Property Loan/Commercial Mortgage
What is CRE?
Office complexes, hotels, flats/ apartments, and retail centers, which generate income, is collectively known as Commercial Real Estate (CRE).
Commercial Financing and Loans to cover acquisition, development, and construction of business properties, typically undertaken by lending companies in the form of a mortgage or lien on commercial as opposed to residential property.
Who Borrows against CRE?
There is a difference between lenders and borrowers
Residential loans are made by independent mortgage lenders and banks to private individuals.
Commercial Real Estate, however, is a whole other animal and therefore attracts a different type of client ( a business enterprise). Capital loans for CRE come from specialized lending companies; private investors, pension funds, merchant banks.
The purpose of owning commercial real estate is to generate income, which makes it an extremely attractive and lucrative venture for both the lender and the borrower.
How is a Loan Structured?
A business without a financial track record or credit history will probably be asked to provide the lender with personal guarantees from the owners or principals.
The lender does not require a guarantee by company individuals; the property becomes the only asset leaned against the loan. Known as a non-recourse loan, it means that the lender has no recourse against any person or other property.
Loan Repayment Schedules vary between 5 years (sometimes less) and 20 years. The amortization period is often worked differently between finance house and borrower. For example, the commercial loan might be for seven years with an amortization period of 25 years: The investor repays the loan in seven years at a monthly premium based on the loan being paid over 25 years. After the seven year period, the investor will make a final “balloon” payment (the entire remaining balance).
There are many scenarios and deals that the investor can take, and they all depend on the type of Financial Lender.
The longer the loan repayment period, the higher the interest rate charged.
The Bottom Line
- Lenders evaluate the investor’s creditworthiness and the loan’s collateral.
- Financial statements going back three to five years are also investigated to show fiduciary and income tax disciplines.
- The Commercial Property must demonstrate growth as an investment asset.
Pros and Cons
- A simple product with a defined monthly payment making forecasting in the short term easy to do
- Business Cash is not tied up in long-term finance; the company has more liquidity rather than being cash poor.
- Commercial Mortgage Interest Repayments are tax deductible.
- Commercial Mortgage Contracts will commit a company to a longer debt period.
- Repayment calculated on a monthly basis: Failure to pay involves penalties such as additional interest. Continued default on debt often results in the repossession of the property.
- Variable rate of interest attracts higher payments if there are changes in the interest rate.
- Due to the impersonal nature of a commercial property, little or no tolerance shown for default and repossession is almost immediate.