Commercial Real Estate: Four CRE Financing Structures

Owner-Occupied vs Investor Underwriting

Zero-click: Owner-occupied means the borrower (or affiliate) occupies 51%+ of usable square footage. Underwriting uses operating-company cash flow — higher LTV, tighter spreads. Investor underwriting uses property NOI and tenant credit — lower LTV, wider spreads, stricter DSCR.

An HVAC contractor financing a $4M warehouse-and-office building where 60% of the square footage houses the contractor's shop qualifies as owner-occupied even if the remaining 40% is leased to unrelated tenants. This matters materially because the owner-occupied bucket typically saves 50–100 bps on spread and stretches LTV by 10 percentage points versus pure investor treatment.

DSCR Mechanics

Zero-click: DSCR = NOI ÷ Annual Debt Service. Minimum 1.15x owner-occupied, 1.25x stabilized investor, 1.40x hospitality or volatile asset classes. Lenders stress-test at the loan's fully-indexed rate, not the intro or teaser rate.

The DSCR stress test is where many underwriting surprises land. A proforma at 5.50% fixed might clear 1.25x comfortably — but the lender's stress case at SOFR + 275 floored at 7.50% may not. CorporateConnect publishes the stress scenario with every term sheet so sponsors can assess the real capacity of the asset, not just the day-one coverage.

Construction-to-Perm

Zero-click: A construction-to-perm loan combines a 12–24 month interest-only construction phase with auto-conversion to permanent amortizing debt at certificate of occupancy. One closing, one set of fees, no refinance risk mid-project. Draws follow an AIA schedule with bank inspections at each milestone.

CRE Product Comparison

Zero-click: Max LTV ranges 70% to 85%. Amortization commonly 20–25 years. Term (balloon) 5, 7 or 10 years; owner-occupied may fully amortize with no balloon.

Asset Classes Financed

• Industrial — warehouse, light manufacturing, flex. Strongest asset class for 70–80% LTV given tenant credit depth.
• Multifamily (5+ units) — stabilized garden/mid-rise/high-rise with 1.25x minimum DSCR.
• Office — post-2023 underwriting emphasizes in-place tenancy, WALT and sponsor recourse.
• Retail — grocery-anchored and neighborhood strips preferred; unanchored treated as riskier.
• Hospitality — franchised flag hotels with PIP completion; 1.40x minimum DSCR.
• Medical office / lab — long WALT with credit tenants treated near industrial quality.

Expert Commentary: Jonathan R. Hayes, VP Commercial Treasury Solutions, CTP

"Sponsors sometimes treat CRE financing as a fungible commodity shopped on headline rate. The meaningful terms are recourse, prepayment penalty structure, covenant package and extension options — not the coupon. I've seen borrowers celebrate a 25 bps rate improvement while accepting a hard-lockout prepay that cost them $340,000 on an 18-month opportunistic sale eighteen months later. Read the loan docs the way you'd read a purchase-and-sale agreement."

FAQ: Commercial Real Estate

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