Commercial Mortgage Loans
A commercial mortgage loan (also called a commercial property loan or income property loan), like a residential mortgage loan, is a loan that is secured by real estate; however, for commercial mortgage loans, the real estate being mortgaged is used by a business or to generate income, rather than for residential purposes. In other words, commercial loans are for the purchase, refinance, or construction of a commercial property. Thus, commercial real estate loans are generally taken out by businesses rather than individuals. For this reason, the process used by lenders to determine creditworthiness, interest rates, etc., in a commercial loan is usually more complicated than in standard residential loans.
What Makes a Commercial Property Eligible for a Commercial Mortgage Loan?
Commercial real estate loans are usually underwritten based entirely on the value/prospects of the property being mortgage or refinanced, rather than on the credit qualities of the borrower(s). To protect themselves from forfeiture due to bankruptcy, lenders usually require that the property be owned by a single asset entity (a corporation or LLC created specifically and only to own the property being used as collateral) that is “bankruptcy remote”; this means that if the borrower defaults, the lender can foreclose on the property even if the borrower goes into bankruptcy. In a standard residential loans, lenders cannot easily sell a foreclosed property involved in a still-pending bankruptcy case.
How Do Commercial Property Loans Work?
The length of commercial loans can vary from 5 to 30 years. Commercial mortgage terms consist of two factors: the length of time allowed until a balloon payment is required and the amortization period. Most commercial mortgage loans allow borrowers to make monthly payments based on a 20-30 year timeframe, but require a balloon (or total) payment after a shorter time period. Many borrowers refinance the loan at the time the balloon payment is due.
Most commercial real estate loans are non-recourse, meaning that, should the borrower default, the lender can seize the commercial property (the collateral) but cannot pursue the borrower for any further deficiency; in other words, the borrower’s assets, other than the property used to secure the loan, are safe from lenders. However, some mortgage lenders do require borrowers to accept a general obligation, meaning that the borrower must still pay the debt in full if foreclosure of the mortgaged commercial property does not render complete restitution.
How Do Commercial Mortgage Interest Rates Work?
Commercial California mortgage interest rates are usually higher than the interest rates of standard residential loans.
Most commercial mortgage loans are fixed-rate loans, in which the applied interest rate remains the same for a fixed period (usually the life of the loan). This means that the commercial mortgage interest rates, and thus the commercial mortgage loan repayments, do not fluctuate with the market. Fixed-rate commercial lender loans are based on stable markers such as treasuries, corporate bonds, swaps, or Commercial Mortgage Backed Securities (CMBS) rates.
Less often, commercial real estate loans are capped or variable. A capped loan is an index-based loan in which the interest rate can drop but cannot rise over a set level (the “cap”) for a certain period of time. In a variable-rate loan, the interest rate changes in keeping with an index (e.g. – the LIBOR rate, Bank Base Rate, etc.); this is an advantage when market interest rates drop but a disadvantage when interest rates rise. Variable-rate loans often offer a lower introductory interest rate than fixed-rate loans, followed by a rate increase when the introductory period expires.
Can Secondary Loans Be Taken Out on a Mortgaged Commercial Property?
Additional mortgage loans (known as “second commercial mortgages”) can be taken out on a commercial property secured behind the first lien. These second mortgages are subsidiary to the first mortgage and carry a higher interest rate.
