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Commercial Real Estate Primer

CRE Financing Overview

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CRE Financing Overview

Commercial real estate is built on borrowed money. Four debt sources dominate: government-backed agencies (multifamily), CMBS pools (mixed asset), life insurers (long-term, low-leverage), and bridge lenders (short-term, high-risk).

Key takeaways​

  • Fannie Mae and Freddie Mac are the largest multifamily lenders, offering 30-year amortization, ~65% loan-to-value, and rates near Treasury + 100–150 bp.
  • CMBS loans are non-recourse, 5–10 year balloons, sold into securitized pools—they require strong credit tenants and are less forgiving than agency debt.
  • Life insurance companies lend long-term (10–25 years), prefer low leverage (50–60% LTV), and seek stable, long-lease assets like industrial warehouses and office.
  • Bridge loans are 1–3 year interim financing for value-add plays, relying on a permanent refinance at exit; they carry high rates (8–12%) and strict prepayment timelines.
  • Debt availability and pricing move with Fed policy, not cap rates—tightening credit in 2023 choked refinance activity even as cap rates normalized.

Fannie Mae and Freddie Mac: The engine of multifamily​

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) with an implicit U.S. government backing. Their multifamily lending programs are the single largest source of CRE capital. In 2023, they originated roughly $150–$180 billion in multifamily mortgages.

A Fannie/Freddie multifamily loan has these hallmarks:

  • Term: 30 years amortization, fully amortizing (no balloon)
  • LTV: 60–65% typical, up to 70% for strong sponsors
  • Rate: Treasury yield + 100–150 bp (roughly 5.5–6.5% in 2024)
  • Recourse: Full recourse to borrower (recourse note)
  • Covenants: Moderate (debt service coverage ratio ≥1.2x, occupancy >90%)
  • Speed: 60–90 day close, if underwriting is clean

The GSEs focus on stabilized, well-located properties. New York Class A apartments, Washington DC high-rise, Austin suburban multifamily—these are Fannie's sweet spot. A borrower with strong credit, proven operations, and a 4.5% cap rate property can lock in a 6% all-in cost of debt and harvest a 250 bp spread at 1.25x leverage.

Freddie Mac has a similar program (Freddie Mac Multifamily) but with some differences: slightly different pricing, focus on secondary markets, and flexibility on mixed-use (apartments with retail). Both agencies have seller/servicer networks—you don't go directly to "Fannie"; you work through approved lenders like Wells Fargo, Citi, or boutique mortgage shops.

Why are Fannie/Freddie dominant? Safety. A 65% LTV, 30-year loan to a diversified multifamily portfolio is a low-risk bet. The GSEs are incentivized to keep mortgages affordable and stable. They securitize loans into mortgage-backed securities (MBS), which trade at low yields (5–6%), making the economics work at scale.

A pitfall: Fannie/Freddie require "credit quality"—experienced sponsors, audited financials, strong track records. A new operator with a great deal but weak sponsor history will struggle to get agency debt. In those cases, sponsors turn to CMBS or bridge lenders at much higher cost.

CMBS: Securitized, non-recourse, rigid​

Commercial Mortgage-Backed Securities (CMBS) are pools of commercial mortgages—typically 50–150 loans of $5 million to $50 million each—packaged and sold to investors. A CMBS deal might include multifamily, office, retail, industrial, and hotel properties, tranched by seniority.

Key features of a CMBS loan:

  • Recourse: Non-recourse (lender can only look to the property; if it fails, lender takes it, borrower is done)
  • Term: 5–10 year balloon (no amortization; full balance due at maturity)
  • LTV: 50–65% typical
  • Rate: SOFR + 200–300 bp (often 7–8% in 2024)
  • Covenants: Strict lockbox accounts, yield maintenance prepayment penalties, escrows for capital expenditure
  • Servicing: Third-party servicer; deals with distress across dozens of properties

A CMBS loan feels tighter than a Fannie loan. You cannot prepay early without penalty. You cannot refinance into an agency program if your sponsor profile changes. You must meet a debt yield test (minimum NOI / mortgage amount). If occupancy drops below a threshold, you might be placed in special servicing even if you're current on payments.

CMBS dominance: 2013–2019, when interest rates were low and securitization demand was voracious. In 2020–2021, CMBS nearly vanished (post-COVID dislocation). It revived in 2022–2023 as cap rates normalized. A strong industrial or best-in-class retail property can access CMBS at a 6.5–7.5% all-in cost—cheaper than bridge, pricier than agency, more leverage than life company.

The mechanic: A mortgage banker or loan arranger bundles a deal, does underwriting, and sells it to a CMBS issuer (major banks, specialty finance firms). The issuer securitizes the loans, sells tranches to pension funds, insurance companies, and hedge funds. The borrower never sees this process; they just make monthly payments to a servicer.

Life insurance company loans: Patient capital​

Life insurers (Prudential, Lincoln National, MetLife, Equitable) hold long-dated liabilities (pension obligations, annuities). They seek long-term, stable real estate assets to match those liabilities. A 15–25 year fixed-rate mortgage on an industrial warehouse or AAA-credit office building appeals to them.

Typical life company loan structure:

  • Term: 10–25 years, fully amortizing
  • LTV: 50–60% (very conservative)
  • Rate: 4.5–5.5% (fixed, long-term, low leverage)
  • Recourse: Full recourse, often with guarantees
  • Credit tenant: Preferred (Whole Foods, Walgreens, Microsoft, Costco on lease)
  • Covenant: Loose (no lockbox, flexible prepayment, modest DSCR requirements)

A trophy asset—a Google office building leased to Google, or a 12-year Costco warehouse lease—can access life company debt at very attractive rates. The lender is satisfied with 5% yield on a 50-year present value, because the cash flows are predictable and the borrower's creditworthiness is transparent.

Life company debt moves slower than agency or CMBS. Underwriting is fundamental-focused: What is the tenant's credit? How long is the lease? What's the renewal probability? Pricing adjusts for lease length—a 15-year lease gets better rates than a 3-year lease.

The catch: Life companies lend opportunistically. They might do $5 billion in CRE in a year, then cut back to $2 billion the next if liabilities shift. In 2022–2023, higher interest rates expanded their universe of assets and they became more aggressive. By 2024, they had deployed capital and became selective again.

Bridge loans: Interim muscle for value-add​

Bridge loans are 1–3 year mortgages with a "bridge" to permanent financing (agency, CMBS, or life company debt). They're used in value-add plays: buy a multifamily property at a discount, renovate and lease it up, then refinance at a higher valuation into a Fannie loan at year 2 or 3.

Typical bridge structure:

  • Term: 12–36 months (36-month is most common)
  • LTV: 65–80% (higher than permanent debt, because it's short-term)
  • Rate: 8–12% (high, because it's risky and short-term)
  • Amortization: None (interest-only is standard; full balance due at maturity)
  • Recourse: Full recourse, often with personal guarantees
  • Prepayment: Allowed, sometimes with yield maintenance
  • Advance: Holdback for capital expenditure (10–20% of loan amount held for improvements)

A bridge lender is betting on your execution. You say, "I'll buy this $40 million multifamily at a 5.2% cap rate, renovate $5 million of units, and refinance into Fannie at a 4.8% cap rate at year 2.5, reducing debt to $20 million and equity profit to $5 million." The lender's risk is that you don't execute (delays, cost overruns, market downturn, refinance rejection) and they're stuck with a half-renovated building at a lower cap rate.

Bridge rates are high—8–12%—but the duration is short. A $25 million bridge at 10% costs $2.5 million a year in interest, or ~$208k per month. That's a material carry cost. A successful bridge reduces carry cost quickly by hitting milestones.

Bridge lenders are non-bank: specialty finance shops like Starwood Capital, Blackstone Tactical Opportunities, various regional lenders. They thrive in active markets (2012–2019, 2021–2022) and become scarce in recessions (2008–2012, 2020 brief, 2023 tightening).

How debt markets interlock​

The four debt sources form a hierarchy:

  1. Strongest sponsors, best properties → Agency (Fannie/Freddie) at 5.5–6.5%
  2. Moderate sponsors, stabilized assets → CMBS or life company at 6.5–7.5%
  3. Weaker sponsors, value-add repositioning → Bridge at 9–12% for 2–3 years, then refi to agency

A savvy sponsor sequences debt: bridge a value-add play for 2–3 years, then refinance into a permanent 30-year agency loan as cap rates compress during value creation. A stumble—renovation delays, tenant mix-up, market crash—can trap you in expensive bridge debt and force a distressed sale.

Debt market volatility​

Financing costs move independently from property cap rates. In 2021, cap rates were 3.5–4.5% (compressed by low rates) but debt was cheap (SOFR + 100 bp). By 2023, cap rates had normalized to 4.5–5.5% but debt had jumped to SOFR + 250–300 bp. A property that was a cinch to finance in 2021 became underwater in 2023, not because the property got worse, but because debt pricing exploded.

The spread between cap rate and cost of debt is the equity return hurdle. If a property's 4.5% cap rate is financed at 6.5% (1.5x leverage at 65% LTV), your unleveraged yield is 4.5%, but your levered equity yield is negative until you realize appreciation. That's why 2023 forced a repricing: deals that penciled at 4% cost of capital in 2021 didn't work at 8% cost of capital in 2024.

Decision tree: Which debt source?​

Next​

Each debt source has its own underwriting standards and pricing mechanics. The next three articles zoom into three specific loan programs: CMBS loans (non-recourse, securitized, rigid), agency multifamily loans (GSE-backed, fully amortizing, friendly), and life company loans (long-term, patient, selective). Understanding these deeply is essential for any CRE investor or REIT analyst trying to gauge a deal's feasibility or refinance risk.