Mixed-Use Loan Tier: Why the Rental Income Split Decides Tier I or Tier II

A mixed-use building is Tier I or Tier II based on which side of the property produces the rent, not which side occupies the floor area. More than 50% of gross rental income from the residential units makes it Tier I; more than 50% from the commercial units makes it Tier II. Square footage does not enter the test at all.

That distinction is worth money. Tier drives the maximum LTV available to the deal, feeds into pricing, and changes what we require of you if you manage the building yourself. A borrower who assumes the tier follows the floor plan — three apartments upstairs, one storefront down, therefore residential — can find out at underwriting that the storefront out-earns the apartments and the whole file reprices.

Below: the test exactly as our guidelines write it, the place where two sections of the same document disagree at the 50% line, a labelled illustration of a building that flips tiers on one lease renewal, and the eligibility gates underneath it all.

What counts as mixed-use in the first place

Before tier matters, the property has to be mixed-use. Our guidelines define it narrowly.

One of each is the floor. There is no five-unit minimum for mixed-use the way there is for multifamily — two apartments over one shop is a mixed-use property, not an undersized apartment building. The five-unit rule is covered separately in [the five-unit minimum and full-kitchen rule for multifamily](/blog/multifamily-loan-five-unit-minimum-and-full-kitchen-rule).

One requirement does apply here directly: residential units in a Tier I mixed-use building must have full and legal kitchens. That is written into the Tier I property type entry itself. A change dated 07/10/2026 removed the old minimum square footage for residential units and replaced it with the kitchen requirement.

The test: rent, not square feet

Here is the calculation our guidelines actually specify.

Total monthly rent of one component over total monthly rent of the building. Nothing in that formula references area, unit count, or the number of tenants. A 4,000 square foot ground-floor restaurant paying below-market rent on an old lease can be the minority component in a building whose 900 square foot apartments are all at market.

Owners describe their building by its footprint, because that is how it looks from the sidewalk. The tier is decided by the rent roll.

Where the two sections disagree at exactly 50%

Our guidelines state the mixed-use tier test in two places, and the wording is not identical. At most rent splits they produce the same answer. At exactly 50.00% they do not.

Both passages sit in the same document, effective 8/3/2026, so neither is the newer statement superseding the other on its face. We have resolved it, and the answer is the stricter reading.

So the exactly-even building is Tier II. If you are at 50.00%, do not model Tier I terms.

A second, quieter ambiguity sits in the same wording. One passage says "gross income," another "gross rental income," and Appendix A says "rental income" then gives a formula built on "total monthly rent." Our glossary defines Gross Potential Income as current rents in place plus market rent for vacant space, and Effective Gross Income as rental income plus miscellaneous income less vacancy, collection losses and concessions — and does not say which the tier test uses. The formula handed to you is a contract-rent formula. Where a building has meaningful laundry, parking or storage income, or real vacancy, ask how the split will be computed.

A worked illustration: the building that flips on one renewal

The figures below are invented for illustration. They are not a quote, not an approval, and not drawn from any real file. They exist to show the arithmetic.

A six-unit building: four apartments on the upper two floors, two ground-floor storefronts.

Residential total is $5,575. Divide by $10,675 and the residential component contributes 52.2% of the building's monthly rent. Commercial contributes 47.8%. More than half the rent comes from the residential space, so this is a Tier I mixed-use property under either reading of the two passages above.

Note what the floor plan would have told you. The two storefronts are the largest spaces in the building by a wide margin — ground floor, full depth, street frontage. Run the test on square footage and this building looks commercial-dominant. The rent says otherwise.

Now renew one lease

Storefront B's lease comes up. The tenant renews at $3,200 instead of $2,500 — a $700 increase, entirely ordinary for a retail space that has been under-rented for a term.

Nothing was built, converted, or sold. No unit changed use. One tenant signed a renewal at a higher number and the property changed tier.

The part that catches people is the direction. The renewal is good news for the property: gross rent up 6.6%, net operating income up, debt service coverage improved. And it moved the building into the more conservatively treated tier. A stronger asset, a worse classification — the two are measuring different risks and do not have to agree.

The reverse works too. If Apt 4 goes vacant and the rent roll shows $0 for that unit, residential rent falls to $4,275 against a building total of $9,375 — a 45.6% residential share, which is Tier II. Whether a vacancy is carried at zero or at market rent for the tier calculation specifically is not something the guidelines spell out. The formula they give is a contract-rent formula, and our glossary contemplates market rent for vacant space in a different context. Ask before you assume, particularly on a building with a unit sitting empty at application.

Three different 50% tests, measured three different ways

This is where files genuinely go sideways. Our guidelines use a 50% threshold in three separate places, and each one measures something different. They can and do produce contradictory-sounding labels for the same building.

So the tier test is a rent test, the owner-occupied test is a square-footage test, and the investor-property test is an income test on a different income measure. A building can be Tier I on rent, investor-classified on EGI, and fail the owner-occupied area test all at once, and none of that is a contradiction — the three tests were never asking the same question.

A related trap: if a borrower-affiliated business occupies 25% or more of the property's rentable square footage or contributes 25% or more of the property's rental income, we may require additional documentation, including a business profit and loss statement and business bank statements, to evaluate that operating business. If the storefront in your mixed-use building is your own company, expect that request.

What the tier actually changes

Tier is an input to several things that cost money.

Maximum LTV. Maximum allowable LTVs for each property type, tier, and credit program are set forth in the current Pricing Matrix. That matrix is updated periodically and its figures are not published in the guideline document, so ask for the current number for your tier and program before you plan a down payment around it.

Pricing. Loan pricing is determined by the applicable loan program, property type, credit score, LTV, amortization term, loan amount, and occupancy status. Any material change to those factors during underwriting may result in a pricing adjustment. Initial rates are fixed upon issuance of the Letter of Intent until the closing date, but the final rate may be affected by changes in the property type, among other factors. A tier reclassification mid-process is exactly that kind of change.

Self-management radius. This one is concrete and it surprises people.

Note the direction: Tier I mixed-use carries the tighter radius. A borrower living 120 miles away who self-manages is inside the commercial radius but outside the Tier I one. We may allow self-management regardless of property type or location if the borrower can verify five or more years of investor or ownership experience with real estate of like kind, size, and geographic area as the proposed collateral. Otherwise a third-party manager with an executed management agreement solves it.

Appraisal form. We may accept the FHLMC 71A or 71B forms with adequate addenda on a case-by-case basis for some multi-family and mixed-use properties. That is a case-by-case allowance, not an entitlement.

"The tier may increase depending on the use of the commercial space"

Our Tier II mixed-use entry carries a hedge that is easy to skim past.

The rent split gets you to Tier I or Tier II. What the commercial tenant actually does can move it further. The guidelines say "may" and do not enumerate which uses trigger it or what the resulting classification is, so we will not invent a table for you. What we can tell you is the surrounding machinery.

Certain property types are ineligible outright but are permitted as third-party tenants in a Tier II property when the income they generate is 25% or less of total property cash flow. Adult entertainment, churches and religious organizations, funeral homes, education, gambling and gun ranges sit in that carve-out, each with its own conditions. Note that the carve-out is written for Tier II properties. Whether the same accommodation is available in a Tier I mixed-use building is not addressed, which is itself a reason to ask early if you have one of these tenants.

Separately, single-user office, automotive, warehouse, retail or light industrial space of 25,000 or more square feet of gross building area is Special Purpose; multi-tenant properties may exceed 25,000 square feet, but no individual tenant may occupy 25,000 or more. And at the discretion of our operations team, the property type may be updated when the leasable space is adaptable for alternative uses; for single-tenant properties with unique or specialized spaces, classification follows the property's current use.

Gates that sit underneath the tier question

The tier calculation assumes the property is eligible at all. A few things that stop a mixed-use file regardless of the split:

• Zoning. The subject property must be commercially zoned — retail, office, multi-family or industrial. Properties zoned residential or agricultural are prohibited. Properties with commercial uses located within a residential zoning district and operating under a special use permit, or as defined by the municipality, are eligible for a maximum LTV of 50%. We will not lend on a property subject to a zoning change. Whether your specific parcel's classification qualifies is a question for your municipality and your attorney, not for us.
• Fee simple. The property must be held in fee simple as noted on the title policy. Leasehold and ground lease interests are prohibited, unless we receive evidence that the leasehold interest will be purchased at closing and the final title policy will show fee simple thereafter.
• Short-term rental units. Units utilized for Airbnb purposes will be deemed vacant. In a mixed-use building that is a direct hit on the residential side of the rent split.
• Rent regulation. Rent control and rent stabilized properties in New York are ineligible. We reserve the right to review rent control and stabilization regulations in other states to determine whether such statutes may affect long-term marketability.
• Kitchens. Residential units in a Tier I mixed-use property must have full and legal kitchens.

What to have ready

For an investor mixed-use property, expect to produce a current rent roll — the appraiser's rent roll analysis, or a rent roll included in the appraisal report, is acceptable — plus executed leases with all current addendums for the commercial tenants. If the appraisal includes the leases we will rely on those; if they are incomplete we will condition for the entire document. Residential leases may be required where we deem it appropriate. You will also typically provide the most recent two years of property operating statements or Schedule E plus year-to-date.

On a purchase where the seller cannot provide a rent roll or operating statements, reliance is placed on the appraiser's analysis, and our guidelines are explicit that a seller's failure to produce historical data on a purchase is not treated as a policy exception.

The rent roll decides your tier. Send it first.

What this page does not do

This page explains one classification test. It is not an approval, not a pre-qualification, and not a quote, and nothing here commits us to a rate, a term, or a loan amount.

It does not give you the LTV or the pricing attached to either tier. Those live in the current Pricing Matrix, which changes periodically, and we will not publish a number here that could be stale by the time you read it. Ask for the current figure for your tier, program and credit profile.

It does not resolve the exactly-50/50 case. Two sections of the guidelines read differently at that point and we have shown you both rather than picking one.

It does not tell you which commercial uses cause the tier to increase beyond Tier II. The guidelines say the tier may increase depending on the use of the commercial space and do not enumerate the uses or the outcome, so neither do we.

It does not cover the multifamily five-unit minimum in depth, DSCR minimums, credit score or reserve requirements, documentation program selection, environmental review, or the appraisal process beyond the form allowance noted above.

And it does not answer legal, tax, zoning-law or permitting questions. Whether your building's zoning classification permits its current mix, whether a conversion requires a variance, and what any of it means for your tax position are questions for your attorney, your accountant and your municipality.

Guideline SBC 08/03/2026 · Reviewed August 31, 2026

Published August 31, 2026 · Updated August 31, 2026