Getting a deal across the finish line starts long before closing day. It starts with understanding how lenders think — and what truly drives the terms behind commercial real estate loans.
When it comes to underwriting, lenders are laser-focused on a few key areas that shape how much they’ll lend, on what terms, and at what risk.
Key Factors That Influence CRE Lending Decisions
Lenders evaluate deals based on several critical factors:
- Property Type: Retail, industrial, office, flex, medical office — each carries its own risk profile and lending standards.
- Borrower Profile: Who is buying the property, and who is guaranteeing the loan?
- Tenant Strength: Are tenants local, regional, or national? Are leases corporate-backed or individually guaranteed?
- Lease Terms: Is the lease structured as triple-net (NNN) or gross? How long is the remaining lease term? What are the rental escalations?
- Market Location: Is the property in a primary, secondary, or tertiary market?
- Environmental Risks: Are there concerns requiring Phase I or Phase II assessments?
Each of these elements affects a lender’s appetite for risk — and how aggressively they’re willing to structure a deal.
Loan-to-Value (LTV) vs. Loan-to-Cost (LTC)
A critical distinction borrowers need to understand is Loan-to-Value (LTV) versus Loan-to-Cost (LTC):
- Loan-to-Value (LTV):
Measures the loan amount relative to the appraised value of the property. - Loan-to-Cost (LTC):
Measures the loan amount relative to the total cost of acquiring or developing the property (including purchase price, improvements, and construction).
Current lending environment:
Average LTVs are around 70%, but that number can flex higher or lower based on deal quality.
- Stronger deals (national tenants, long lease terms, prime locations) may achieve higher leverage.
- Riskier deals (short-term leases, local tenants, transitional assets) often see lower LTVs, sometimes as low as 60–65%.
Why Small LTV Changes Matter
Even slight adjustments in LTV dramatically affect the required equity:
- 70% LTV on a $2M purchase = $1.4M loan, $600K equity.
- 65% LTV on a $2M purchase = $1.3M loan, $700K equity.
That extra $100,000 in equity can shift a project from feasible to unfeasible — making it essential for buyers to understand lender expectations early.
How Interest Rates Impact Your Loan
The interest rate environment plays a massive role in deal economics. Even a 1% swing in rate has significant consequences:
- At 6% interest: $1M loan = $60,000/year interest expense
- At 7% interest: $1M loan = $70,000/year interest expense
- At 8% interest: $1M loan = $80,000/year interest expense
A $10,000–$20,000 difference in annual interest can materially impact cash flow, debt service coverage ratios (DSCR), and investor returns.
Lenders today typically price loans over benchmarks like:
- 5-Year Treasury or 10-Year Treasury (spreads of 225–350 basis points)
- Prime Index (Prime rate + 0–100 basis points)
- SOFR Index (1-Month SOFR + 200–350 basis points)
Understanding these spreads — and how they move with broader market conditions — is critical to anticipating financing costs.
Bottom Line: Positioning your deal correctly from the start can make all the difference when it comes to securing the right financing. Our team can help you structure and present your opportunity in a way that resonates with lenders — and, thanks to our strong network, we can even introduce you to trusted lending partners when the time is right. In a market where relationships matter just as much as the numbers, having the right team in your corner is critical.
Reach out to us to learn how we can help you move your deal forward with confidence.