What is a mezzanine loan?

The collateral used for most commercial mortgages is the real estate itself. However, some lenders will lend using the cash flow of the property as the collateral. These lenders are called mezzanine lenders.

Therefore, Mezzanine loans are similar to 2nd mortgages. One of the major differences is that if the borrower fails to make payments and defaults on the mezzanine loan, the lender can foreclose in a very short time. In fact, they can foreclose in just a matter of days instead of the usual 18 months it takes to foreclose on most mortgages. This is because the stock of a company is considered personal property. Mezzanine lenders will usually not look at loans for less than $1 million, with property values of around $10 million and higher.

All Access Loans is able to help place lenders with mezzanine loans.

Is there a standard commercial mortgage loan application?

While some commercial mortgage lenders will accept a form 1003, most have their own application. A form 1003 is a standard uniform mortgage application supplied by Freddie Mac / Fannie Mae. However, it is a residential application and any commercial lender that will accept it will also require other documentation to support it. While a 1003 contains a personal financial statement, it is not designed to report on the property's cash flow. An income (or operating) contains that information.

The Debt Service Coverage Ratio (DSCR)

The Debt Service Coverage Ratio (DSCR) is one of the most important ratios that a lender or investor will look at when analyzing the performance of commercial property. It is a ratio that measures the property's income against its operating expenses and mortgage payments. It is computed by taking the property's annual net operating income (NOI) and dividing it by its annual debt service (mortgage principal and interest payments).

While the residential market focuses a lot more on the loan to value (LTV), in commercial real estate the DSCR is the more important ratio. Most commercial lenders will not consider to lend to a commercial property unless the DSCR is 1.1 or greater. A DSCR of 1.1 means that the property is producing $1.10 of net operating income for every $1.00 in mortgage payments.

The Commercial Property Capitilization Rate

The Capitilization Rate is a measurement of the rate of return of the cash flow generated from a commercial property. It is calculated by taking the cost of the property divided by the net operating income (NOI). (The net operating income is the total income minus expenses.) You use annual figures when computing the capitilization rate. It is an important factor when determining the market value of a property.

The Capitilization rate is important when investors look at commercial property to determine its value.

The Income (Operating Statement)

The income & expense (also known as operating) statement is a strong indicator of a commercial property's performance. Lenders require that this statement be submitted to support a commercial loan request for income producing properties.

The income & expense statement shows the property's gross income and operating expenses. Besides the obvious expenses like taxes, insurance, water / sewer, utilities, etc., there are other expenses deducted from the gross income such as management fees, a vacancy factor, and replacement reserves. The net operating income (NOI) of a building is the gross income minus the expenses. The NOI is critical when understanding a building's value from both the appraisal's market approach and income approach to value.

Lenders will usually want to see the prior two years operating performance data, a year to date, and pro forma (projected statement) for the next twelve months.

The Commercial Mortgage Collateral

The commercial mortgage creates a lien on a piece of commercial real estate. However, there is a group of commercial loans called "mezzanine" loans which uses the property's cash flow as the collateral, rather than the real estate. However, all other secured commercial mortgage transactions use the real estate as the collateral.

The most common types of commercial real estate are:

• Multi-family
• Mixed Use
• Office
• Retail
• Warehouse / Flex
• Light Industrial
• Industrial / Manufacturing
• Special Use (such as self storage, movie theatre, bowling alleys, car washes, etc.)

For commercial real estate, the property's income or income potential contributes to its perceived value by lenders.

The Capital Markets - The Portfolio Lender vs. The Securitizer

The Capital Markets

The Capital Markets consist of two different types of lenders, the Portfolio Lender and the Securitizer. The markets are usually divided into large "conduit" loans and "small cap" properties (usually under $3MM). Lenders within these markets have various underwriting requirements and price the loans based on the type of property, value of the property, property's income, as well as the credit worthiness of the borrower and tenants.

The Portfolio Lender

A portfolio lender keeps the collateralized mortgage obligation for their own portfolio. Portfolio lenders are usually:

• A Savings Bank
• A Commercial Bank
• Community Bank
• Credit Union
• Insurance Company
• Pension Fund
• Real Estate Investment Trust

They take deposits from the public or private sector and reinvest them into real estate mortgages.

A Securitizer

A securitizer borrows money from a warehouse to fund their securitized mortgage obligations. They take their "closed" loans and combine them into a loan package. The securitizer then turns this package into a security instrument called a CMO bond and sells it at a lower price than what it will be worth in the future. Once the package is "sold," the warehouse is repaid and the securitizer keeps the difference.