Commercial real estate (CRE) loans differ significantly from residential mortgages. While a home loan focuses on the borrower's personal income, a commercial loan focuses primarily on the income-generating potential of the property itself. This calculator helps investors and business owners evaluate the viability of a commercial purchase by looking at key metrics like LTV, DSCR, and Balloon Payments.
Key Metrics Explained
Loan-to-Value (LTV): Most commercial lenders prefer an LTV between 65% and 80%. A lower LTV usually results in better interest rates and a higher chance of approval.
Debt Service Coverage Ratio (DSCR): This is arguably the most important metric. It measures the property's ability to cover its debt. A DSCR of 1.0 means the property breaks even. Lenders typically require a DSCR of 1.20 to 1.35.
Net Operating Income (NOI): Your gross income minus all operating expenses (taxes, insurance, maintenance). This figure does not include mortgage payments.
Balloon Payment: Commercial loans are often amortized over 25 or 30 years but have a "term" of only 5, 7, or 10 years. At the end of the term, the remaining balance must be paid in full or refinanced.
Example Calculation
Imagine you are purchasing a warehouse for $1,000,000. You put 25% down ($250,000) and secure a loan for $750,000 at 6.5% interest. Even if the loan is amortized over 25 years, the lender may set a 10-year term. In this scenario:
Your monthly payment would be roughly $5,064.
After 10 years of payments, you would still owe a "balloon" balance of approximately $574,258.
If the property generates $105,000 in annual NOI, your DSCR would be a healthy 1.73, making the loan very attractive to lenders.
Strategic Tips for Commercial Borrowers
To secure the best terms, ensure your operating expenses are well-documented. Lenders often apply a "vacancy factor" (typically 5-10%) even if your building is 100% occupied. Always account for capital expenditures (reserves for roof, HVAC, parking lot) when calculating your true NOI to avoid surprises during the underwriting process.
function calculateCRE() {
var price = parseFloat(document.getElementById('crePrice').value);
var down = parseFloat(document.getElementById('creDownPayment').value);
var rate = parseFloat(document.getElementById('creRate').value) / 100 / 12;
var amortYears = parseInt(document.getElementById('creAmort').value);
var termYears = parseInt(document.getElementById('creTerm').value);
var income = parseFloat(document.getElementById('creIncome').value);
var expenses = parseFloat(document.getElementById('creExpenses').value);
if (isNaN(price) || isNaN(down) || isNaN(rate) || isNaN(amortYears)) {
alert("Please enter valid numeric values.");
return;
}
var loanAmt = price – down;
if (loanAmt <= 0) {
alert("Down payment cannot exceed purchase price.");
return;
}
var totalMonthsAmort = amortYears * 12;
var totalMonthsTerm = termYears * 12;
// Monthly Payment Calculation
var monthlyPayment = (loanAmt * rate * Math.pow(1 + rate, totalMonthsAmort)) / (Math.pow(1 + rate, totalMonthsAmort) – 1);
// LTV
var ltv = (loanAmt / price) * 100;
// NOI and DSCR
var noi = income – expenses;
var annualDebtService = monthlyPayment * 12;
var dscr = noi / annualDebtService;
// Balloon Payment (Remaining Balance Formula)
// Balance = P * [(1+r)^n – (1+r)^p] / [(1+r)^n – 1]
var balloon = loanAmt * (Math.pow(1 + rate, totalMonthsAmort) – Math.pow(1 + rate, totalMonthsTerm)) / (Math.pow(1 + rate, totalMonthsAmort) – 1);
// Total Interest over the loan term
var totalInterest = (monthlyPayment * totalMonthsTerm) – (loanAmt – balloon);
// Format Currency
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
maximumFractionDigits: 0
});
document.getElementById('resLoanAmt').innerHTML = formatter.format(loanAmt);
document.getElementById('resMonthly').innerHTML = formatter.format(monthlyPayment);
document.getElementById('resLTV').innerHTML = ltv.toFixed(2) + "%";
document.getElementById('resNOI').innerHTML = formatter.format(noi);
document.getElementById('resDSCR').innerHTML = dscr.toFixed(2) + "x";
document.getElementById('resTotalInt').innerHTML = formatter.format(totalInterest);
document.getElementById('resBalloon').innerHTML = formatter.format(balloon);
// Visual indicator for DSCR health
if(dscr < 1.2) {
document.getElementById('resDSCR').style.color = "#d9534f";
} else {
document.getElementById('resDSCR').style.color = "#1a2b49";
}
}
// Initial calculation
calculateCRE();