This is a term for a sum of money that is a loan which is secured by the commercial property which can include an office building, industrial complex, apartments, shopping complex, etc. The construction, development and the acquisition of the real estate shopping malls, complexes and hotels and apartments are done by taking major mortgage loans.
What is Commercial Mortgage?
- These are structured loans that are designed to meet the needs of the borrower and the lender.
- There is extensive underwriting involved and there is sue diligence just before closing of the loan.
- The underwriting processes comprise a brief review of the property and the assets of the borrower that are intended to be kept for the loan purposes. There can be an appraisal too from time to time.
- Commercial mortgages can be at two rates. One is the fixed rate and other is the floating rate. The fixed rates are usually pried based on a swap spread model. These are matched to the terms of the loan. There are lots of factors that influence the fixed interest rate and the lenders and the borrowers must know all about the loan disbursement amount, the term loans, rate of interest and what the flexible points in payment option are. Interest rates on commercial mortgages are higher than those for residential mortgages.
What are structured loans and what is the need for a good faith deposit?
These structured loans can be a first tier loan as a first lien or if greater amount is required or any other form of finance is available then, this can be structured at a preferred equity or a mezzanine note and this carries a higher interest rate at any given point of time.
- Commercial mortgages require an application fee or a good faith deposit. This is usually used by the lender to cover the underwriting expenditure such as property appraisals. These commercial mortgages may also be subject to origination fees or the underwriting fees and may also be liable for an exit fees on repayment of the loan.
- Term of the commercial mortgages can be from five years to ten years. This is with the influx of established cash inflows. These can also be for a period from one to three years for a property in transition. The financial track record, the difference between a company and an entity and the processes of the recovery in case of loan default are some of the terms that a borrower must keep in mind, while taking the mortgage loan.
What is amortization?
This means that the borrower pays the interests well as the principal over a period of time. The loan balance at the end of the term is therefore less than the original loan amount. A commercial mortgage is taken on by any entity formed specifically for this purpose. This is a deviation from the standard loans that are taken by an individual or a borrower organization. This gives the levy on the lender to foreclose the property in case there is a default on the payment and the borrower has fallen into bankruptcy.
Commercial mortgages may be subject to recourse or non recourse. In the case of the former, there is an obligation from the borrower or the guarantee from the owner of the property to satisfy the whole debt, even after the property has been hypothecated by the lender, if the situation so demands. A non recourse mode is one that is secured only by the property which is meant as collateral in the whole mortgage. Foreclosure on such property can happen to satisfy the debt. However, all loan matters are subjects to market risks and they require proper solicitation and counseling with the experts.
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