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.
Monday, June 1, 2009
Saturday, May 23, 2009
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.
Tuesday, May 19, 2009
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.
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 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 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:
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.)
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
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.
What is commercial mortgage financing?
Commercial mortgage financing is a security interest that attaches to commercial real estate collateral. The commercial real estate is either income producing or will be income producing. However, one to four family income producing properties are excluded because most state banking departments consider them residential.
Therefore, commercial mortgage financing is not for an individual's primary residence or a multi-family property consisting of less than five units.
Therefore, commercial mortgage financing is not for an individual's primary residence or a multi-family property consisting of less than five units.
Monday, May 18, 2009
Difference between fixed rate, adjustable rate (ARM) and interest only mortgages
A fixed rate loan is a loan where the interest rate and monthly payment remains the same for the entire term of the mortgage. Fixed rate loans give borrowers the security of knowing exactly what they are going to pay.
An adjustable rate mortgage (ARM) is a mortgage whose interest rate fluctuates according to a specified index. Generally used as the index is the 1 year T bill. The lender will charge the current interest rate plus a predetermined margin. Initial ARM rates are often offered at low "teaser," rates, but continue to increase and over the life of the loan may be the more expensive option. To protect the borrower however, ARMs are often regulated so that there are "caps" as to how high the rate can go and limits as to the amount of times the rate can change in one year and over the life of the loan.
Hybrids are a form of ARM loans that allow you to choose each month what you would like to pay, an interest only payment, the minimum payment amount or your regular principal and interest payment. You can make an accelerated payment as well.
Interest only loans - allow you to pay only the interest of the loan each month for the first several years of the loan. While these loans offer lower monthly payments, however, eventually the loan balance will have to be repaid. Most interest only loans are adjustable, however they can be fixed rate loans as well.
An adjustable rate mortgage (ARM) is a mortgage whose interest rate fluctuates according to a specified index. Generally used as the index is the 1 year T bill. The lender will charge the current interest rate plus a predetermined margin. Initial ARM rates are often offered at low "teaser," rates, but continue to increase and over the life of the loan may be the more expensive option. To protect the borrower however, ARMs are often regulated so that there are "caps" as to how high the rate can go and limits as to the amount of times the rate can change in one year and over the life of the loan.
Hybrids are a form of ARM loans that allow you to choose each month what you would like to pay, an interest only payment, the minimum payment amount or your regular principal and interest payment. You can make an accelerated payment as well.
Interest only loans - allow you to pay only the interest of the loan each month for the first several years of the loan. While these loans offer lower monthly payments, however, eventually the loan balance will have to be repaid. Most interest only loans are adjustable, however they can be fixed rate loans as well.
Sunday, May 17, 2009
What is Hard Money?
Aside from bank lending, many private capital corporations, life insurance companies, pension fund companies, etc are in the business of lending commercial mortgage loans. You'll find that this secondary group of lenders, while they have more lenient requirements than a bank, do require that the property's income be able to service its debts.
The debt coverage service ratio required from this group of lenders is almost always 1.1 and greater. Some of these lenders will allow borrowers to combine other sources of income when analyzing their income. However, there is another group of borrowers who cannot demonstrate that their property's income is servicing its debts.
In that case, private investors or "hard" money can be used. Instead of analyzing the property's cash flow, hard money lenders look at the property's quick sale value. However, any time their is an increased risk associated with the loan, you can expect to pay more. Loan points and fees and interest rates are considerably higher for these loans. Hard money lenders also offer lower loan-to-value (LTV) ratios than banks and other institutional lenders, usually maxing out at 60% of the property's value.
When your property does not meet the requirements for a commercial mortgage bank loan and cannot show income, contact All Access Loans, a commercial mortgage broker.
The debt coverage service ratio required from this group of lenders is almost always 1.1 and greater. Some of these lenders will allow borrowers to combine other sources of income when analyzing their income. However, there is another group of borrowers who cannot demonstrate that their property's income is servicing its debts.
In that case, private investors or "hard" money can be used. Instead of analyzing the property's cash flow, hard money lenders look at the property's quick sale value. However, any time their is an increased risk associated with the loan, you can expect to pay more. Loan points and fees and interest rates are considerably higher for these loans. Hard money lenders also offer lower loan-to-value (LTV) ratios than banks and other institutional lenders, usually maxing out at 60% of the property's value.
When your property does not meet the requirements for a commercial mortgage bank loan and cannot show income, contact All Access Loans, a commercial mortgage broker.
When to use a Commercial Mortgage Broker
For commercial borrowers, this seems to be one of the major questions regarding their property's financing. Commercial mortgage brokers often charge a fee, and simply put, why does a commercial borrower need to use a mortgage broker?
First thing to discuss here would be that the commercial and residential markets differ tremendously. Aside from the borrower's credentials, the main factor the bank will focus on is the property's performance. By performance of the property, I mean the ability of the property's income to service its debts. Furthermore and especially recently, banks have been able to cherry pick only the best deals because federal regulations have caused banks to tighten their lending criteria.
So what does that mean for the average borrower? The commercial mortgage borrower is not able to find a bank loan as they might be used to. And if he or she does, there's usually limitations:
Higher loan to values % up to 90% of equity
Amortization schedules up to 30 years
Credit scores from 580 and above
Commercial mortgage brokers have partnerships with private lending corporations, life insurance companies, pension funds, private investors and other sources of capital. These brokers have the knowledge of where to fund a specific deal that the bank can't. Also, commercial investors are constantly needing capital because commercial mortgage loans balloon (expire) faster than the length of their term, this means commercial properties are constantly needing to be refinanced.
When you need to work with a commercial mortgage broker who can help get your loan approved and closed fast, try www.allaccessloans.com.
First thing to discuss here would be that the commercial and residential markets differ tremendously. Aside from the borrower's credentials, the main factor the bank will focus on is the property's performance. By performance of the property, I mean the ability of the property's income to service its debts. Furthermore and especially recently, banks have been able to cherry pick only the best deals because federal regulations have caused banks to tighten their lending criteria.
So what does that mean for the average borrower? The commercial mortgage borrower is not able to find a bank loan as they might be used to. And if he or she does, there's usually limitations:
- Commercial mortgage banks and S&L institutions often will not go beyond a 60% LTV (meaning they will only offer 60% of the property's equity)
- Commercial mortgage banks will usually not go beyond a 20 year amortization (period for the loan to be repaid)
- Commercial mortgage banks often wont look at any credit scores below 660
Higher loan to values % up to 90% of equity
Amortization schedules up to 30 years
Credit scores from 580 and above
Commercial mortgage brokers have partnerships with private lending corporations, life insurance companies, pension funds, private investors and other sources of capital. These brokers have the knowledge of where to fund a specific deal that the bank can't. Also, commercial investors are constantly needing capital because commercial mortgage loans balloon (expire) faster than the length of their term, this means commercial properties are constantly needing to be refinanced.
When you need to work with a commercial mortgage broker who can help get your loan approved and closed fast, try www.allaccessloans.com.
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