Commercial Mortgages Explained

One typical way for people to acquire business property is to procure a loan, also known as a mortgage. When they are going to be using the property for business functions, the loan will be a commercial mortgage. These types of loans can be used to buy a structure where specialists will operate the business. The other choice is to acquire a house or apartment building that will be leased to other people.

Options for Professionals

Some people may be able to obtain a mortgage with no money down. These people are generally professionals who will use the property to perform services for their clients. Instead of a down payment, these professionals can offer the lender an asset that will be collateral for these 100 percent loans. In these cases, the lenders are offering a secured loan that is less risky for them because they will be able to sell the asset offered as collateral if the borrower cannot make the payments on the loan.

Because there is no down payment required for these 100 percent mortgages, the interest rate will be higher, but these types of loans can be advantageous to those who have not started their businesses yet. These professionals may need to have cash to begin setting up their practices, and they will have the opportunity to do that with no money down.

Mortgages for Other Purposes

The other type of commercial mortgage requires that the property be placed as collateral for the loan. The terms of these loans will be different from the typical mortgage that can have a term as long as 30 years. With loans used to purchase commercial property, the term can be much shorter, a couple of days, or it can also be 30 years. The business owners will make monthly payments just like for their residential properties, but they will, most likely, have a balloon payment after a determined number of years.

For example, if the term for the loan is 10 years, the business owners will make monthly payments for this amount of time. At the end of the term, the full balance will be owed to the lender, called the balloon payment.

Qualifying for the Loan

Qualifying for these loans also is similar to obtaining a loan for a home because the business will need to have a credit check. Although a lower credit score will not necessarily disqualify a business from borrowing money, a higher credit score is preferable for lenders.

What is very important to lenders is how well the business is currentlyperforming. If the business has been very profitable up until the present time, it will be easier for these business owners to receive the money they need to purchase their properties. The lenders may also require that business owners offer them a business plan that will demonstrate how their businesses are going to benefit from the purchase of the property. If the plan can rhow that business profits will increase, lenders can be secure that they will receive the money back that they lend to these business owners, an important factor in deciding whether or not to lend business owners money.

Multifamily Financing Tips

Apartment buildings are hot today. As a matter of fact those who own them benefit from this real estate bear market. If you wonder how's that, just think of the millions of homeowners whose properties have been foreclosed or were forced to short sale their homes. These folks are now renting, they can't qualify to buy another house, at least not for a few years. In the meantime, banks are in no hurry to dispose of the recently foreclosed homes as the government has helped them eliminate their losses (through bailouts). While these homes are sitting vacant for months, if not years, the apartments are getting full and more demand is thus created.

Before rushing in to look for apartment buildings be sure to learn what it takes to qualify for a mortgage nowadays. Skin in the game is a must, there are no 100% loan programs available today no matter what the internet says. Financial strength is also required, the lender must feel comfortable that you'll have sufficient reserves/net worth to cover for the mortgage payments should high vacancy occur or major repairs must be made. And last but not least, it's the background in owning and managing apartment buildings. Owning and managing residential properties is not sufficient experience, yes both are real estate but completely different breeds. For more details on how to position yourself first in line for financing read my past article titled "Reality vs Fantasy in Commercial Financing".

As far as apartment building loan programs there are a few that most seasoned owners/investors are currently taking advantage of. For example, there is a Multifamily Small Loan Program that streamlines the entire loan process for multifamily acquisition and refinancing for loans between $1 million to $3 million ($5 million in major MSAs). Why is this loan so cool? First of all because once you have it you won't need to refinance after a few years. You see, most bank loans have terms of three, five, seven or ten years (with balloon payments and longer amortizations), after which owners simply are forced to refinance. Not with this loan! You get a low rate and save money - and equity - by not having to refinance in the future.

Does it appear too good to be true? No, not really, because as mentioned earlier a substantial down payment (if purchase) or equity (if refinancing) is required. Expect an average of 70 to 80% LTV (Loan to Value) with no exceptions above this limit. Expect to provide evidence of previous multifamily ownership and a solid PFS (Personal Financial Statement). If you're half way there here is an idea. Find a trustworthy partner with whom to join forces, and remember the word "trustworthy".

When it comes to rates while they are low they won't be as low as residential rates. However, the lower the LTV the better the rate. For example a loan with a forty percent equity and a higher debt service ratio will benefit in form of lower rates due to its lower risk. (For a rate quote please contact me). The other difference is that residential loans today tend to come with no prepayment penalties while many commercial loans do. So what should a borrower expect? Up to five years with a penalty determined when the loan is underwritten. Yet, this should not be considered a big detriment unless you plan on selling the property during the next few years. This loan program is best used for those planning on holding on to the property in longer term (more than five years) otherwise, there are better programs for short-term investors.

Properties best suited for this program are those in good to great condition and with high occupancy rates of 90% or above. I see plenty of requests out there for distressed multifamily properties and yes, there are great opportunities in buying and stabilizing such properties. And hard money or private money may be the temporary solution. After the property is fully stabilized it may then qualify for the Multifamily Small Loan Program.

Please try to forget the guidelines from the past decade. Forget the no down payment or little down payment programs. Forget the stated income, no income and no documentation programs. They are fantasy, unrealistic, time-wasting thoughts. They are gone and not coming back for a long time. Seasoned investors know this and that's why they work rather efficiently when they are in need of financing. Their goal is a successful closing and they know what it takes to get there...a viable project and a viable borrower with more than enough proof to provide to the lender.

One last piece of advice. If you're looking to finance apartment buildings in Croatia or Australia or some other far-off land you won't get funded by American lenders. No matter how appealing your project is it won't happen. Why? The problem is one of taxation. If a foreign bank were to make a big loan here in the states, the US government would levy a foreign lender tax of 30% of its interest income. Conversely, an American lender doing a loan in another country would subject itself to a similar tax imposed by the foreign country (check with your tax adviser for more details). There is one exception, however, and that is if an Australian bank starts a subsidiary bank here in the US and the subsidiary makes loans in the US. Generally speaking, if you are seeking a loan in Croatia, save time and energy, and go local.
About this Author

The Lending industry is quite chaotic and unpredictable, especially in today's economic environment. Banks will like your deal today and hate it tomorrow. Most commercial loans are originated today as Portfolio Loans. This means the lender keeps the loan in their portfolio for the entire term. So, if they find today they have too many retail centers in their portfolio, they will decide - over night and without a warning - to shift to apartment buildings.

I have a system of shopping for your loan to hundreds of lenders nationwide and target the ones that are currently lending for YOUR particular need. Visit my site for more information at