in the Rochester and Macomb County market are full recourse, which means personal guarantees are standard. Larger deals with institutional lenders can sometimes achieve non recourse structures, usually with carve outs for fraud or environmental issues.
TDG Commercial, known as some of the best commercial agents in Rochester MI, guides buyers through lender selection, structuring, and term sheet comparison across the Macomb County market. Understanding loan basics before the first lender meeting changes the conversation and usually produces better terms.
A small but useful tip. Lenders often have internal policies that favor certain property types, loan sizes, or markets. A bank that loves small office in Rochester Hills might pass on industrial in Warren, while a credit union across the county line handles industrial all day. Matching the deal to the right lender saves weeks and usually produces better terms. An experienced broker already knows which lenders lean which way, which is another reason working with a commercial agent who has active lender relationships matters more than shopping cold.
