Questions to Ask Commercial Real Estate Lenders
Written for anyone borrowing against a commercial building, whether you will run your own business from it or hold it for the rent, and comparing quotes from a bank, a credit union, a government-backed program or a mortgage broker. The 53 questions follow the order the talks take: the first call, how the loan is sized, rate and term, fees and prepayment, guarantees and covenants, then the reports and the closing. The vocabulary and the program names are American, and lending rules differ by country, state and lender, so confirm how each point works where the building stands.
The questions
Each question, and why to ask it
First call
Which loan types do you offer for a building like this, and which one fits my deal?
Why ask it
Expect a short menu: a conventional loan the lender keeps, a government-backed program for a business that occupies its own building, a bridge loan for a property that is not yet full, or a non-recourse loan placed with an outside investor. The useful part is the reason they give for their pick, and what would move you into another. In the United States an owner-occupier can ask about SBA 7(a) and 504 loans by name; elsewhere, ask what the local equivalent is.
Do you lend on this property type, at this loan size and in this market?
Why ask it
Give the type, the address and a rough amount in one sentence and let them answer. Lenders set their own minimums, and many step back from hotels, restaurants, gas stations or anything outside their home territory. After a yes, ask how many loans like it they closed in the past year: a quick no costs nothing, but a soft yes that turns into a no three weeks into your financing period can cost you the deal.
Roughly what loan amount, rate, term and amortization would you offer on a deal like this today?
Why ask it
Before they have seen your numbers a range is the fair answer, and it is enough to drop a lender whose best case still does not work for you. Write the date beside it, because quotes gathered weeks apart are not comparable. Anything said at this stage is an indication until a term sheet repeats it.
Does it matter to you whether my business occupies the building or I rent it out to tenants?
Why ask it
It usually changes the whole file. An owner-occupied loan leans on your company's financial statements, and an investment loan leans on the leases and the rent. The share of the building you must occupy to count as an owner-user is set by the lender or the program, so get their number and not a rule of thumb.
Will you keep this loan on your own books, or will it be sold, securitized or placed with another lender?
Why ask it
A lender that holds the loan can usually agree to a change later, such as consent to a new lease or an extension at maturity. Once a loan sits in a securitized pool, a servicer follows the documents and has little room to bend. Either way, find out who will collect the payments and who you would call with a problem in year four.
What weighs most in your decision: the property's income, my financial strength or my experience?
Why ask it
Most commercial lenders look at all three, and the order they give tells you where your file is thin. A first-time buyer with a well-leased building can follow up by asking whether a hired property manager or an experienced partner would cover the gap.
What do you need from me to quote real terms instead of a range?
Why ask it
Typically a rent roll, two or three years of operating statements, the purchase contract and a personal financial statement, plus business tax returns if you will occupy. Send the same package to every lender on the same day, so that their quotes are answers to one question.
Does a deal like mine go to a loan committee, and has anyone on it seen it yet?
Why ask it
At many lenders the officer on the phone is not the person who approves the loan. Ask when the committee meets, what it has sent back lately and whether your officer has previewed this building with a credit officer. Terms offered before that preview are an opinion.
As a broker, how are you paid on this loan, and would I owe the fee if I closed with a lender I found myself?
Why ask it
This one is for debt brokers and other intermediaries, not for a bank or credit union. The fee is commonly a percentage of the loan paid at closing, and the engagement letter says whether the arrangement is exclusive and how long it binds you. Before you sign it, get two more answers: which lenders they plan to show the deal to, and whether any lender pays them on top of what you pay.
Can you put the terms in a written term sheet, and which parts of it bind either of us?
Why ask it
A term sheet or letter of intent normally leaves the lender free to walk away from the loan, while its clauses about your deposit and expenses can hold you from the day you sign. Ask which later document is the lender's actual commitment, and what has to happen between the two.
Loan size
What is your maximum loan-to-value for this property, and is it measured against the purchase price or the appraised value?
Why ask it
On a purchase most lenders use the lower of the two, so a generous appraisal does not raise the loan. On a refinance the limit often drops when you take cash out, so tell them the amount you hope to pull. Write the percentage next to the property type, since one lender may advance less on a restaurant than on a warehouse.
What debt service coverage ratio do you require, and how do you work out the income you measure it on?
Why ask it
Coverage is the building's net operating income divided by a year of loan payments, and the lender's version of that income is rarely yours. They may subtract a vacancy allowance, a management fee and a replacement reserve even where you carry none of those costs. Their figures, line by line, show you where the two versions part.
On this deal, which limit sets the loan amount: loan-to-value or debt service coverage?
Why ask it
Only one is doing the work at a time. If coverage is the limit, a longer amortization or a lower rate raises the loan and a bigger appraisal does nothing; if value is the limit, everything rides on the appraiser's number. Some lenders add a third test called debt yield, which is net operating income divided by the loan amount, so check whether one applies.
How do you treat a lease that ends during the loan term, or one tenant who pays a large share of the rent?
Why ask it
Some lenders discount that income, some want a leasing reserve funded at closing, and some shorten the loan so it matures before the lease does. Name the tenant and the expiry date when you ask. For an owner-occupied building the same question becomes what happens if your own business moves out.
If my business will occupy the building, how many years of its financial statements do you want, and what cash flow do you count?
Why ask it
The loan is then repaid by the company, so the lender builds a coverage figure from business earnings, often adding back depreciation, interest and the rent you will stop paying. Ask which add-backs they accept and whether a weak year is averaged in or stands alone. For a young business the first thing to learn is whether there is a minimum time in operation.
How much of my own cash has to go into the deal, and can part of it come from a seller note, a partner or a gift?
Why ask it
Lenders care where the equity comes from as well as how much there is. A second loan from the seller may be allowed only if the seller agrees to wait behind the lender, or not at all, and a partner's money may make the partner a guarantor. Settle it before you build the purchase around it.
What net worth and cash on hand do you want me to show once the loan has closed?
Why ask it
Many lenders test the guarantor's net worth against the loan amount and liquid funds against some months of payments, each with its own numbers. Retirement accounts and equity in other property count with some lenders and not with others. Both tests are run on what is left after your down payment and closing costs have gone out.
How much does my personal credit count, and what in my history should I explain before you pull it?
Why ask it
On smaller and owner-occupied loans the guarantor's credit report is usually part of the file, and each lender or program sets its own floor. A past bankruptcy, foreclosure, tax lien or lawsuit goes down better raised by you with a short written explanation than found by the underwriter. Check whether every owner above a certain stake is pulled, or only you.
Can the loan cover renovations or a tenant build-out as well as the purchase, and how is that money paid out?
Why ask it
Some lenders fund improvements inside the same loan and release the money in stages against invoices or inspections, and others expect the work to come out of your cash. If it is included, two details decide what it is worth: whether the loan is sized on today's value or the value once the work is done, and whether interest runs on money you have not yet drawn.
Rate and term
Is the rate fixed or floating, and what index and spread is it priced from?
Why ask it
A quote given as an index plus a spread lets you check the arithmetic and compare lenders on the spread alone. The index should be a published one that you can look up yourself. A bare percentage with nothing behind it may be out of date within days.
When does the rate lock, and what does it cost to lock it earlier?
Why ask it
On many commercial loans the rate is set at commitment or shortly before closing, not at application, which leaves you exposed for weeks. Ask whether an early lock needs a deposit, how long it lasts and what happens to that deposit if closing slips past the lock date.
How long is the loan term, and over how many years is the payment amortized?
Why ask it
These are two different numbers, and the gap between them is the balloon. A ten-year term on a twenty-five-year schedule has payments sized as if you had twenty-five years, with whatever is left falling due in year ten. Have them run the payment at each amortization they would offer.
What balance will still be owed at maturity, and what are my choices on that date?
Why ask it
Have them state the balloon as an amount, then ask whether the loan can be extended or renewed, at what fee and on whose decision. A renewal that is entirely at the lender's discretion is a hope, so plan the refinance as if it will not be offered.
If the rate resets partway through, on what date and by what formula?
Why ask it
A loan fixed for five years inside a longer term reprices to an index plus a margin, sometimes with a floor underneath. Run the formula at today's index to see the payment you would face if the reset were tomorrow. The prepayment penalty sometimes starts over at the reset as well, so check whether this one does.
Is there an interest-only period, and what does the payment become when it ends?
Why ask it
Interest-only months help a building that is still filling up, and they leave the balance exactly where it started. Get the later payment as a figure, and ask which of the two payments the lender uses when it tests coverage.
If the rate floats, is there a floor or a ceiling, and do you require a swap or a rate cap?
Why ask it
A floor stops your rate from falling with the index, and a ceiling may exist only if you buy one. Some banks deliver a fixed rate by pairing a floating loan with an interest rate swap, and unwinding that swap on an early payoff can cost you money or pay you some, depending on where rates have gone. A worked example with rates higher and lower than today shows the size of it.
Does the rate you quoted depend on my moving business accounts to your bank?
Why ask it
Banks and credit unions often price a loan on the whole relationship, and some write a deposit requirement into the loan agreement. Find out which accounts or what balance they expect, and what happens to the rate if the money later leaves. When you set this quote beside one with no strings, count the work of moving payroll and card processing.
Can a buyer take over this loan if I sell the building, and on what conditions?
Why ask it
An assumable loan lets a sale go ahead without setting off the prepayment penalty, and a buyer may pay for it if rates have risen since. Expect an assumption fee and the lender's approval of the buyer. Your release from the guarantee does not follow automatically, so get that answered in the same breath.
Fees and prepayment
What is your origination fee, and which other lender charges will be on the closing statement?
Why ask it
Go through them by name: origination, underwriting, processing, documentation, the lender's outside counsel and any broker fee. The lender's legal bill is often passed to the borrower and left open, so request an estimate or a cap. Two loans at the same rate can sit a long way apart once these are added.
What deposit do you collect before closing, and how much of it comes back if the loan is declined or I withdraw?
Why ask it
An expense deposit normally pays for the appraisal and the other reports, and whatever is left may or may not be returned. Get the rule for three cases: they decline, you withdraw, and the terms change so much that you no longer want the loan. Be wary of a large fee requested before anyone has reviewed the property.
How is the prepayment penalty calculated: a declining percentage, yield maintenance or defeasance?
Why ask it
A step-down schedule is a percentage of the balance that falls each year, and you can read it off the page. Yield maintenance and defeasance depend on where interest rates stand when you repay, and they can be much larger than borrowers expect once rates have fallen. Have the lender price its method on your loan amount as if you repaid in year three.
Does the penalty apply if I sell the building, refinance with you or pay off after a fire or condemnation?
Why ask it
These are the three exits where borrowers assume a waiver and often do not have one. Some lenders drop the charge on a refinance they keep in house, and some documents excuse a payoff made from insurance proceeds. Whatever is promised, ask which paragraph of the note will say so.
Can I pay down part of the principal each year without a charge, and is there an open period before maturity?
Why ask it
Some bank loans allow a set share of the balance to be prepaid each year, which suits an owner whose cash arrives unevenly. The open window at the end matters more: without one you can owe a penalty for refinancing a loan that is about to come due anyway. The final few months, at least, are worth negotiating free of it.
What is the late charge, how long is the grace period, and when does a default interest rate apply?
Why ask it
A late charge is usually a percentage of the missed payment, while a default rate is added to the interest on the whole balance, so the second is the expensive one. Check whether either can land on the balloon if your refinance closes a few days after maturity. Local law may limit these charges, which is a point for your attorney and not the loan officer.
Can you give me one list of every cost between application and closing, with estimates?
Why ask it
Lender fees, third-party reports, legal fees on both sides, title, survey, recording and any reserves funded at closing belong on a single page. Add your down payment and you have the cash you must bring. Have them mark which figures are firm and which are guesses.
Guarantees and covenants
Is this loan full recourse, limited recourse or non-recourse, and who has to sign a guarantee?
Why ask it
Full recourse means the guarantors stand behind the whole debt if the building does not cover it. Smaller bank loans and government-backed loans usually ask for that, and larger loans on stable properties may not. How a guarantee is enforced depends on where you are, so have your own attorney read it before you agree.
If several owners guarantee, is each liable for the whole loan or only for a share?
Why ask it
The usual wording makes every guarantor answerable for all of it, which lets the lender go after whichever partner is easiest to collect from. A guarantee limited to each owner's percentage is sometimes available if you raise it early. Find out the ownership stake at which a signature is required, and whether a spouse is asked to sign.
Can the guarantee shrink or end once the property reaches a set occupancy, coverage or loan balance?
Why ask it
Lenders call this a burn-off and rarely volunteer it. It suits a deal where the risk sits in the early years: a lease-up, a renovation, a new business in the space. If they agree, the trigger and who certifies it belong in the loan documents, not in an email.
On a non-recourse loan, which acts would make me personally liable?
Why ask it
The exceptions, often called carve-outs, typically cover fraud, misuse of rents or insurance money, environmental problems and a voluntary bankruptcy filing. Get the list in writing and sort it into the acts that make you liable for the lender's loss and the acts that make you liable for the entire loan. A long list can leave a non-recourse loan looking a lot like a full guarantee.
Is this building the only collateral, or will the loan also reach my other property or my business assets?
Why ask it
A lender stretching on leverage may ask for a lien on a second property, and an owner-occupied loan can come with a blanket lien on the company's equipment and receivables. Each one narrows what you can borrow against elsewhere. Ask what would let them release the extra collateral later.
What reserves or escrows will you hold for taxes, insurance, repairs and future leasing costs?
Why ask it
Monthly deposits for property tax and insurance are common, while replacement reserves and accounts for tenant improvements and leasing commissions depend on the building and the lender. Three numbers matter: what is funded at closing, what is added each month, and how quickly a draw is paid when the roof or a new tenant needs the money. Cash in a lender's reserve is still yours, but you cannot spend it on anything else.
What financial covenants will I have to meet during the loan, and how often are they tested?
Why ask it
A minimum coverage ratio, a maximum loan-to-value and a liquidity floor for the guarantor are the usual three. The reporting is a covenant too: rent rolls, operating statements, tax returns and a personal financial statement, each with a due date. A missed reporting deadline can be a default in its own right, so put those dates in your calendar at closing.
What happens if the building falls below a covenant while every payment is on time?
Why ask it
Answers run from a conversation, to a demand that you pay the loan down, to the lender collecting the rents itself until the ratio recovers. Ask about cure rights: how long you get, and whether posting cash fixes it. One lost tenant can trip a coverage test, so treat this as a likely case and not a remote one.
Which decisions about the building need your consent: new leases, a change of manager, a second loan or a change in ownership?
Why ask it
Lease approval above a certain size is the one that bites in practice, because a prospective tenant will not wait weeks for your lender. Ask for a response deadline, and for silence past it to count as approval. Bringing in a new partner or moving the property into a different entity can also be a default if you do it without asking.
Reports and closing
Which third-party reports do you require, who orders them and what will each one cost me?
Why ask it
The usual set is an appraisal, an environmental assessment and a property condition report, with a survey, a zoning report or a flood or seismic study added where the lender wants one. Lenders generally order from their own approved list and bill you. Ask whether they would accept a recent report that you or the seller already hold if the consultant readdresses it to them.
Who picks the appraiser, and will I get a copy of the appraisal?
Why ask it
The lender normally engages the appraiser so that the opinion is independent of the borrower, and you normally pay for it. Because the lender is the appraiser's client, get the promise of a copy in writing before you send the deposit. You can still pass the rent roll, the leases, recent capital work and comparable sales through the loan officer so the appraiser has them on day one.
If the appraised value comes in below the contract price, do you cut the loan or can the terms be reworked?
Why ask it
The loan amount usually drops with the value, and the gap lands on you as extra cash unless the seller moves on price. Some lenders will consider a rebuttal with better comparables, so find out how that works and how long it takes. Then check that your purchase contract gives you a way out, or a way back to the table, if it happens.
What level of environmental review do you need, and what happens if it recommends more testing?
Why ask it
Small loans sometimes pass with a database screen or a questionnaire. Most lenders want a Phase I assessment, and a finding in it can lead to Phase II sampling, so ask who pays for the second round, how many weeks it adds and whether a finding ends the loan or reprices it. A site with a dry cleaner, a fuel tank or a repair shop in its past is worth mentioning on the first call.
What will you need on title, survey, zoning and insurance before you fund?
Why ask it
A lender's title policy, a current survey, evidence that the use is permitted and insurance certificates naming the lender are standard requests, each with its own lead time. Insurance is the one borrowers leave late. Get the coverage requirements in writing and send them to your agent the same week.
Will you want estoppel certificates or subordination agreements from the tenants?
Why ask it
An estoppel certificate has a tenant confirm its lease terms in writing, and a subordination agreement ranks the lease behind the mortgage. Many lenders want both from the larger tenants, signed by people who owe you no favors and are in no hurry. Check what each lease obliges the tenant to sign and how quickly, then start the day the lender names the tenants.
How many weeks from a signed term sheet to closing, and which step most often runs late?
Why ask it
Ask for the timeline in stages: underwriting, reports, committee approval, commitment letter, documents, funding. Set it against the financing deadline in your purchase contract, and ask whether the lender would confirm the date in a letter to the seller. If the honest answer is longer than the contract allows, negotiate the extension now.
Between the term sheet and the commitment letter, what can still change?
Why ask it
Rate, loan amount and reserves are the three that move, usually with the appraisal, a report or the committee given as the reason. Ask how often their closed loans match the first term sheet. A useful answer names a specific cause; a reassurance does not tell you much.
When will my attorney see the loan documents, and which terms are open to negotiation?
Why ask it
Whatever was agreed on the phone counts only if it appears in the note, the security instrument, the guarantee and the loan agreement. Ask for drafts a week or two before closing, not the night before. Banks that hold their own loans tend to negotiate more than lenders working from standardized documents, so ask which kind you are dealing with.
How to compare commercial real estate lenders
Practical guidance for the conversation itself
Getting ready to ask
Build one loan package
Put the rent roll, two or three years of operating statements, the purchase contract or a refinance summary, photos and a personal financial statement in a single folder. A lender who receives a tidy package answers with terms; one who receives a phone call answers with a range. Sending every lender the identical folder is also what makes their quotes comparable.
Work out your two ratios first
Divide the loan you want by the price to get loan-to-value, and divide net operating income by a year of payments at a realistic rate to get coverage. Use cautious income: allow for some vacancy and a management fee even if you have neither. If your own figures are close to a lender's limit, you know which question to press before they tell you.
Rank what you would trade
The lowest rate, the largest loan, no personal guarantee and freedom to sell early seldom come from one lender. Decide which two matter most for this building before the calls start. An investor planning to sell in a few years and a business owner planning to stay for twenty should not be choosing the same loan.
Choose three or four lenders of different kinds
A local bank or credit union that keeps its loans, a lender active in the government-backed program for owner-occupiers where one exists, and a debt broker for a larger or unusual property will show you different corners of the market. Three or four full conversations tell you more than ten rate inquiries.
Running the conversation
Take the groups in order
First call questions go to every lender by phone and take ten or fifteen minutes. Loan size, Rate and term and Fees and prepayment are worth asking once the lender has your package, because before that the answers are ranges. Hold Guarantees and covenants and Reports and closing until a term sheet is on the table.
Ask for figures on your loan
The balloon as an amount, the payment after a rate reset, the prepayment penalty if you repaid in year three: a lender who works these out for your loan has engaged with it. General descriptions of how their loans usually work are easy to give and hard to hold anyone to.
Ask what worries them about the building
A credit officer usually has one main concern, whether it is a lease expiry, a tenant, the age of the roof or your experience. Hearing it early lets you answer it with a document before the committee meets. A lender who names no concern at all has probably not read the file yet.
Confirm by email the same day
Write back with the terms as you understood them and ask the officer to correct anything wrong. It costs five minutes, and it is the only record you will have if the commitment letter arrives with a different number in it.
Reading two term sheets side by side
Line up the same nine rows
Loan amount, rate and how it is set, term, amortization, balloon, lender fees, prepayment, recourse and reserves. Fill a column for each lender and leave a blank where a term sheet is silent. The blanks are your next round of questions.
Price the exit you expect
If you are likely to sell or refinance in five years, work out what leaving would cost under each loan in that year. A lower rate with yield maintenance can cost more over the hold than a slightly higher rate with a step-down that has nearly run off.
Count the cash, not only the rate
Reserves funded at closing, a required deposit balance and a smaller loan all take money out of your hands on day one. Add up what each offer needs from you at closing and during the first year. The cheapest rate is sometimes the offer that ties up the most cash.
Weigh the chance it closes as written
A lender that has already shown your deal to its credit officer, lends on this property type every month and gave you a staged timeline is offering something a better-looking term sheet may not. If your purchase contract has a financing deadline, certainty has a price and it is fair to pay some of it.
What depends on where you are
Programs and their names
The SBA loans mentioned in this list are United States programs with their own eligibility and occupancy rules, and those rules are revised from time to time. In another country, ask a business banker which government-backed scheme covers owner-occupied premises there, and take the current rules from the program itself.
Guarantees, default and foreclosure
What a lender can collect from a guarantor, whether a spouse must sign and how a foreclosure runs are matters of local law. Treat a lender's summary as a starting point and ask how it works in the state or country where the building stands.
Who should read the documents
Have a commercial real estate attorney read the loan documents and the guarantee, and an accountant look at the ownership entity and the tax side. This page helps you decide what to ask a lender, and it does not replace either of them.