What is CRE (Commercial Real Estate)?
Real property used for business purposes, including office, retail, industrial, multifamily (5+ units), and hospitality properties.
CRE (Commercial Real Estate) in commercial lending practice
CRE lending involves specialized underwriting focused on property-level cash flow (NOI), occupancy and lease structure, market conditions, and sponsor strength. Standard CRE underwriting includes rent roll analysis, T-12 normalization, DSCR stress testing, debt yield calculation, and an LTV analysis against current appraisal. Bank regulators monitor aggregate CRE exposure under the FDIC/OCC interagency 100/300 capital concentration thresholds.
Worked example
CRE (Commercial Real Estate) in numbers
Setup
A bank is sizing a $4.2 million acquisition loan on a 32-unit garden-style multifamily property in a tertiary metro. Purchase price $5.8 million, appraised value $5.7 million. Trailing-twelve in-place rents annualize to $556,800; T-12 operating expenses run $214,000. Replacement reserve underwritten at $300 per unit. Proposed terms: 6.50%, 25-year amortization, 10-year balloon (annual debt service $339,936).
Calculation
Underwritten NOI = $556,800 − ($556,800 × 7% vacancy) − $214,000 − ($300 × 32) = $304,624
DSCR = $304,624 ÷ $339,936 = 0.90x
LTV (against appraised value) = $4,200,000 ÷ $5,700,000 = 73.7%
Debt yield = $304,624 ÷ $4,200,000 = 7.25%
Interpretation
The deal fails the DSCR test by a wide margin even though the LTV looks acceptable. The bank would need to either reduce the loan amount (to roughly $3.4M for a 1.20x DSCR), restructure with interest-only during a value-add period, or decline. This is the canonical CRE pattern: collateral cushion alone does not save a deal that does not cash flow, and the credit memo needs to be explicit about which constraint is binding.
Variations by loan type
How CRE (Commercial Real Estate) differs across CRE, C&I, and SBA
Multifamily
Driven by rent roll, T-12 operating performance, and submarket vacancy benchmarks. Standard underwriting: 7% vacancy floor, $250-$350/unit replacement reserve, 4%-5% management fee even on owner-managed assets. DSCR floors typically 1.20x-1.25x; LTV typically capped 75%-80% on stabilized.
Office
Driven by tenant credit, lease structure, and WALT. Underwriting reconciles rent roll with T-12 for in-place vs scheduled rent, expense recoveries, free rent and TI, and rollover exposure. DSCR floors typically 1.25x-1.35x; LTV typically capped 65%-70% in current-cycle underwriting.
Retail
Adds percentage rent, co-tenancy clauses, exclusivity provisions, and sales-per-square-foot benchmarking on in-line tenants. Anchored centers underwrite differently than unanchored strip; net-leased single-tenant retail can carry materially higher LTVs than multi-tenant.
Industrial
Generally cleaner: NNN leases, larger tenants, fewer rent roll lines. Risk concentrates in tenant credit and lease-term concentration — loss of a single tenant on a four-tenant building meaningfully affects NOI. WALT and tenant-credit analysis carry more weight than expense normalization.
Hospitality
Most cyclical asset class. Underwriting uses USALI (Uniform System of Accounts for the Lodging Industry), with FF&E reserve typically 4% of revenue. RevPAR, ADR, and brand/franchise relationship are central. DSCR floors are higher (1.40x+ common) and LTVs lower (60%-65%).
Further reading
Go deeper on CRE (Commercial Real Estate)
Frequently asked
CRE (Commercial Real Estate) FAQ
What are the FDIC/OCC CRE concentration thresholds?
The 2006 interagency CRE concentration guidance defines two thresholds: construction and land development loans exceeding 100% of total capital, or total CRE loans (including construction) exceeding 300% of total capital with growth above 50% over the prior three years. Banks above either threshold face heightened supervisory scrutiny, including additional documentation expectations on individual credit memos and stronger portfolio-level stress testing.
What is the difference between owner-occupied and investor CRE?
Owner-occupied CRE means the borrower (or a related operating company) occupies more than 50% of the property. The repayment source is primarily the operating company's cash flow, not third-party rent. FFIEC LTV supervisory limits are higher (85% vs 80%), and underwriting includes the operating business's financials in addition to the property. Investor CRE relies on third-party rent and is underwritten on rent roll, NOI, DSCR, and LTV.
How do banks underwrite value-add CRE deals?
By running both an as-is and an as-stabilized analysis. The loan is typically structured with an interest-only period during the value-add execution, conversion to amortization at stabilization, and a stabilization test (usually a DSCR threshold against trailing-three-month or trailing-six-month NOI). The credit memo documents the sponsor's track record, the value-add plan, and the stress scenarios if stabilization runs late or partial.
How does AI underwriting handle CRE?
Modern AI underwriting platforms read the rent roll, T-12, appraisal, environmental report, and PFS; extract and normalize the data; calculate DSCR, debt yield, and LTV at multiple stress points; and draft the analysis sections of the memo with citations back to the source documents. The credit officer keeps ownership of risk rating, structure, and the recommendation.
Related terms
Related concepts in commercial underwriting
NOI (Net Operating Income)
Total property revenue minus operating expenses, excluding debt service, capital expenditures, depreciation, and income taxes.
Read definitionCap Rate (Capitalization Rate)
The ratio of a property's net operating income (NOI) to its current market value or purchase price, expressed as a percentage.
Read definitionDSCR (Debt Service Coverage Ratio)
The ratio of net operating income (or available cash flow) to total annual debt service, including principal and interest payments.
Read definitionLTV (Loan-to-Value Ratio)
The ratio of the loan amount to the appraised value of the collateral property.
Read definitionRent Roll
A detailed schedule of all tenants in an income-producing property, listing tenant names, unit numbers, lease start and end dates, monthly rent amounts, security deposits, and any concessions.
Read definitionT-12 (Trailing Twelve Months Operating Statement)
A financial statement showing a property's actual income and expenses over the most recent twelve-month period.
Read definitionDebt Yield
The ratio of a property's net operating income to the total loan amount, expressed as a percentage.
Read definitionConcentration Risk
The risk arising from excessive exposure to a single borrower, industry, geography, or loan type within a lending portfolio.
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