At some point, residential investors look at the 12-unit mixed-use building on the main street corner and wonder how to finance it. Commercial real estate financing follows different rules than residential — higher down payments, shorter amortization, and full-doc underwriting are common. But private lending has bridged much of the gap.
What Qualifies as Commercial
5+ units is the dividing line for residential vs. commercial. Mixed-use (residential above retail) is also commercial. Single-tenant retail, multi-tenant strip centers, and office properties are all commercial. The financing products, rates, and underwriting criteria differ significantly from 1–4 unit residential.
Commercial Financing Options
SBA 7(a) and 504 loans for owner-occupied commercial. CMBS (conduit) loans for stabilized income-producing commercial. Agency (Fannie/Freddie) small balance for 5–50 unit multifamily. Private bridge loans for value-add, distressed, or time-sensitive acquisitions. Debt funds for larger deals ($5M+) requiring faster execution than traditional sources.
Underwriting Commercial NOI
Commercial underwriting is all about net operating income. The lender divides your NOI by their required cap rate to determine supportable value — then lends 65–75% of that value. Unlike residential where appraisers compare sales prices, commercial appraisers rely heavily on income capitalization. Strong, verified NOI is your most important asset in commercial financing.
A mixed-use building with ground-floor retail and upper-floor residential often gets underwritten at a blended cap rate. Vacancy in the retail space hits your NOI hard — always model 10–15% commercial vacancy in your pro forma.
