How Much Should An Average 12 Year Old Boy Weight Some Important Facts About First Position Commercial Mortgage Notes

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Some Important Facts About First Position Commercial Mortgage Notes

Creating attractive interest is a challenge in today’s low interest rate environment. The attractive thing about First Position Mortgage Notes is the fact that investors (lenders) are held in the first position as mortgagee of the property – so there is a hard asset (real estate) that provides the security for their investment.

The 50-year average for home ownership in the US is about 65%. Most experts see that number declining as the move to rental communities continues to rise along with the challenges younger consumers find in securing sustainable employment, which is directly correlated to one’s ability (and desire) to own a home. The marketing of traditional home financing in today’s marketplace has created a greater understanding of how these loans work for consumers. Combine that with the competition in the home finance market and it’s understandable why most adults understand home finance. But what about commercial real estate?

Every single consumer leaves their home and visits multiple commercial properties – for work – for dining – for shopping – for entertainment – but few understand the difference between the commercial finance marketplace versus the home finance marketplace. The term “commercial loans” is mainly divided into “multi-family properties (5 plus units), office buildings, retail centers, industrial and warehouse spaces, single tenant box buildings (such as Lowes and Walmart) and specialty properties such as gas stations, schools, churches, etc. Regardless of the use, access to business loans is completely different from home loans.

For home loans, the normal procedure is for the lender to request 2 years of tax returns, bank statements, payslips, credit checks and valuation of the property. The primary focus of the loan guarantee is the borrower’s ability (through an income and expense model) to make the monthly mortgage payments including taxes and insurance.

In a commercial loan, the lender will first look at the condition of the property and its ability to service the loan out of the cash flow from its day-to-day operations. The lender will request copies of current leases (tenancy roll) and two years of the borrower’s operating history. In addition, they will review recent capital improvements, interior and exterior photos of the property, and lien and title searches. With these documents in hand, the underwriter will create a debt service coverage ratio (DSCR) to determine if the property can cover the claims that the new loan will bring. In addition, the lender will look at third-party appraisals and be aware of not only the property in question, but also the surrounding area and trends in the market.

A commercial borrower must have strong finances and credit history to qualify for the loan. However, the lender places the greatest weight on the properties’ ability to sustain the loan rather than the borrower’s personal situation. This is in direct comparison with mortgage insurance, where the borrower’s personal financial situation is of greater importance than the property that is part of the mortgage.

There are six sources of commercial real estate loans – Portfolio Lenders – Government Lenders – CMBS Lenders – Insurance Companies – SBA Loans – Private Money/Hard Money Lenders.

Portfolio Lenders – These mostly consist of banks, credit unions and companies that participate in commercial loans and keep them on their books until the maturity date.

Lenders from government agencies – these are companies licensed to sell commercial loan products that are financed by government agencies such as Freddie Mac and Fannie Mae. These loans are pooled (securitized) and sold to investors.

CMBS lenders – these lenders issue loans called “CMBS loans”. When the mortgages are sold, they are transferred to a trust, which in turn issues a series of bonds with varying maturities (length and price) and payment priority in the event of default.

Insurance companies – Many insurance companies have looked at the commercial mortgage market to increase the return on their holdings. These companies are not subject to the same statutory lending guidelines as other lenders are and therefore have greater flexibility to create loan packages outside of conventional lending norms.

SBA loan – Borrowers who wish to purchase a commercial property for their own use (owner-occupant) have the option of using an SBA-504 loan, which can be used for various types of purchases for their own business, including real estate and equipment.

Private Money/Hard Money Loans – For those borrowers who cannot qualify for traditional financing due to credit history or challenges with the property in question – hard money loans can be a viable source of funds for their intended project. These loans have higher interest rates and higher fees than other types of loans. Regardless of the higher cost of borrowing – these loans meet a need in the commercial mortgage market.

Commercial mortgages can be either recourse or non-recourse in design. In a typical recourse loan, the borrower(s) are personally liable for the loan in the event that the loan is foreclosed and the proceeds are not sufficient to repay the loan balance in full. In non-recourse loans, the property is the security, and the borrower is not personally responsible for the mortgage debt. In typical non-recourse loans, a provision called “bad-boy clauses” are part of the loan documents, which state that in the event of fraud, willful misrepresentation, gross negligence, criminal acts, misappropriation of asset income and insurance windfalls, the lender may hold the borrower(s) personally liable for the mortgage debt.

Understandably, in commercial mortgage negotiations, lenders prefer recourse loans, where borrowers prefer non-recourse loans. In the process of underwriting, the lender and borrower(s) work to create a loan that meets the needs and goals of both parties, and if an impasse occurs – the loan is not issued.

The world of commercial mortgages allows investors to participate in a marketplace that can have attractive returns, principal security through mortgages on real estate assets and durations (12 months to 5 years) that are acceptable to most. The creation of ongoing monthly interest through holdings such as Commercial Mortgage Notes is attractive to both consumers and institutional investors.

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