đź’° Common Lending Mistakes CRE Investors Make (and How to Avoid Costly Financing Errors) đźš«
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🏢 Top Commercial Real Estate Lending Mistakes Investors Make Before Closing ⚠️
Common Lending Mistakes CRE Investors Make
Commercial real estate financing is rarely simple—and small mistakes at the loan-structuring stage can cost investors hundreds of thousands of dollars over the life of a deal. From choosing the wrong loan product to misunderstanding lender underwriting priorities, these errors often surface late in the process when options are limited.
As a mortgage broker working across banks, agencies, CMBS lenders, and private capital, I see the same lending mistakes repeated again and again. Below are the most common commercial real estate lending mistakes—and how smart investors avoid them.
1. Choosing the Loan Based on Rate Alone
Interest rate is only one component of a commercial loan—and often not the most important.
Common issues include:
Ignoring prepayment penalties (yield maintenance or defeasance)
Overlooking recourse exposure
Selecting short-term debt for long-term assets
Missing flexibility for future refinances or sales
A slightly higher rate with better terms often produces a stronger long-term outcome.
2. Not Matching the Loan Structure to the Business Plan
A value-add deal, stabilized property, and owner-occupied acquisition all require different financing strategies.
Mistakes occur when investors:
Use permanent debt for transitional assets
Use bridge debt without a clear exit
Underestimate seasoning requirements for take-out financing
Your financing should support your timeline, risk tolerance, and exit strategy, not work against it.
3. Underestimating DSCR and Cash Flow Requirements
Many investors focus on purchase price and loan-to-value while overlooking debt service coverage ratio (DSCR).
Lenders care about:
Net operating income sustainability
Stress-tested cash flow
Market vacancy assumptions
Over-leveraging a deal often leads to reduced proceeds, higher pricing, or a declined loan late in underwriting.
4. Poor Financial Documentation Preparation
Incomplete or inconsistent documentation slows deals and weakens borrower credibility.
Common mistakes:
Outdated or mismatched rent rolls and P&Ls
Missing entity documents
Unexplained income or expense anomalies
Weak personal financial statements for guarantors
Well-prepared financials signal professionalism and reduce lender friction.
5. Ignoring Recourse and Guarantee Language
Not all “non-recourse” loans are truly non-recourse.
Investors are often surprised by:
Bad-boy carveouts
Environmental or fraud triggers
Partial or burn-off recourse structures
Understanding guarantee exposure before signing a term sheet is critical to risk management.
6. Waiting Too Long to Involve a Mortgage Broker
Many investors approach lenders directly without understanding how capital markets price risk.
A mortgage broker:
Shops multiple lenders simultaneously
Structures leverage and terms strategically
Anticipates underwriting objections early
Aligns the loan with future refinancing options
Early involvement creates leverage—not cost.
7. Assuming All Lenders Underwrite the Same Way
Banks, agencies, CMBS lenders, and debt funds each evaluate risk differently.
Differences include:
How income is calculated
Treatment of tenant rollover
Market concentration limits
Appetite for specialized assets
Understanding lender psychology is just as important as understanding the numbers.
Final Takeaway
Commercial real estate lending mistakes are rarely fatal—but they are expensive.
The best investors treat financing as a strategic tool, not a commodity. Proper loan structuring preserves equity, improves returns, and protects flexibility in changing markets.
If you are buying, refinancing, or repositioning a commercial property, the right financing strategy can be the difference between a good deal and a great one.
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© 2023-2024 Bill Rapp, Medallion Funds LLC, Director of Capital Advisory
