commercial building with a commercial mortgage

How Commercial Mortgages Work?

Applying for a commercial mortgage can be a frustrating and stressful exercise, especially when dealing with traditional banks still gun-shy so many years after the leverage crisis that triggered the 2007 big national recession.

Can I get a mortgage for a commercial property?

According to the Mortgage Bankers Association’s newly released 2019 Commercial Real Estate Finance Outlook Survey, commercial mortgage loan is expected to increase by 13 percent compared to 2018. Also, based on the Mortgage Bankers Association, commercial property sales volumes were 11 percent higher during the first three quarters of 2018 than during the same period in 2017. The increase was driven by an 86 percent rise in the volume of “entity-level” transactions.

There are plenty of opportunities in the commercial mortgages out there.

That said, for best results ensure that the commercial mortgage broker you elect to deal with is integrally involved in assisting you to pre-qualify as a legitimate and viable borrower. Understanding how commercial mortgage work – here are some professionally driven answers.

The Property itself, the Circumstances, and the Asset Owner

The first item on the agenda will be the property itself and the category it falls into. This type of lending applies to Industrial, commercial, and mixed-use real estate but it goes much further when one drills down. Here are some of the typical questions and issues that commonly occur when commercial leveraging is a prime consideration:

  1. Is this new construction (i.e. a construction loan) or is an existing asset the focus of attention?
  1. If existing, is there currently a mortgage attached?
  1. And if so is it maturing? In cases like this a large balloon payment is invariably hovering over the real estate owner, hence the urgency for a new-loan application.

A few words on the terms “owner” and “maturing” before we move on: in most cases, the owner is a partnership, trust, corporation, LLC, Delaware Corporation, estate, or even a foreign national. Be sure when filling out the application forms (which amount to mounds of paperwork in most cases) you are representing the right entity. On the aspect of loan maturity, moving from one loan to the next can be very tricky and sometimes it looks like it can’t be done. It’s not uncommon to feel trapped by the loan you’re currently in but unable to enter the ideal loan given your changed circumstances. Kind of between a rock and a hard place if you will. The local banks are very reluctant to help in this regard as you may by now have realized.

Commercial Mortgages often help transition from one loan to the next

We spoke about this with Jacob Clopton, head of Clopton Capital a Chicago-based commercial mortgage broker with billions of dollars of lending arrangements under its belt over the last 10 years. His advice centered on looking at the potential of bridge loans, analogous to a conduit between your existing financing and permanent new funding maybe a year or two down the road. In fact, these options are often referred to as conduit loans. You should without question work with a reputable digitally connected advisor to create the opportunity into not only bridge loans but also close cousins mezzanine financing and private equity lending. Jacob believes you will be pleasantly surprised by their low rates and built-in latitude for making considered decisions without pressure.

How much deposit do I need for a commercial mortgage?

Whether transitioning or starting from scratch, the key to success in any commercial loan transaction is Loan to value (LTV). As a general rule, the owner entity is expected to have at least 20% invested in the asset but this can range between this and 30% depending on who the lender is.

Knowing the right Lender to match the Application

Talking of lenders, Jacob told us something very few of his peers are ready to divulge: the commercial mortgage business is factually all about relationships built up over time, and secondly the brokers ability to give you direct access to the same. In the end, the lowest interest rates available count the most alongside terms that favor the borrower.

Recourse versus Non-recourse Mortgages

In today’s market, non-recourse loans are readily available if you know where to look. So, once you qualify on the due diligence process make sure that your broker follows this route.

What to Expect when Applying for a Commercial Mortgage 

Don’t get upset, but the due diligence may extend out to include personal information like personal liabilities, tax records etc., no matter how much you try to distance yourself personally from the ownership structure. If you are seen to be the driving force in the business, the lender will want to look at you from every angle.

Another thing that comes under consideration is the focus of the business: owner occupied or non-owner occupied, or perhaps a combination. The lender will want perusal of rental rolls and tenant lease terms. If the owner is a major tenant, projected income statements, cash flows, and balance sheets will be firmly on the agenda.

The process runs along a predictable track once the loan application is forwarded to a loan underwriter or loan committee. The latter has a single function: to approve or reject the application based on the data provided therein. The time-lag can be between 3 – 5 days but may be staggered depending on whether or not additional information is requested.

If accepted at committee stage, you can expect a letter of intent shortly thereafter or alternatively a term sheet that you must peruse and sign off on. You will find that this document is detailed on all aspects of the loan including collateral, terms of payment, with or without recourse etc., There should be no shock-reads at this point in the game. The objective of the review is a mutual agreement and to ensure that borrower and lender are on the same page.

Sometimes the lender requests a check as a deposit to be returned with the LOI to cover report items in the approval. However, nothing’s final until it’s final and so the fully signed (by the borrower) LOI goes back to the loan committee for final approval, and of course then a representative of the borrowing entity will have to sign the closing document. If a closing agent is involved, all documents will be sent to it as facilitators of the closing details.

Different Types of Commercial Mortgages

When looking for a commercial mortgage it should be appreciated that the term in itself is generic for every loan-type that’s not retail. Some interesting deviations from the norm occur when borrowers with appreciated collateral backed assets want to refinance to access hard money to put in their pocket or reinvest in another real estate opportunity. This is called a cash out arrangement and it can be implemented in many different ways. Banks again are reticent in going to such lengths but there are many lenders that will with no recourse. Then there are lenders that specialize in hotels, CMBS leveraging, office buildings, self-storage or mobile homes.

What Is the Current Interest Rate for Commercial Mortgages?

Also what are the minimums and maximums applications $ value and term? When it comes to interest rates they can fluctuate by the day so it is superfluous itemizing them in this article. Clopton Capital and many other online brokers feature updated daily interest rates for the site visitor’s free perusal, monitored daily.

Jacob informs us that typically Clopton works with all the mortgage banks across the USA in every city, town, and rural district as well as private equity funders that are comfortable with private investors, small/middle market real estate entities, and family offices. He also points out that loans of $1 million to as high as $40 million are available with no recourse for terms of up to 30 years with variable, fixed or interest only terms.

In Conclusion

This should provide a meaningful overview. For a more direct interface with mortgage broker specialists, we suggest connecting with Jacob at 866-647-1650. He assures us that you’re always welcome to explore the right options and terms to suit your every possibility. And with low closing costs attached to a straightforward documentation and underwriting process, your commercial loan process will be as stress-free as it can get.