Most operators compare commercial mortgages the way they compare car insurance: they look at the rate and pick the low number. That works badly here, because in commercial real estate the rate is one of five independent variables, and it is frequently not the one that determines what the loan costs you or whether it survives contact with a bad year. Two loans quoted within a quarter point of each other can behave nothing alike five years in.
The five dials are term, amortization, rate mechanics, recourse and prepayment. Every commercial mortgage sets all five, and the named structures: bank portfolio loan, government-guaranteed owner-occupied financing, investor debt sized on property cash flow, bridge, are just conventional settings of those dials for a particular kind of borrower and property. Learn the dials and the product names stop mattering. This guide walks through each one, then shows how the common structures configure them.
Term and amortization are not the same thing
This is the single most common misunderstanding in commercial real estate finance, and it costs people money. Amortization is the schedule the payment is calculated on. Term is how long the lender is committed before the loan comes due. A residential mortgage usually sets them equal: 30 and 30. Commercial mortgages almost never do.
A twenty-five-year amortization with a five-year term means your payment is computed as if you had twenty-five years to repay, but the entire remaining balance is due at the end of year five. That balance is the balloon, and refinancing it is your problem, not the lender's. The structure exists because lenders do not want to hold a fixed rate for twenty-five years, not because anyone expects you to write a check in year five.
Two practical consequences. First, longer amortization lowers the payment and therefore improves coverage, which is often what actually determines loan size. Second, a shorter term means you carry refinance risk sooner. You will be re-underwritten at whatever rates and values exist on that date, which nobody can promise you anything about.
The five dials, and what each one controls
| Dial | What it controls | Typical settings you will see |
|---|---|---|
| Term | How long before the balance comes due and you are re-underwritten | 3, 5, 7 or 10 years; occasionally fully self-liquidating |
| Amortization | How the payment is computed, and therefore coverage and loan size | 15 to 30 years; 20 and 25 are the workhorses |
| Rate mechanics | Whether the payment can move, and when | Fixed for term, fixed then resetting, or floating over an index |
| Recourse | Who the lender can pursue beyond the building | Full recourse, limited guarantee, or non-recourse with carve-outs |
| Prepayment | What it costs to exit early or refinance out | Step-down penalty, lockout, yield maintenance, or open |
Rate mechanics: fixed, reset, floating
A rate fixed for the full term gives you a payment you can budget around until the balloon. A rate fixed for an initial period and then resetting on a stated schedule (fixed for five, adjusting every year after, for example) gives you certainty for a while and hands you the market risk afterward. A floating rate moves with an index continuously.
The trade is straightforward: you generally pay something for certainty. What matters more than the pricing difference is whether your property can survive the adjustment. If a reset would push your coverage below where it needs to be, you have not bought a cheaper loan; you have bought a covenant problem on a future date. Model the reset at a rate meaningfully above today's before you accept the structure.
Recourse and the personal guarantee
Recourse determines what happens if the property does not repay the debt. Under full recourse, the lender can pursue the guarantors personally for any shortfall. Under a non-recourse structure, the collateral is the remedy: with carve-outs, which are the exceptions that convert non-recourse debt back into recourse debt if the borrower does something specific.
Those carve-outs are not decoration. They typically cover fraud, misapplication of rents or insurance proceeds, unpermitted transfers or additional liens, environmental liability, and sometimes voluntary bankruptcy. Read them. A borrower who takes rent out of a property in distress and does not apply it to the mortgage can turn a non-recourse loan into a personal judgment without ever intending to.
For small and mid-sized commercial credit, expect a personal guarantee to be standard. Non-recourse is more common on stabilized, income-producing property at moderate leverage, and it usually costs something in rate or proceeds. Partial or burn-off guarantees, where the guarantee reduces or falls away once the property hits a stated coverage or occupancy for a stated period, are worth asking about and are more negotiable than most borrowers assume.
Prepayment: the cost of changing your mind
Prepayment terms decide what happens if you sell, refinance or pay down early. There are four common shapes, and the difference between them can be six figures on a mid-sized loan.
Step-down penalty
A declining percentage of the balance prepaid, often expressed as a series like 5-4-3-2-1 over the first five years. Simple, predictable, and easy to price into a hold decision.
Lockout
No prepayment permitted at all during a stated window. Common in structures where the loan has been sold or pooled. If you might sell inside the window, a lockout is a hard constraint, not a fee.
Yield maintenance and defeasance
Both are designed to make the lender or bondholder whole on the interest it expected. Yield maintenance charges the present value of lost interest. Defeasance substitutes a portfolio of securities that replicates the payment stream. In a falling-rate environment either can be extremely expensive: sometimes larger than any savings from refinancing.
Open prepayment
No penalty, usually available at some cost in rate or after the penalty period expires. Worth paying for if your hold period is genuinely uncertain.
How the common structures set the dials
With the dials understood, the named structures become easy to place. The table below is a generalization, every lender writes its own credit policy and the settings vary by property, file and market.
| Structure | Term / amortization | Recourse | Usual fit |
|---|---|---|---|
| Bank or portfolio mortgage | 5–10 yr term, 20–25 yr amortization | Usually full recourse | Owner-occupied or investor property with a banking relationship |
| Government-guaranteed owner-occupied | Long term, often self-liquidating | Personal guarantee required | Owner-occupied purchase with limited down payment |
| Coverage-sized investor debt | 5–10 yr term, 30 yr amortization common | Often limited or non-recourse with carve-outs | Stabilized income property underwritten on its own rent |
| Bridge / short-term | 12–36 months, often interest-only | Typically recourse | Vacancy, repositioning, or a deal that cannot wait for full underwriting |
Reading a term sheet properly
A term sheet is not an approval and it is not a commitment. It is the structure a desk is prepared to take into credit, subject to appraisal, environmental review, title and final underwriting. Treat it as a description of the deal shape and interrogate it accordingly.
What to extract from every term sheet before you compare
- Term and amortization stated separately, and the estimated balloon balance at maturity.
- Rate mechanics: fixed for how long, resetting to what index and margin, with what caps if any.
- Recourse: full, partial, burn-off, or non-recourse, and the exact carve-out language.
- Prepayment: shape, schedule, and whether partial paydowns are permitted without penalty.
- All fees: origination, commitment, guarantee or program fees, legal, appraisal, environmental, title, servicing.
- Reserve and escrow requirements: taxes, insurance, replacement reserves, tenant improvement holdbacks.
- Covenants: minimum coverage, minimum liquidity, reporting frequency, and what happens if you miss one.
- Conditions precedent: what still has to be delivered or verified before funding.
- Assumability and whether a future buyer can take the loan over.
Then compare the sheets on total cost over your actual hold period rather than on the coupon. Fees plus interest plus a realistic exit cost, divided by the years you intend to hold, is the number that matters.
Why do commercial lenders use balloons at all?
Because holding a fixed rate for twenty-five years is a risk most balance-sheet lenders will not take, and because a shorter term lets them re-underwrite the property periodically. The balloon is a feature of the lender's funding and risk model, not a judgment about you. Plan for it by starting the refinance conversation well before maturity.
Is a longer amortization always better?
It lowers the payment and improves coverage, which usually helps loan size. It also means you build equity more slowly and carry a larger balance into the balloon. If you intend a long hold and value amortization, a shorter schedule can be the better economic choice even though it underwrites tighter.
Can I get a non-recourse commercial mortgage?
It exists, generally on stabilized income-producing property at moderate leverage, and it usually costs something in rate or proceeds. Availability varies by lender, property type and file. For most owner-occupied and smaller investor deals, expect a personal guarantee.
What is interest-only, and when does it make sense?
An interest-only period suspends principal repayment, lowering the payment and improving coverage during the period. It fits situations where cash flow is ramping: a lease-up, a repositioning, a business moving into a new building. It is a poor default on a stabilized asset, because you reach the balloon with the full original balance outstanding.
How much does the rate actually vary between structures?
We do not quote ranges, and anyone who quotes you one before seeing the property and the file is guessing. What we can say is directional: more leverage, more risk in the property, shorter processing time and less recourse all tend to cost more, and the structure that fits your deal is usually a better lever on total cost than shopping the coupon.
What is a debt yield and why did a lender mention it?
Debt yield is net operating income divided by the loan amount, a leverage test that does not depend on the interest rate or the amortization schedule. Lenders use it because coverage and loan-to-value can both be flattered by a low rate or a generous appraisal, while debt yield cannot. Thresholds vary by lender and property type.
Should I take the lowest quoted rate?
Only after you have normalized the sheets for term, amortization, fees, recourse and exit cost over your hold period. A quarter point on a $2 million loan is roughly $5,000 a year; a three-point exit penalty on the same loan is $60,000 at once. The dials frequently outweigh the coupon.
Where to start
Write down your realistic hold period first, not the one in the pitch, the one you actually believe. Then set the dials in that order: amortization long enough to clear coverage, term at least as long as your hold, rate mechanics you can survive at reset, recourse you can live with, and a prepayment structure that does not punish your most likely exit.
Bring a property and a file to the desk and have the structure sized before you are under contract with a clock running. It is far easier to choose a structure when nobody is waiting on you.
Qualified Commercial Underwriting Desk
Credit and capital markets
The Qualified Commercial underwriting desk reviews commercial real estate, dealer and Main Street files daily. The Academy is written from that work (how files are actually read, priced and declined) rather than from a rate sheet.
Educational content only. Nothing here is a commitment to lend, an offer of credit, or tax, legal or accounting advice. Program terms, timelines and thresholds vary by lender, file and market conditions, and any figures shown are illustrative.