Creating attractive interest is a challenge in today’s low interest rate environment. The attractiveness of first-position mortgage notes lies in the fact that investors (lenders) are placed in the first position as the lien holder of the property – hence a difficult asset (real estate) providing protection for their investment.
The 50-year average for homeownership in the United States is about 65%. Most experts see that number shrinking as the move to rental communities continues, along with the challenges that young consumers are finding in finding permanent employment, which is directly related to their ability to own a home (and desire ) Is related to. In today’s market, marketing for traditional residential mortgage financing has created a higher understanding of how these loans work for consumers. Couples who are in competition with the residential financing market and understand why most adults understand residential financing. But what about commercial real estate?
Everyday and everyday consumers leave their homes and visit many commercial properties – for work – for food – for shopping – for entertainment – but few understand that in the commercial financing market versus the residential financing market Difference. The term “commercial loan” was mainly divided into segments such as “Multi-family properties (5 plus units), office building, retail center, industrial and warehouse space, single tenant box building (like Lowes and Walmart) and specialty use properties.” Gas stations, schools, churches, etc., even though the reach of commercial loans is quite different from that of residential loans.
The common procedure in residential lending is to request the lender to have a 2-year tax return, bank statements, payment stubs, credit checks, and appraisal of the property. Loan underwriters primary focus is the ability of the borrower (through an income and expense model) to make monthly mortgage payments, including taxes and insurance.
In a commercial loan the lender will first look at the condition of the property and its ability to service the loan from cash flow to its day-to-day operations. The lender will request copies of current leases (rent rolls) and two-year operating history of the borrowers. In addition, they will review recent capital improvements, interior and exterior photographs of the property and lien and title searches. With these documents the underwriter will determine a loan-to-service coverage ratio (DSCR) to determine whether the property can cover the demands that the new loan will have with it. In addition, the lender will focus on third-party valuations that pay attention not only to the property but also to trends in the surrounding area and market.
A commercial borrower must have a strong financial and credit history to qualify for a loan. However, the lender places the greatest weight on the ability of the properties to sustain the loan on the personal status of the borrower. This compares to the underwriting of residential mortgages, where the borrower’s personal financial condition is of more concern than the property that is part of the mortgage.
There are six sources for commercial real estate lending – Portfolio Lender – Government Agency Lender – CMBS Lender – Insurance Companies – SBA Loan – Private Money / Hard Money Lender.
Portfolio lender – These include most banks, credit unions and corporates who participate in commercial loans and hold them on their books through the maturity date.
Government agency lender – These are companies authorized to sell commercial loan products funded by government agencies such as Freddie Mac and Fannie Mae. These loans are deposited together (securitization) and sold to investors.
CMBS Lenders – These lenders issue loans called “CMBS loans”. Once sold the mortgage is transferred to a trust, which issues a series of bonds with different terms (length and rate) and payment preferences in the event of default.
Insurance company – Many insurance companies have looked to the commercial mortgage market to increase the yield on their mortgages. These companies are not subjected to the same regulatory lending guidelines that other lenders have and therefore have more flexibility to create loan packages outside of traditional lending criteria.
SBA Loans – Borrowers looking to purchase a commercial property for their own use (owner-occupied) have the option to use the SBA-504 loan, which is used for their own business, including real estate and equipment. Can be done for a variety of purchases.
Private Money / Hard Money Loans – For borrowers who cannot qualify for traditional financing due to the credit history or challenges with the property in question – hard money loans can be a viable source of funds for their intended project. These loans have higher interest rate and cost of money than other types of loans. Despite the high cost of lending – these loans fill a need in the commercial mortgage market.
Commercial mortgage loans can be either recourse or non-recourse in their design. In a typical intercourse loan, the borrower (s) is personally held responsible for the loan in the event that the loan is mentioned and the income is not sufficient to repay the loan balance in full. In non-recurring loans the property is collateral and the borrower is not held personally responsible for the mortgage loan. In normal non-recourse loans, a provision called “bad-boy clause” is part of loan documents that state lender mortgages in the event of fraud, intentional misrepresentation, gross negligence, criminal acts, misappropriation of property proceeds, and insurance windmills. The borrower may be personally responsible for the loan.
In particular, lenders prefer repetition of loans in commercial mortgage negotiations where the borrower would prefer non-lending loans. In the process of underwriting the lender and borrower, works to create a loan that meets the needs and objectives of both parties and – if a deadlock presents itself – the loan is not issued.
The world of commercial mortgages provides investors with the ability to participate in a market that may have attractive yields, principal protection through a lien on real estate assets, and periods (12 months to 5 years) that are most acceptable. The creation of monthly interest running through holdings such as commercial mortgage notes is attractive to both consumers and institutional investors.
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