This allows the lender to foreclose on the property in the event of default even if the borrower has gone into bankruptcy, that is, the entity is " bankruptcy remote ". Commercial mortgages may be recourse or non-recourse. A recourse mortgage is supplemented by a general obligation of the borrower or a personal guarantee from the owner s of the property, which makes the debt payable in full even if foreclosure on the property does not satisfy the outstanding balance.
A nonrecourse mortgage is secured only by the commercial property that serves as collateral. In an event of default , the creditor can foreclose on the property, but has no further claim against the borrower for any remaining deficiency. If a sponsor is seeking financing on a portfolio of commercial real estate properties, rather than a single property, the sponsor may choose to take out a cross-collateralized loan, in which the all of the properties collateralize the loan. Lenders usually require a minimum debt service coverage ratio which typically ranges from 1.
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. Lenders look at rents per square foot, cost per square foot and replacement cost per square foot. These metrics vary widely depending on the location and intended use of the property, but can be useful indications of the financial health of the real estate, as well as the likelihood of competitive new developments coming online.
Since the financial crisis, lenders have started to focus on a new metric, debt yield, to complement the debt service coverage ratio.
Debt yield is defined as the net operating income NOI of a property divided by the amount of the mortgage. Lenders typically do thorough extreme due diligence on a proposed commercial mortgage loan prior to funding the loan. Such due diligence often includes a site tour, a financial review, and due diligence on the property's sponsor and legal borrowing entity.
Lenders look at credit score , bank statement, time-in-business, and annual revenue as well.
The Handbook Of Real Estate Lending Information
Many lenders also commission and review third-party reports such as an appraisal , environmental report, engineering report, and background checks. Banks, large and small, are traditional providers of commercial mortgages. Conduit lenders originate commercial mortgages and hold them as investments for a short period of time before securitizing the loans and selling CMBS secured by the underlying commercial mortgage loans. Conduit lenders include both banks and non-bank finance companies.
Securitization of commercial mortgages in its current form began with the Resolution Trust Corporation 's or RTC's commercial securitization program in The RTC applied an approach similar to the one it had begun successfully using with residential mortgages, issuing multiple tranches of securities secured by diversified pools of commercial mortgage loans. These loans are typically structured to forbid prepayment beyond a specified amortization schedule.
This makes the resultant securities more attractive to investors, because they know that the commercial mortgages will remain outstanding even if interest rates decline. Then, the subprime mortgage crisis and the resultant global financial crisis caused CMBS prices to fall dramatically, and new issuances of CMBS securities came to a virtual halt in Government-sponsored enterprises such as Fannie Mae and Freddie Mac , as well as government corporations such as Ginnie Mae , are active lenders for multifamily commercial real estate that is, apartment buildings in the United States. A mortgage broker is a trained mortgage professional who represents your best interests to the lender.
Mortgage brokers do not provide commercial mortgage loans, but are often used to obtain multiple quotes from different potential lenders and to manage the financing process. Mortgage brokers will get you the best rates and terms. These brokers are licensed and regulated by the province they operate in. They are paid by the lenders only when the mortgage closes, which means they will work hard to make sure you get what you need.
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No matter what your niche is, there are books for every investor. Keep reading to find out some of the best real estate finance books of the year. There are countless books on real estate finance out there to help you get started, but these are some of the best at explaining financing for entrepreneurs at all levels:.
Texas Real Estate Lending Guide
I would recommend this to investors who are just starting on the journey to becoming an entrepreneur. It will provide an excellent framework of business operations and real estate financing.
The book contains some great advice, so even if you are a more seasoned investor you can find value in it. This book contains excellent information on different types of investments and private money. If yes, this is one of the best real estate finance books you can get your hands on.
Frank Gallinelli provides checklists, proposals, and more to help you lay out everything you need when it comes to real estate financing. The Millionaire Real Estate Investor: I would describe this as a handbook for real estate investors seeking financial freedom. Gary Keller collected advice from countless investors and put together a book full of real estate financing information. It outlines proven models and strategies, and it contains great mindset advice as well. This book is also a great team read, so be sure to pass the link along to your colleagues.
Whether you have been involved in commercial real estate or are looking to expand your investment opportunities, these commercial real estate finance books offer great information:. Negotiating Commercial Real Estate Leases: A lot of real estate investment finance books fall into the trap of using too much legal jargon or technical terms. Opportunity Zone investing is a promising opportunity with substantial tax credits. Learn how it can strategically fit into your portfolio to boost your bottom line.
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Thought Leaders. Ira Grossman March 03, at PM. Thank you for sharing! Your article was successfully shared with the contacts you provided. Compliance Risk The risk to the value of the loan from contamination may often happen when the bank fails to account for the Federal, state and local laws, rules and regulations that apply at the time of loan origination. Real Estate Lending Standards OCC states that environmental contamination should be one of the concerns in overall portfolio management.
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