Foreclose Online
A commercial mortgage is similar to a residential mortgage, except the
collateral is a commercial building or other business real estate, not
residential property.
In addition, commercial mortgages are typically taken on by businesses instead
of individual borrowers. The borrower may be a partnership, incorporated
business, or limited company, so assessment of the creditworthiness of the
business can be more complicated than is the case with residential mortgages.
Commercial mortgages are typically nonrecourse, that is, that in the event of
default in repayment, the creditor can only seize the collateral, but has no
further claim against the borrower for any remaining deficiency. Less commonly,
the mortgage is supplemented by a general obligation of the borrower, which
makes the debt payable in full even if foreclosure on the mortgaged collateral
does not satisfy the outstanding balance.
Commercial Mortgage loans are almost always designed to be underwritten based on
entirely on the attributes of the property being mortgaged, as opposed to the
credit attributes of the borrower. To facilitate this, many times lenders
require the property to be owned by a single asset entity such as a corporation
or an LLC created specifically to own just the subject property. This allows the
lender to foreclose on the property in the event of default even if the borrower
went into bankruptcy (the entity is known as "bankruptcy remote"). In a normal
residential mortgage, a lender would have a difficult time selling a property if
the bankruptcy court case is still pending.
Lenders usually also require a minimum debt service coverage ratio which
typically ranges from 1.1 to 1.4; the ratio is net cash flow (the income the
property produces) over the debt service (mortgage payment). As an example if
the owner of a shopping mall receives $300,000 per month from tenants, pays
$50,000 per month in expenses, a lender will typically not give a loan that that
requires monthly payments above $227,273 (($300,000-$50,000)/1.1)), a 1.1 debt
cover.
Lenders also look at Loan to value (LTV). LTV is a mathematical calculation
which expresses the amount of a mortgage as a percentage of the total appraised
value. For instance, if a borrower wants $6,000,000 to purchase an office worth
$10,000,000, the LTV ratio is $6,000,000/$10,000,000 or 60%. Commercial mortgage
LTV's are typically between 55% and 70%, unlike residential mortgages which are
typically 80% or above.