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Commercial real estate loans are different than the typical commercial loan made to a business.
As the name implies, a commercial real estate loan is secured by a rental property, such as an apartment building, office building, or shopping center, or by some sort of business-related property, like a hotel, bowling alley or self storage facility.
RilCorp. Brokerage is a commercial mortgage Loan Broker where a user can apply to any one of 750 different commercial mortgage lenders. If you are shopping for a commercial real estate loan right now, please click here.
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Below are some interesting articles about commercial real estate loans, and commercial real estate lending, that you may find helpful:
Suppose your client is trying to buy a commercial property with a down payment of just 10%.
His plan is to have the seller carry back a second mortgage on the commercial property equal to 15% of the purchase price.
He will then try to get a loan from a commercial bank for 75% of the purchase price.
Unfortunately the plan will not work. Most banks and all CMBS lenders forbid second mortgages on the property at the time of the purchase. (Many CMBS lenders WILL allow a mezzanine loan, however.)
So why are second mortgages forbidden on the sale of commercial properties.
The reason is because commercial lenders fear that the property owner, if cash gets tight, will use the repair money to make the payments on the second mortgage rather than to maintain the property.
A good solution is to have the seller carry back the second mortgage on another property owned by the buyer, say a rental duplex or a different office building.
When you apply for a commercial mortgage loan using RilCorp., we have a special section called "Special Issues" where you can describe the junior financing that you hope the bank will alllow the seller to carry.
RilCorp. Brokerage is a great way to quickly present your deal to 30 lenders to find the one lender aggressive enough to help your client.
Commercial Lenders Base Their Commercial Loan on Sales Price, Not the Appraisal
Almost every day I see new commercial loan agents with commercial loan requests where they want to get 90% or 100% LTV financing because the buyer is buying the property for less than market.
They are dreaming! If a seller can get $1,000,000 for his commercial property, he is NOT going to sell it for $800,000.
As far as 99.999% of all commercial lenders are concerned, the purchase price is the best indication of the fair market value of the commercial property.
Your commercial loan will be based on the lower of the two - purchase price or appraisal.
Your client buys a commercial property at a foreclosure sale and moves his own company into the building.
The building is run down, so your client fixes it up very nicely. Then he wants to pull out his cash by refinancing the commercial building and obtaining a larger commercial mortgage loan.
The commercial bank to whom you have taken his commercial mortgage loan request asks for a pro forma operating statement, but you have a problem.
Because your client has owned the property for just four months, you have no operating expense history on the building. What do you do?
The answer is to simply assume the commercial building is leased on a triple net basis. Just assume the tenant pays all of the expenses, except for reserves and management.
You can simply pull a figure out of the air and declare it to be the fair market triple net rent for the property. (The appraiser hired by the bank will eventually determine if your guess was accurate.)
Take off 5% for Vacancy and Collection Loss to arrive at the Effective Gross Income. Then deduct, say, 4% of the Effective Gross Income for management and another 3% for Reserves for Replacements.
Voila! You have just produced a Pro Forma Operating Statement on a commercial property with no operating expense history. Sneaky and cool, huh?
Commercial Financing and How to Guestimate a Commercial Triple Net Lease Rate
What's a Fair NNN Rent for a Commercial Property to Get Commercial Financing?
You are a commercial mortgage broker or a commercial mortgage banker. You are seeking a new commercial mortgage loan on an owner-used commercial property.
The owner's tool company occupies the commercial property. You need to prepare a pro forma operating statement in order to apply for a commercial mortgage loan, but you don't know what lease rate to use.
No problem. Just work backwards from the commercial property's value. If you know the commercial property is worth $600,000, just assume a cap rate of 9%. Nine percent of $600,000 is $54,000 per year in net income, after operating expenses.
If we assume the property is leased on a triple net basis, then the only operating expenses are replacement reserves (say, 3% of effective gross income) and management (say, 4% of effective gross income).
We therefore multiply the $54,000 in net operating income by 107% (3% plus 4%) to arrive at the effective gross income of $57,780.
The effective gross income is just the gross rental income less 5% for vacancy and collection losses. Finally, simply take $57,780 and divide it by 95% to get the triple net annual gross rental income of the commercial property!
You can learn the entire practice of commercial mortgage finance,
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Fannie Mae and Freddie Mac will buy loans on homes, duplexes, triplexes, and fourplexes. These loans are referred to as one-to-four family dwellings.
Loans on one-to-four family dwellings are usually not considered to be commercial loans.
However, if an apartment building has five or more units, a loan on such a property is usually considered to be a commercial loan.
The terms "commercial loans" and "major loans" are often used interchangeably by banks. The same loan officers who make the commercial loans for the bank also make the major loans.
Major loans includes not only commercial loans, but also land development loans and residential subdivision construction loans.
You can find hundreds of banks, hungry to make commercial loans, land development loans, and residential subdivision construction loans.
If You Try to Pay Off a Commercial Mortgage Loan Your Penalty Might Be 20% of the Balance!
Most commercial mortgage lenders making fixed rate commercial mortgage loans charge a prepayment penalty.
The reason why is because the investors who buy commercial mortgage backed securities (CMBS) want a certain yield that is locked in.
Why? Imagine you are a pension plan making actuarial projections to be sure you have enough money to pay your retirees.
You need to know that you will earn a certain amount of interest. This is why you buy commercial mortgage backed securities.
The most common form of prepayment penalty is a defeasance formula. The legal definition of defeasance is, "A provision in an instrument that nullifies it if certain acts are performed."
When a borrower wants to pay off a fixed rate commercial mortgage loan, he must perform an act; i.e., he must give to the lender a bundle of U.S. Treasuries that provides the lender with the same stream of interest payments and the same balloon payment as the original mortgage.
Buying and assembling these U.S. Treasuries is immensely expensive, often on the order of 15% to 20% - and sometimes 25% - of the principal balance on the loan!
Watch out for loans with a defeasance prepayment penalty.
You can find hundreds of fixed rate commercial lenders, many of whom have either small prepayment penalties or none at all.
I just returned from the Mortgage Bankers Association's annual conference on commercial mortgage finance.
This year's conference was held in the fabulous Gaslamp District of San Diego. I came away stunned by the amount of money chasing commercial mortgages.
And the lenders were really rolling out the red carpet for commercial borrowers.
One company was offering 25 year fully-amortized commercial mortgages for no points, no appraisal fee, no toxic report fees, and no closing costs.
You'll find this lender with RilCorp.
Another lender was a huge residential mortgage banker that had just entered commercial.
They were packaging commercial mortgages in the same fully-documented style as home loans destined for sale to FNMA. The impressive thing about this giant was that they already had an installed base of 20,000 residential mortgage brokers.
One lender was offering no income verification, no asset verification commercial mortgages at rates only 75 basis points higher than normal bank commercial mortgages.
Never in the history of commercial mortgage finance has so much money been chasing commercial mortgages.
I was training one of my loan officers today and he asked, "When do I use a loan-to-value ratio and when do I use a loan-to-cost ratio?"
The answer is that it depends on whether this is a construction loan or a loan on a standing property. A standing property is obviously one that has already been built.
The loan-to-cost ratio is only used for development projects. Perhaps the borrower is a developer who wants to build an office building or a residential subdivision (housing tract).
In this case the commercial mortgage underwriter would want to look at the cost of the project and make sure that the developer is contributing at least 20% of the total cost of the project.
Put another way, the underwriter would want to make sure that the loan-to-cost ratio does not exceed 80%.
In contrast, if you are financing a standing property, then the only applicable ratio is the loan-to-value ratio.
Commercial Financing and Blanket
I saw a commercial loan application link on RilCorp. Brokerage recently, for a $10 million loan, where the commercial mortgage broker was trying to obtain a blanket loan over 10 different commercial properties owned by the same borrower but spread out all across town.
A blanket loan is one where there is just one promissory note (I promise to pay $10 million ...), but the note is secured by several different mortgages on several different non-contiguous parcels.
If the parcels were contiguous (touching), it is customary for the lender to use just one mortgage and to include each of the contiguous parcels in the legal description of the property.
Where the properties are clearly different and separated from each other, it is customary to use a separate mortgage for each separate property.
So why would a borrower want to get a blanket mortgage? He might think that he is saving money on closing costs by making the loan just one big deal. In addition, the larger the commercial loan, the slightly lower the interest rate.
But commercial lenders in general do not like to blanket properties, especially if the properties have different uses.
Few commercial mortgage lenders would jump at the opportunity, for example, to make a blanket loan across an apartment building and an office building.
This is especially true if the commercial mortgage lender loved apartment loans but hated office building loans becasue they are over-built, or vice versa.
Blanket commercial loans are messy and complicated. They are also very difficult for a commercial mortgage lender to re-sell in the secondary market.
Certainly conduits and life companies would rarely make a blanket loan. Most banks would pass as well.
Some commercial mortgage lenders will indeed blanket different properties, but they will usually only do so if they feel insecure.
Certainly hard money lenders and the occasional bank, lending for its own portfolio will consider a blanket loan.
The most common blanket loan you will see, however, is one where the commercial mortgage lender blankets the borrower's personal residence.
So if you get a request for a blanket commercial mortgage loan, be smart. Split the deal up into several smaller loans.
You can find hundreds of commercial lenders for just about any commercial property type.
A mixed use property is one that has both a commercial component and a residential component.
The most common example can be found in inner cities, where there will be a storefront on the ground floor and maybe one or two apartment units on top.
Mixed use properties are classified as investment properties, and the SBA is not chartered to help investors become more wealthy.
Instead the SBA is chartered to help small businesses grow and hopefully hire more workers.
You can find scores of SBA lenders on the RilCorp. link for owner-user properties, such as industrial buildings and office buildings.
This commercial mortgage loan system is exactly what you need.
Seven hundred and fifty commercial lenders await your application. Simply input your needs.
Then ask the system, "Hey computer, show me the cheapest commercial mortgage lenders for my particular deal."
Presto-chango, the computer will instantly search a database of 750 commercial mortgage lenders and give you a list of twenty commercial mortgage lenders who are hungry for your exact type of deal.
You can then submit your loan to the four most attractive commercial lenders with just one mouse click. You can also use the phone numbers listed to call the lenders directly.
Lenders will then contact you by phone and by e-mail to compete for your business. These direct commercial mortgage lenders chase YOU, so your negotiating position is so much stronger.
Commercial lenders are fussy. No problem. If your loan gets turned down, simply go to the next four cheapest commercial lenders on the list and apply with a simple mouse click.
There are lots of "A" paper lenders, "B" paper lenders and easy "C" paper lenders. You fill out just one application, and it works for everyone. Slick, huh? Please tell us below how the lenders can reach you.