Commercial Real Estate Debt: Options for CRE Loans

Commercial real estate (CRE) debt is different from other business debt. The loans are larger, terms are longer, and the stakes are higher. Whether you own the building your business operates in, purchased investment property, or developed real estate, falling behind on CRE debt can mean losing substantial assets.

But there are options—even if you're facing balloon payments, maturity defaults, or declining property values.

Types of Commercial Real Estate Loans

Traditional CRE Loans

• Purchase loans: Finance property acquisition (owner-occupied or investment)
• Refinance loans: Replace existing mortgage with new financing
• Construction loans: Finance new construction or major renovations
• Bridge loans: Short-term financing (1-3 years) until permanent financing

SBA 504 Loans

• Government-backed CRE financing
• Owner-occupied properties (business operates in building)
• Long terms (10-25 years)
• Lower down payment requirements (10%)
• Personal guarantee required

Commercial Mortgage-Backed Securities (CMBS)

• Loans packaged and sold to investors
• Serviced by third parties
• Less flexibility for modifications
• Strict enforcement of terms

Common CRE Debt Problems

1. Balloon Payment Coming Due

Most CRE loans have 5-10 year terms with balloon payments. You've been paying interest-only or partially amortized payments, and now the full balance is due.

Example:

• Original loan: $2,000,000 at 6% for 20-year amortization
• Balloon payment due after 5 years
• You've paid $773,000 in payments
• Balloon due: $1,760,000

If you can't refinance or sell, you default.

2. Property Value Declined

• Market downturn reduced property value
• Now underwater (owe more than property worth)
• Can't refinance without bringing cash to closing
• Lender won't extend/modify without additional collateral

3. Cash Flow Problems

• Vacancy increased (tenants left, can't find new ones)
• Rental income dropped below debt service
• Operating expenses increased
• Can't cover monthly payment from property income

4. Can't Refinance

• Credit deteriorated
• Property doesn't cash flow (low debt service coverage ratio)
• Lending market tightened
• Property condition declined

Your Options for CRE Debt Relief

Option 1: Refinance with New Lender

When This Works:

• Property has positive cash flow (1.2+ debt service coverage ratio)
• Your credit is decent (640+)
• Property value supports loan amount
• Lending market is favorable

Benefits:

• Pay off balloon payment
• Potentially lower interest rate
• Reset term (new 5-10 years)
• May be able to pull cash out if property appreciated

Requirements:

• Debt Service Coverage Ratio (DSCR) of 1.20-1.35+ (property income ÷ debt payment)
• Loan-to-Value (LTV) under 75-80%
• Personal credit score 640+
• Personal financial strength (net worth, liquidity)
• Property appraisal
• Financial statements (property and personal)

Option 2: Loan Extension/Modification

How It Works:

Negotiate with current lender to extend the balloon date or modify terms.

What to Request:

• Balloon extension: Push balloon payment out 1-5 more years
• Interest rate reduction: Lower rate to improve cash flow
• Amortization change: Extend amortization to reduce payment
• Interest-only period: Temporarily pay only interest

Lender's Perspective:

They'll modify if:

• You have good payment history
• Problem is temporary (market conditions, specific tenant issue)
• Property still has adequate value as collateral
• Modification is cheaper than foreclosure

Fees: Expect extension/modification fees (1-2% of loan balance)

Option 3: Deed in Lieu of Foreclosure

How It Works:

Voluntarily transfer property deed to lender in exchange for releasing you from the loan.

When to Consider:

• Property is underwater (worth less than you owe)
• You can't afford payments
• You don't want to deal with foreclosure process
• Property is a liability, not an asset

Pros:

• Avoid foreclosure on credit report
• Faster than foreclosure (months vs. years)
• May negotiate deficiency waiver (owe nothing after)
• Less embarrassing than public foreclosure sale

Cons:

• Lose the property
• May still owe deficiency if underwater
• Taxable event (forgiven debt = income)
• Credit impact (7 years, though less than foreclosure)

Important: Negotiate in writing that deficiency will be waived. Don't give up property and still owe money.

Option 4: Sell the Property

Standard Sale:

• List property for sale
• Pay off loan with proceeds
• Keep any equity remaining

Short Sale (if underwater):

• Sell for less than you owe
• Lender must approve
• May forgive deficiency (negotiate this upfront)
• Better than foreclosure

Timeline Challenges:

• CRE sales take time (6-12+ months)
• If balloon payment is near, lender may not wait
• Request extension while marketing property

Option 5: Bring in Partner/Equity Investor

How It Works:

• Find investor to buy into property
• Use their capital to pay balloon or cure default
• Give up partial ownership
• Remain involved in property

Where to Find Partners:

• Real estate investor groups
• Commercial brokers
• Private equity firms (for larger properties)
• Friends/family with capital

Terms to Negotiate:

• Ownership percentage
• Profit sharing
• Decision-making authority
• Buyout options

Option 6: Chapter 11 Bankruptcy

How It Helps CRE Debt:

• Stops foreclosure immediately (automatic stay)
• Time to restructure (3-5 years)
• May "cram down" loan to property's current value
• Force modified terms on lender if court approves

Cramdown Example:

• Owe: $2,000,000
• Property value: $1,500,000
• Court may reduce secured claim to $1,500,000
• Remaining $500,000 becomes unsecured (paid pennies on dollar in plan)

Requirements:

• Must be investment property (not primary residence)
• Court approval of reorganization plan
• Prove you can make modified payments
• Attorney fees: $15,000-50,000+

Best For: Viable property with cash flow potential, but current terms are unsustainable

Full Chapter 11 Guide →

Option 7: Let It Foreclose (Strategic Default)

When This Makes Sense:

• Property is deeply underwater
• No personal guarantee (non-recourse loan)
• Property has negative cash flow
• Better to cut losses than continue throwing money into it

Recourse vs. Non-Recourse:

• Recourse loan: You're personally liable for deficiency. Lender can sue you.
• Non-recourse loan: Lender can only take property, not pursue you personally (rare for CRE)

If You Have Personal Guarantee:

Foreclosure doesn't end it. You'll still owe deficiency. Consider personal bankruptcy (Chapter 7) to discharge guarantee liability.

Debt Service Coverage Ratio (DSCR) Explained

DSCR is THE key metric for CRE lending:

Formula: DSCR = Net Operating Income (NOI) ÷ Annual Debt Service

Example:

• Gross rental income: $300,000/year
• Operating expenses: $120,000/year
• NOI: $180,000
• Annual debt payment: $150,000
• DSCR: $180,000 ÷ $150,000 = 1.20

What Lenders Want:

• 1.20-1.25 minimum: Acceptable for most lenders
• 1.35+: Strong (easier to refinance)
• Below 1.0: Property doesn't cover debt (red flag)

If your DSCR is below 1.20, refinancing will be difficult. You'll need to either increase income (raise rents, reduce vacancy) or reduce debt (pay down principal).

Preventing CRE Debt Problems

1. Plan for Balloon Payments Early

• Start refinance process 12-18 months before balloon due
• Don't wait until last minute
• Build relationship with multiple lenders

2. Maintain Strong Property Performance

• Keep occupancy high (target 90%+)
• Maintain property in good condition
• Document all income and expenses properly
• Build reserves for capital improvements

3. Monitor DSCR Quarterly

• Calculate your DSCR every quarter
• If it drops below 1.25, take action immediately
• Don't let problems compound

4. Have Contingency Plans

• Know multiple exit strategies
• Have relationships with backup lenders
• Keep personal finances strong
• Don't over-leverage

Frequently Asked Questions