Commercial mortgage arithmetic differs from residential in one structural way that trips up new commercial borrowers: the amortisation period and the loan term are usually different numbers. That single difference changes both the payment calculation and what you owe at maturity.
Calculating the payment
The monthly payment on a commercial mortgage uses the standard amortisation formula, but with the amortisation period — not the loan term. A loan maturing in seven years but amortising over thirty is calculated on thirty.
Payment is based on the amortisation schedule. Maturity is based on the term. A 7/30 loan makes 30-year payments for 7 years, then the remaining balance is due. Both numbers matter, and they are not interchangeable.
The balloon balance
Because you are making payments calculated over a longer period than the loan actually runs, a substantial balance remains at maturity. On a 10-year term with 30-year amortisation, the majority of the original principal is typically still outstanding.
That balloon is not a surprise — it is the structure. What matters is your plan for it: refinance, sell, or extend. Model it explicitly rather than assuming refinancing will be available on acceptable terms.
Debt service coverage
DSCR = Net Operating Income ÷ Annual Debt Service
Where NOI = gross income − operating expenses, before debt service.
On residential investment property the same test appears as monthly rent divided by PITIA. On commercial property the calculation uses annual figures and a properly derived NOI. A result of 1.0 means income exactly covers debt service.
| DSCR | How lenders read it |
|---|---|
| 1.35 and above | Strong. Best pricing and highest leverage generally available. |
| 1.20 – 1.34 | Standard for most commercial programs. |
| 1.00 – 1.19 | Thin. Reduced leverage, wider spread, or declined depending on asset. |
| Below 1.00 | The property does not cover its debt. Bridge or transitional financing territory. |
Getting NOI right
NOI is where commercial underwriting diverges most from a borrower's own model. Lenders normalise it, and their version is usually lower than yours.
- Vacancy allowance. Lenders apply a market vacancy factor even on a fully leased building. Your 100% occupancy is not what gets underwritten.
- Management fee. Applied even if you self-manage, because the lender underwrites the asset independent of you.
- Replacement reserves. An annual allowance for capital items, deducted from income.
- Actual operating expenses. Taxes at the reassessed figure, real insurance quotes, utilities, maintenance, and repairs.
- Excluded from NOI. Debt service, depreciation, capital expenditure, and owner-specific items do not belong in the calculation.
Worked examples
| Scenario | NOI | Annual debt service | DSCR | Outcome |
|---|---|---|---|---|
| Stabilised multifamily | $180,000 | $126,000 | 1.43 | Strong — best tier pricing |
| Leased industrial | $145,000 | $116,000 | 1.25 | Standard — funds comfortably |
| Retail with rollover | $96,000 | $88,000 | 1.09 | Thin — reduced leverage or wider spread |
| Lease-up office | $62,000 | $79,000 | 0.78 | Bridge territory — no permanent loan |
The calculation mistakes that matter
- Using term instead of amortisation for the payment. A 10-year term with 25-year amortisation calculated over 10 years produces a payment far higher than reality.
- Using gross income instead of NOI. Coverage is calculated after operating expenses, not before.
- Assuming full occupancy. Lenders apply a vacancy factor regardless of current occupancy.
- Omitting the management fee. It is applied even to self-managed properties.
- Modelling the seller's tax bill. Reassessment on sale can move the largest line in your expense stack.
- Forgetting replacement reserves. Lenders deduct them; your model should too.
For 1–4 unit residential investment property, our DSCR calculator runs the residential version of this arithmetic directly.
Program parameters vary by lender and property type and change with market conditions. Figures here describe what is typical across the commercial and business-purpose market — they are not a quote. Send us the scenario for real numbers.
