Commercial real estate loan calculator, sized like a lender.

How the payment is calculated

A commercial loan payment depends on three things: the amount borrowed, the interest rate, and the amortization, meaning the number of years over which the payments are calculated. The payment is level, so each month covers that month's interest and repays a little principal, with the principal share growing over time.

A worked example. $5,000,000 at 7 percent on a 25-year amortization is a monthly payment of $35,339, or $424,068 a year. That annual figure is the debt service that the property's income has to cover, and it is the number every coverage test divides into.

Amortization is a choice, not a fact of the loan. Stretching the same loan to 30 years lowers the payment and raises coverage, which is why lenders limit how long an amortization they will accept by property type.

Term, amortization and the balloon

Most commercial loans have a term shorter than their amortization. A 10-year loan amortized over 25 years is paid as though it ran 25 years, which keeps the payment affordable, but it comes due at year 10. Whatever principal remains is due in one payment, the balloon.

On the example above, the balloon at year 10 is about $3,931,670, so roughly four fifths of the original loan is still owed at maturity. Almost nobody pays that from savings. It is repaid by refinancing or selling the property, which is why the real risk in a balloon loan is whether the property can be refinanced at whatever rates and values prevail ten years from now.

How lenders decide how much you can borrow

A lender does not size a commercial loan from the payment you can afford. It sizes it from the property, running three tests and offering the lowest answer. Loan to value caps the loan as a share of the property's value. Debt service coverage caps it by how much payment the income can carry with a cushion. Debt yield caps it by income relative to the loan, regardless of rate.

The example below uses a property with $500,000 of net operating income worth $7,000,000, a 7 percent rate on a 25-year amortization, and limits of 65 percent loan to value, 1.25x coverage and a 9 percent debt yield. Coverage allows about $4.7 million and debt yield about $5.6 million, but loan to value stops at $4,550,000, so that is the loan. At that amount the property covers its debt service 1.30 times and earns an 11 percent debt yield, both comfortably inside the limits.

Why the test that binds keeps changing

The same property can be limited by a different test depending on rates and price. Raise the interest rate and the payment per dollar borrowed rises, so the coverage test allows less. On the example property, loan to value binds at 6 and 7 percent, but at 8 percent coverage takes over and the largest loan falls to about $4.3 million.

Price has the opposite effect. If the same $500,000 of income is valued at $9,000,000, which is a lower cap rate, loan to value would allow $5,850,000, but coverage still stops at about $4.7 million. Expensive property is usually limited by its income rather than its value, which is why low cap rate deals so often need more equity than buyers expect.

Interest-only periods

Many commercial loans, especially bridge loans, start with a period of interest-only payments. During that period the payment is just the interest, which is lower than an amortizing payment and makes coverage look stronger.

Lenders know that, so many test coverage on the amortizing payment the loan will carry once the interest-only period ends, not on the lower one. This calculator uses the amortizing payment for the same reason. A loan that only covers its debt service while it is interest-only is a loan with a scheduled problem.

How much down a commercial loan needs

The equity required is whatever loan to value leaves over. At a 65 percent limit a buyer brings 35 percent; at 75 percent, 25 percent. Across common commercial limits that usually means more than 20 percent down, and often more than the loan to value limit alone suggests, because coverage or debt yield can bind first and cut the loan further.

Owner-occupied property is the main exception. The SBA 504 program, which pairs a bank first mortgage with a second loan backed by an SBA debenture, can finance owner-occupied commercial real estate with as little as about 10 percent down.

What this calculator leaves out

It is a planning tool, and real proceeds usually come in lower for reasons it cannot see. Lenders underwrite their own net operating income, applying market vacancy even to a full building, charging a management fee even if the owner self-manages, and deducting replacement reserves. That underwritten income is lower than the sponsor's, and every sizing test runs on it.

It also leaves out closing costs, lender and legal fees, the reserves funded at closing, prepayment terms, and for floating-rate loans the cost of the interest rate cap a lender will require. Use it to find the shape of the loan and the test that limits it, then check those against a term sheet.