Commercial mortgage loans are used to purchase or renovate commercial real estate. Loan terms generally span seven to 30 years with rates that can either be fixed or variable.
Commercial mortgage lenders generally require a detailed business plan, last three to five years’ of personal and corporate financial documents (both personal and business), as well as an established credit history from any potential applicants. Some are more restrictive than others.
Commercial mortgage loans provide financing for income-producing property purchases such as office buildings, retail centers, hotels, industrial warehouses and apartment complexes.
Rate and terms for commercial real estate loans will depend on several factors, including property value, creditworthiness of borrower and lender lending criteria. Lenders may offer fixed or variable interest rates which fluctuate with economic conditions – typically, variable rates tie directly into market trends so their impact will rise or fall accordingly.
Banks typically provide the lowest commercial real estate loan rates, though they may not lend to smaller borrowers. For larger loans, Certified Development Companys (CDCs), such as those available under the Small Business Administration 504 program may provide assistance in form of lower interest rates and possibly requiring higher down payments due to taking on some of the risk borne by banks themselves.
When applying for a commercial loan, the type of collateral a company uses as security has an enormous effect on interest rates, loan amounts and terms. Common forms of collateral include property, cash savings accounts and securities. Most lenders prefer cash as it can easily be converted to liquid funds while inventory, unpaid invoices and equipment can also serve as forms of security.
Business owners must also submit personal financial documents, three to five years’ of tax returns (both personal and commercial), a detailed business plan and provide personal guarantees if their credit or plan fall below standard.
Contrary to personal loans that may be guaranteed with home equity, commercial mortgages must be secured by property. They are more complex and expensive to close than residential loans due to stricter requirements for credit approval and higher down payments as well as higher interest rates compared with housing loans.
Due diligence is one of the cornerstones of commercial real estate transactions, as it ensures all necessary information is gathered prior to signing any contract and can help avoid unanticipated costs down the line. To conduct proper due diligence, this involves reviewing various documents including tax returns, service contracts, mortgage documents and litigation records; additionally it also involves conducting background checks on both current owners and occupants of the property in question.
Commercial real estate due diligence entails thoroughly understanding key aspects of a property, its financing, seller obligations and any legacy liabilities from past owners in order to minimize or mitigate financial concerns. Prospective buyers must thoroughly investigate zoning restrictions, potential liens and existing structures to determine repairs needed and associated costs as well as whether legacy liabilities from former owners’ legal and regulatory violations will transfer.
Due diligence for commercial mortgage-backed securities (CMBS) can be time consuming and complex, as it involves reviewing loan agreements, debtors, originators, properties and properties. Cognitiv+ can make this process more efficient by helping lenders analyze underlying collateral quickly while simultaneously assessing originators integrity at every level.
Like home mortgage loans, commercial mortgage loans are secured by real estate. They’re designed for investors looking to purchase income-generating properties like retail shops, office buildings and multifamily units. In order to qualify for one, lenders will review your background, credit score and debt service coverage ratio as well as business assets like time-in-business revenue and annual revenue; as well as third-party reports like engineering studies and environmental surveys.
Documenting and closing on a commercial mortgage can be costly, yet experienced borrowers understand its costs and factor them into their overall financing plan. Costs such as commitment fees, commercial appraisal fees and third-party reports (up to 1%) should be factored into your finances plan as expenses that run up to 1 percentage of total property value can add up quickly. Furthermore, other expenses include transfer taxes, broker fees and legal fees (transfer taxes are sometimes charged as transfer taxes as well). An ALTA survey may be included but usually falls on either party