Understanding commercial mortgage
loans is an important element of business success. When creating a business
plan or deciding to expand a business, companies need to consider location.
Where is the best place to operate? How much square footage is needed? Should
we lease a space or purchase the building outright? If your company is looking
at the first time purchase of a building for your business than there are
certain differences
residential and commercial mortgage loans.
The obvious difference between these
two types of mortgage loans is that a residential mortgage loan is for a single
family dwelling while a loan is for an office building, manufacturing plant, or
shopping center. Commercial mortgage loans can also be for an apartment
building or multifamily dwelling. In addition a loan is usually taken out by a
business, whether it is a sole proprietor, a partnership or a corporation,
instead of an individual or married couple. The less obvious differences,
however, are important to your business.
Commercial mortgage loans, unlike
residential mortgages, can be nonrecourse. It means that if a business
defaults on their mortgage, the lender can take the real estate used as
collateral in an attempt to recoup its losses but has no recourse against the
company itself. This is why many commercial mortgages have a supplemental
general obligation clause, where the company that takes out the loan has to pay
the lender the difference between what is owed on the mortgage and the funds
recouped from selling the property. This obligation clause can sometimes even
remain in effect if the company files bankruptcy. The life of a loan taken out
on business real estate is not as long as a residential mortgage. Instead of
20-30 years, a commercial mortgage standard is 3-15 years with a balloon
payment (large payment) due at the end of the loan. So when businesses are
comparing mortgage rates, the length of the loan and the size of the balloon
payment are important considerations in addition to interest rates and
amortization.
Commercial mortgage loans have
different criteria for approval. While lenders look at business plans and
revenue forecasts, their main concern is usually debt service coverage ratio,
or the net income the property produces over the total appraised value of the
property. Therefore, when determining if a company should purchase a property
outright, they should consider the length of the loan, the amount of the
payment due at the end of the loan and if the revenue generated by the property
will cover the mortgage payment.
