Loans for mixed-use buildings

The commercial share decides the lender

The first question on a mixed-use deal is not the rate. It is how much of the building, by space and by income, is commercial. Lenders measure both, and the higher of the two usually decides.

Commercial share	How lenders see it	Programs that fit
A small storefront under apartments, little income	An apartment building with some retail	Fannie Mae Small Loans, FHA 223(f) within its limit, bank, credit union
A meaningful share of income from stores or offices	A true mixed-use loan	Bank, credit union, DSCR loan, portfolio loan
Commercial carries most of the income	A retail or office loan with apartments	Bank, credit union, life company or CMBS on larger, better-located buildings
Vacant storefronts, a repositioning	Transitional	Bridge, DSCR lender, hard money for speed

FHA’s line is explicit: Commercial up to 25% of net rentable area and 20% of effective gross income¹. Agency lenders publish their own limits; ask for them before ordering reports.

Programs ranked for a typical mixed-use building

For a building with 5 to 30 apartments over one to four storefronts, owned by an individual or small partnership:

Rank	Program	Why	Where it loses
1	Bank	Takes any split, underwrites the storefront leases directly, can close quickly	Personal guarantee, shorter fixed period
2	Credit union	Relationship pricing; Part 723 sets no fixed LTV cap; each credit union's board policy must set LTV limits by collateral type	Smaller balance sheets, membership, loans-to-one-borrower caps
3	Fannie Mae Small Loans	Non-recourse and long fixed terms when the apartments dominate	Commercial share limits; stabilized only
4	DSCR loan	Sizes on the building’s income, light personal documentation	Higher rate and points
5	Portfolio or blanket loan	Several neighborhood buildings under one note	Cross-collateral and cross-default
6	FHA 223(f)	High leverage and a fully amortizing fixed rate	Commercial limit, long process, rarely worth it on small loans
7	Bridge	Leases up vacant storefronts or renovates units	Floating rate, short term

What underwriters do to the commercial income

Mixed-use loans are usually sized smaller than the seller’s numbers suggest, and the storefronts are why.

• Separate vacancy factors. Apartments get a residential vacancy assumption. Storefronts get a higher one, and a vacant store is often underwritten at zero.
• Lease term and rollover. A store lease ending within the loan term, especially in the first two or three years, may be haircut or reserved for. Month-to-month commercial tenants are treated as vacant by some lenders.
• Tenant quality and use. A restaurant brings grease traps, venting, fire risk and higher turnover. A laundromat, salon or convenience store has its own environmental and insurance questions. Dry cleaners are an environmental review item on their own.
• Leasing costs. Lenders may underwrite tenant improvement and leasing commission reserves on the commercial space even if apartments need none.
• Expense recovery. If the commercial leases pass taxes, insurance or maintenance through, the lender wants the reconciliations. Gross leases put those costs back on you.
• Zoning and legal nonconforming use. Older mixed-use buildings often predate current zoning. Lenders want to know the building can be rebuilt as it stands after a casualty; a zoning report or ordinance-and-law insurance is the usual answer.
• Separate meters and code compliance. Shared utilities between stores and apartments, and certificates of occupancy for each use, are common conditions.

Sizing example (illustration)

An illustration, not a quote. Eight apartments at $1,650 a month and two storefronts at $3,000 a month each, valued at $2,100,000. Operating expenses are $58,000 a year.

Line	Seller’s view	Lender’s view
Apartment income, 95% occupied	$150,480	$150,480
Storefront income	$72,000 (full)	$64,800 (10% vacancy applied)
Expenses	($58,000)	($58,000)
NOI	$164,480	$157,280

Now a bank sizes it under an assumed 75% LTV and 1.25x DSCR credit policy on a 25-year schedule at an illustrative 6.85% (assumptions for the example, not market figures):

Test	Arithmetic	Loan
LTV	$2,100,000 x 75%	$1,575,000
DSCR, seller’s NOI	$164,480 / 1.25 / 8.37% constant	$1,573,000
DSCR, lender’s NOI	$157,280 / 1.25 / 8.37% constant	$1,504,000

One more check changes the program list. The storefronts bring about 32% of gross income ($72,000 of $222,480). That is above the FHA income limit quoted above, so this building is a bank, credit union or DSCR loan, not an FHA loan. If the stores were one small shop, the building could be priced as an apartment loan with agency terms.

Try your own split in the DSCR calculator and the loan sizer.

Edge cases

• Owner-occupied storefront. If your own business uses the commercial space, the loan can be partly owner-occupied. Banks treat that differently, and an owner-occupied loan or SBA program may fit if the business uses most of the building.
• Office over retail with no apartments. That is not a multifamily loan at all; see office and retail strip centers.
• Condominium storefront in an apartment building. A commercial condo unit is financed on its own, usually by a bank, and agencies look at the residential condo association separately.
• Large urban mixed-use with national tenants. A building with institutional retail tenants and a large unit count moves to life company, CMBS or agency lenders and is underwritten tenant by tenant.

Programs to avoid

• Hard money as a long-term loan. It is a bridge to a bank or DSCR loan, not a hold.
• FHA 223(f) when the commercial share is near the limit. One new lease or a change in rents can break eligibility during a long HUD process.
• CMBS on a small building. The legal and servicing structure costs too much at small balances.