What is a Small Balance Commercial Loan?

A small balance commercial loan is a loan that can be used to finance any type of commercial property. Due to a streamlined underwriting process, higher-balance commercial loans can have stringent underwriting requirements, whereas small-balance commercial mortgages are relatively easy to close. Lenders can offer your commercial borrowers amore comprehensive range of products and packages with more flexibility, in addition to less stringent requirements.

Small equilibrium In the commercial mortgage market, capacity is not being utilized to its full potential. Large banks and most of the other commercial mortgage lenders frequently overlook these loans. A commercial loan with a small balance is one with a balance of $250,000 to $5,000,000. This loan amount range encompasses a large portion of the country's commercial property assets.


Getting to Know: Small Balance Commercial Loan

Commercial lending is a very different thing from residential lending, and it has its own set of terms. Here are SBC loan words that are frequently used:

·      Property income minus property expenses are net operating income (NOI). Rental income, laundry and pet income, and expense reimbursements such as Common Area Maintenance or CAM charges are all examples of sources of income. Taxes, energy and electric bills, cleaning services, landscaping, management fees, and other costs vary greatly depending on the lease type.


·      The ratio of Debt-Service Coverage (DSCR): The ability of a mortgaged property to cover the annual debt payment is determined by this ratio. It is determined in the business world by dividing the NOI by the annual mortgage payment. When the DSCR is greater than one, the NOI at least covers the annual mortgage payment.


·      The CAP Rate is computed by dividing the property NOI by the property value and given as a percentage. For example, the cap rate is 8.33 percent if the NOI is $100,000 and the property value is $1.2million. One measure used to assess a property's expected rate of return is the cap rate.

·      Expenditures on capital goods (CAPEX): Money set aside for property renovations that cannot be immediately expensed as a current operating expense for tax reasons is referred to as a capital expenditure. A new roof, tenant improvements, or parking lots are just a few examples.


A small balance commercial loan considers three main factors, and they're used for office building mortgages to match your borrower's needs with our diverse loan options. These are the factors:

·      the borrower's property type and condition

·      the rental property's cash flow

·      the borrower's financial situation in relation to the property's debt service

Small balance commercial loans are frequently referred to as "story" loans because there is always a reason why a borrower is unable to obtain financing from other conduit lenders and banks. The reasons for this range from the property falling out of favor to bank credit issues.


SBC: Where to Start from?

Whether you have a lot of experience with commercial real estate or not, financing your purchase or refinance might be difficult. Loan programs change often, rates fluctuate, and new lenders regularly enter and exit the business financing market. Who should I get in touch with? How can I determine if the terms of my loan are reasonable? How can I know which form of lender is best for my situation? A slew of other questions has bedeviled commercial real estate investors for decades.

Many investors have been so discouraged by their attempts to obtain small-balance commercial financing with traditional or specialty assets that when they find a lender willing and able to lend on a specific transaction, they assume that lender will be their best, if not only, option for all future commercial transactions. This is far from the case, as the commercial lending industry is significantly more dynamic than a one-size-fits-all strategy.


To approach a small-balance commercial lender with your loan, a Commercial Mortgage Connection would need to see the following:

·      Rent Rolls – rent rolls are records that show who is responsible for what in a given property. This could be residential tenants in a multifamily building or commercial tenants in an industrial, retail, or office building—the rent roll aids in calculating the property's annual income.

·      Expenses - what are all of the costs associated with owning the property? Taxes, Maintenance, and other costs such as landscaping are all part of the property's operation (also known as Operating Expenses).

How do Rent Rolls work?

Property-specific rent rolls can also be created, and a master rent roll for the whole rental property portfolio. Although the specific information on a rent roll varies depending on the type of property, a decent rent roll will always include the following:

Property Information

  • Address     of property
  • Name     of property owner or management company
  • Type     of property (multi-unit, single-family, etc.)
  • the     market area of the property (mixed-use, residential, urban, suburban) or Zoning    

House or Unit Data

  • Unit     number (such as #1, A, etc.) if the property has multiple rental units
  • Square     footage
  • Number     of bathrooms
  • Number     of bedrooms
  • Lot     size
  • Additional     features (back yard deck, 2-car garage, freestanding storage shed, etc.)
  • Other     amenities (HOA, near a greenbelt, common-area swimming pool,  etc.)

Tenant Information

  • Monthly     rent
  • Name     of tenant
  • Additional     rent (additional storage fee, pet fee, parking fee, etc.)
  • Past     due rent 
  • Rent     due date
  • Date     rent paid
  • Security     deposit held by the landlord
  • Lease     start date
  • Prepaid     rent
  • The     landlord gives rent concessions to the tenant
  • Lease     end date

Rental Income Summary

·      The total amount of rent collected per month(including extra rental income)

·      Total annual rental income (including extra rental income and any annual fees charged to the tenant such as carpet cleaning, pest control, or landscaping)

The rent rolls and expenses will reveal whether the property is profitable or not. The goal of analyzing both is to figure out how much money is left over (after expenses) to pay off the debtor pay the mortgage. The lender will be given a ratio called the Debt Service Coverage Ratio due to this. Every lender carries a different risk tolerance but using the rent rolls and expenses to calculate that level of risk is the same.


Commercial loan interest rates are usually higher than residential loan interest rates. In addition, appraisal, legal, loan application, loan origination, and survey fees are commonly included in commercial real estate loans, which add to the overall cost of the loan. Some fees must be paid in advance before the loan is approved (or rejected), while others must be paid annually.