What is a commercial real estate loan?
A commercial real estate (CRE) loan is financing used to purchase, refinance, or develop property intended for business use. For a franchise restaurant, the property can include land, an ownership stake in a building, a leased site improvements package, or construction financing. CRE loans are structured around the property as collateral and typically involve longer terms and different underwriting compared with consumer mortgages.
Common uses for this loan type in franchise restaurants
- Purchase of land or an existing restaurant building to occupy or lease to the franchise operation.
- Construction or build-out of a new restaurant location, including kitchen and dining area improvements.
- Refinancing existing property debt to adjust loan structure, consolidate obligations, or free up capital.
- Acquisition of adjacent properties for parking, signage, or future expansion.
- Funding tenant improvements under a long-term lease when the franchisee will invest in the space.
Typical eligibility considerations
Lenders review multiple factors when assessing CRE loan requests. These considerations vary by lender, loan program, and market conditions.
- Business financials: recent tax returns, profit-and-loss statements, and cash flow projections for the restaurant or operating entity.
- Property characteristics: location, condition, appraised value, zoning, and expected income generation.
- Borrower profile: credit history (business and personal), management experience, and relevant franchise operations history.
- Franchise agreement: terms of the franchise relationship, territory rights, and any franchisor requirements affecting property use.
- Collateral and equity: required down payment or owner equity, and any additional collateral pledged.
- Lease structure: if leasing, the lease length, tenant improvement responsibilities, and strength of the lease covenants.
- Debt capacity: existing debt obligations and the business’s ability to service new debt based on cash flow.
Key risks and considerations
Using CRE loans involves risks that owners and operators should identify and plan for before taking on financing.
- Financial strain: loan payments and related obligations can reduce available working capital for operations, staffing, and supplies.
- Market and location risk: changes in local demand, competition, or traffic patterns can affect sales and property value.
- Lease and franchisor obligations: unfavorable lease terms or franchise requirements can limit flexibility or increase operating costs.
- Construction and timeline risk: build-outs and renovations can encounter cost overruns or delays that affect opening date and cash flow.
- Exit and liquidity risk: property may be illiquid in a slow market, making it challenging to sell or refinance on desirable terms.
- Default consequences: failure to meet loan obligations can lead to lender remedies, including foreclosure or forced sale of the property.
Alternative financing options
Franchise restaurant operators can consider several alternatives or complements to CRE loans depending on needs and circumstances.
- SBA loan programs: may offer small-business-targeted structures for property purchase or leasehold improvements under specific eligibility rules.
- Equipment financing or leasing: separates kitchen and operational equipment funding from real estate debt.
- Business lines of credit: provides short-term working capital flexibility without tying up property as collateral in some cases.
- Seller or landlord financing: negotiated terms with a seller or property owner to spread payments or lease-to-own arrangements.
- Private lenders or investors: nonbank financing sources that may provide alternative structures, often with different underwriting standards.
- Joint ventures or partnerships: sharing property ownership or development costs with investors or other operators.
Explore financing options
The link below provides general information about commercial financing solutions.
This content is for informational purposes only and does not constitute financial advice or a loan offer. Loan eligibility, terms, and approval are determined by lenders based on individual review.
Part of our complete guide to commercial real estate loans — compare programs, costs and lender requirements across every industry.