Take a $2,000,000 commercial property financed at 65%. The loan is $1,300,000, and at 6.4% over 25 years the payment comes to $8,629 a month, or $103,549 a year. With $150,000 of net income, debt coverage is 1.45. Income would support a loan up to $1,506,538, so here the property’s value is what limits the loan.
How commercial lending works
A commercial lender studies the building as closely as the borrower. The question is what the property earns and whether that covers the loan payments. Loans usually run from 55% to 75% of value, and terms are shorter than on a home mortgage.
Debt service coverage
The debt service coverage ratio, or DSCR, is net operating income divided by a year of loan payments. At 1.25, income sits 25% above the payments. Many lenders ask for 1.20 to 1.35. Type in your lender’s requirement and the calculator shows the largest loan your income can carry.
Loan to value and debt yield
Two limits apply at once: the share of value the lender allows, and the amount the income can support. Whichever is smaller wins, and the result tells you which one it was. Lenders also check debt yield, which is net operating income divided by the loan. At $150,000 and $1,300,000 that is 11.5%. It ignores the rate and the amortization, and a higher figure means a safer loan for the lender.
Term and renewal
A five-year term on a 25-year amortization is common. When the term ends, a balance is still owing and gets renewed at whatever rates are on offer then. In the example the balance after five years is $1,174,344. Try a higher rate and watch what happens to the payment.
Costs on top of the loan
Budget for an appraisal, an environmental report, legal fees and lender fees. Some loans carry prepayment penalties or ask for personal guarantees. Have a lawyer go through the commitment letter before you sign anything.
Where the income figure comes from
Use the property’s net operating income: rent after vacancy, minus operating costs, before the mortgage. Lenders often adjust what you give them. Tenants on short leases may lead a lender to use a lower number.
A test with lower income
Cut net income from $150,000 to $110,000 in the calculator. Coverage falls below the 1.25 line and the largest loan drops to about $1,104,800. Now income, not value, sets the limit. Lenders look hard at income, so build your figures on signed leases.
Brokers and property types
A commercial broker can bring offers from banks, credit unions and private lenders, and rates, terms and fees vary a lot. Ask each for a term sheet and compare the total cost, fees and prepayment rules included, and not the rate alone. Property type matters too. A small apartment building is often the easiest to finance, while retail, offices and industrial buildings depend on tenants and lease length. Owner-occupied buildings can be judged on the business income.
Where to go next
The big number is the monthly payment for the loan share you chose. Below it sit coverage, debt yield and the largest loan the income supports. If coverage is under the lender’s line, lower the loan share or raise the income figure with signed leases. Work out net income with the cap rate calculator, model a smaller property in the rental property calculator, or compare a home loan in the mortgage calculator.
Frequently asked questions
What is DSCR?
Net operating income divided by yearly debt payments.
How much can I borrow on a commercial property?
Often 55% to 75% of value, if income covers the payments.
What is debt yield?
Net operating income divided by the loan amount.
What term is common?
Five years, with a 25-year amortization.
What fees apply?
Appraisal, environmental report, legal and lender fees.
Does income or value limit the loan?
Whichever gives the smaller loan.
Sources and updates
Last reviewed: . Full disclaimer. How we build calculators. Editorial policy.
Estimate only. This calculator gives general information for planning. It is not tax, legal or financial advice, and it is not affiliated with the City of Toronto, MPAC or the Canada Revenue Agency. Results depend on the numbers you enter and may differ from official amounts. Check official sources or a qualified professional before you decide.