Conventional commercial bank loans are the workhorse of CRE financing. They cover the widest range of asset types, sizes, and geographies. Most first-time CRE investors will get their first loan from a conventional bank — usually a community or regional bank in their local market.

This lesson covers how conventional loans work, what banks underwrite to, and how to shop the right lender for your deal.

What "conventional" means

"Conventional" is the catch-all term for bank loans that aren't SBA, agency (Fannie/Freddie), or CMBS. They're held on the bank's own balance sheet, underwritten by the bank's own credit team, and priced based on the bank's cost of capital plus a spread.

Conventional loans are sometimes called "portfolio loans" because the bank keeps them in its loan portfolio rather than selling them to investors.

Typical structure

| Feature | Common range | |---|---| | LTV | 65-75% | | Term | 5, 7, or 10 years | | Amortization | 20-25 years | | Rate | Fixed or floating; 6-8% in normal markets | | Recourse | Usually full recourse for smaller deals; partial or non-recourse for larger | | Prepayment | Step-down or yield maintenance | | Origination fee | 0.5-1.5% |

The key feature: the loan term is shorter than the amortization. A 10-year loan with 25-year amortization means you make payments as if you'll pay it off over 25 years, but at year 10 the remaining principal is due as a balloon payment. You either refinance, sell, or pay it off.

This is "balloon mortgage" structure, and it's standard in commercial. Residential 30-year fixed loans don't exist in commercial — even fixed-rate commercial loans have a balloon in 5-10 years.

Term vs amortization — the math

Let's work an example:

Loan: $2,000,000
Rate: 7.0% fixed
Amortization: 25 years
Term: 10 years
Monthly payment: $14,134 (calculated from 25-year amort)
After 10 years of payments, remaining balance: ~$1,510,000

So you've paid $14,134 × 120 months = $1,696,000 over 10 years. About $1,196,000 of that was interest and only $490K was principal. At year 10 you owe $1,510,000 as a balloon.

This is why understanding amortization matters — most of your early payments are interest, not principal. The principal pay-down accelerates in the later years of the amortization, but you typically refinance or sell before getting the benefit.

Recourse vs non-recourse

This is one of the most important loan terms.

Full recourse

You personally guarantee the loan. If the property doesn't cover the debt in default, the bank can come after your personal assets — bank accounts, other real estate, retirement funds (in most states), wages.

Full recourse is the default for small commercial loans (under $5M generally). Banks require it because the loan size doesn't justify the property as sole security.

If you sign full recourse, your downside on a single bad deal is unbounded. This is one reason why diversifying — never having all your wealth tied up in one or two recourse loans — matters so much.

Non-recourse

The bank can foreclose on the property but cannot pursue your personal assets. Your downside is capped at your equity investment.

Non-recourse is standard on:

Larger commercial loans ($5M+)
CMBS loans
Agency loans (Fannie/Freddie multifamily)
Life insurance company loans

Non-recourse always has "carveouts" — specific bad acts that flip the loan to recourse:

Fraud or misrepresentation
Misappropriation of rents or insurance proceeds
Voluntary bankruptcy filing
Unauthorized transfers
Environmental contamination caused by borrower
Failure to maintain insurance

These are the "bad boy carveouts" — they're non-negotiable in non-recourse loans. If you commit one, the bank can pursue you personally for the full loan amount.

Partial recourse

Some loans are partial recourse — the bank can pursue you personally for only a portion of the loan (e.g., 25% of the loan amount). This is a middle ground common in mid-sized commercial deals.

What to push for

If you're a beginner with a small deal: accept full recourse, but try to negotiate "burn-down" — the recourse percentage drops as you make payments and reach LTV milestones (e.g., recourse drops to 25% when LTV reaches 60%).

If you're doing a mid-size deal: push for non-recourse with bad boy carveouts. The lender will say no the first time. Push back. The lender's first offer is rarely their best offer.

What banks underwrite to

Conventional bank lenders underwrite to four primary metrics. Hit all four or the loan doesn't happen.

1. Loan-to-Value (LTV)

LTV = Loan amount / Property value (or purchase price)

Typical max LTV by asset class:

Multifamily: 75-80%
Office: 65-70%
Retail: 65-75%
Industrial: 65-75%
Hotel: 55-65%
Special use (car wash, daycare, etc.): 60-70%

Stronger borrowers and stronger properties get higher LTV. Weaker borrowers and weaker properties get lower LTV.

2. Debt Service Coverage Ratio (DSCR)

DSCR = NOI / Annual debt service

Typical minimums:

Multifamily: 1.20-1.25x
Office, retail, industrial: 1.25-1.35x
Special use: 1.35-1.50x

The lender wants the property's NOI to cover debt service with a cushion. A DSCR of 1.25 means NOI is 25% above debt service.

3. Debt yield

Debt yield = NOI / Loan amount

Lender minimums typically 8-10%.

This is a value-independent measure of how much income each dollar of loan produces. At a 1.25x DSCR with 7% rate and 25-year amort, the debt yield is roughly 9% — within most lender minimums. But if rates rise, the debt yield calculation stays the same (it doesn't depend on rate), making it a more stable underwriting metric.

4. Borrower credit and net worth

Banks look at:

Personal credit score (typically 680+)
Personal net worth (often required to be ≥ loan amount)
Liquidity (typically 10-20% of loan amount in liquid assets)
Real estate experience
Banking relationship (existing customer = better terms)

Some banks are stricter on borrower than property; others are stricter on property than borrower. Knowing which type of bank you're dealing with helps you frame your application.

Types of conventional banks

Not all banks are the same. Three categories matter for CRE.

Community banks

Local, often single-county or regional
Loan sizes: $250K-$10M
Faster decisions (often 4-8 weeks to close)
More flexible on borrowers with relationships
Higher rates than larger banks (50-100 bps)
Often require a deposit relationship
Best for: small deals, first-time borrowers, complex deals that need a story

Regional banks

Multi-state footprint
Loan sizes: $1M-$50M
More structured underwriting
Competitive rates
Often have CRE specialty groups
Best for: mid-size deals, repeat borrowers, standard product types

National banks

Bank of America, Wells Fargo, Chase, US Bank, etc.
Loan sizes: $5M+ typically
Most structured underwriting
Lowest rates but most rigid
Best for: large deals, institutional borrowers, standard product types

For your first deal, target community and regional banks. National banks rarely have the patience or interest in a $1-5M loan from a first-time borrower.

Shopping the loan — how to actually do it

Step 1: Build a "lender package"

Before approaching banks, prepare:

Executive summary (1 page) — deal overview, purchase price, NOI, requested loan
Property information — address, size, photos, current rent roll, T-12
Pro forma (3-5 year)
Personal financial statement (PFS) — assets, liabilities, net worth
Schedule of real estate owned (SREO) — your existing portfolio
Personal credit report
Resume / sponsor bio
PSA (signed)

Banks expect a complete package on first contact. Beginners send a one-line email — "do you guys do CRE loans?" — and get ignored. A complete package signals professionalism.

Step 2: Approach 5-10 lenders simultaneously

Don't approach one bank and wait. Get 5-10 term sheets in parallel. Variation across lenders for the same deal is enormous — rates can vary 100+ bps, LTVs can vary 10%, recourse terms can vary completely.

Use a spreadsheet to track:

Lender name
Loan officer
Initial contact date
Term sheet received? (Y/N + date)
Rate
LTV
DSCR requirement
Recourse
Origination fee
Prepayment terms
Amortization
Term

Step 3: Compare term sheets carefully

The headline rate isn't the only factor. Look at:

Effective rate including origination fees
DSCR cushion (does the loan size require you to underwrite tightly?)
Recourse terms (full vs partial vs non-recourse, burn-down provisions)
Prepayment penalty (yield maintenance is the worst, step-down is better, open prepay is best)
Reserves required (how much cash held by lender for taxes, insurance, replacements)
Covenants (DSCR maintenance covenants? Reporting requirements? Cash management triggers?)
Lender quality (are they easy to work with through closing? Do they fund on time?)

The best loan isn't always the lowest rate. A loan with 50 bps higher rate and friendly terms beats a loan with the lowest rate and onerous covenants.

Step 4: Negotiate

Term sheets are not final. Push back on:

Rate (mention you have competing offers)
Origination fee (often negotiable down 25-50 bps)
Recourse (push for partial or non-recourse)
Prepayment penalty (push for step-down)
Reserves (push to reduce or eliminate)
Covenants (push to eliminate maintenance covenants)

Banks expect negotiation. If you accept the first term sheet without pushback, you're leaving money on the table.

Conventional bank loans are the most common form of CRE senior debt
Standard structure: 65-75% LTV, 5-10 year term, 20-25 year amortization, balloon at maturity
Full recourse is normal for small loans; non-recourse for large loans, with bad boy carveouts
Lenders underwrite to LTV, DSCR (1.20-1.35x typical), debt yield (8-10%), and borrower credit
Three lender types: community (small deals, flexible), regional (mid deals, balanced), national (large deals, rigid)
Always shop 5-10 lenders simultaneously with a complete loan package
Negotiate every term — first offers are never best offers
Watch for prepayment penalties, recourse terms, and covenants — not just rate

Next lesson: SBA loans — the 504 and 7(a) programs that let owner-occupants buy commercial property with as little as 10% down.

Conventional Commercial Bank Loans