Commercial Mortgage Loan Considerations

Considerations When Choosing a Commercial Mortgage Loan

The commercial mortgage loan options available through Enterprise Financial Partners contain terms that are quite favorable to you—our client. At the same time, some of these loans, due to their terms, may not be appropriate for your situation. To help you understand the most common characteristics of a commercial mortgage loan, we’ve put together the following list and description of certain key terms you’ll want to consider when choosing a commercial mortgage loan or other financing arrangement for your real estate projects:

Interest Rates

Interest rates on a commercial mortgage loan with a fixed rate are usually set at a market spread over their corresponding US Treasury obligation, such as the 10-year Treasury note. However, they’re normally only available through select commercial mortgage loan lenders with more restrictive underwriting criteria and cover only certain property types.

The result of using US Treasuries is often a very attractive interest rate on your commercial mortgage loan as compared to more traditional pricing options. Most other commercial mortgage loans are tied to the 30-day London InterBank Offered Rate (LIBOR) or a lender’s base, prime or cost-of-funds rate with a spread of some amount over these indices.

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Loan-To-Values

A loan-to-value is the ratio of a loan amount relative to the value of the property being used as collateral to secure the commercial mortgage loan, which generally run from 70 percent to 85 percent for most improved commercial properties. Loan-to-values for raw land and other special purpose or non-income producing properties typically range from 40 percent to 70 percent, with the financial strength of the borrowing company usually being a consideration when targeting a commercial mortgage loan toward the upper end of this range. Additional commercial mortgage loan financing options may be available, such as mezzanine loans, to bridge funding gaps in certain situations.

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Debt Coverage Ratios

Most lenders will require that a permanent commercial mortgage loan be subject to a minimum debt-service coverage ratio, which is the ratio of the underlying property’s net cash flow to its fixed debt service. For example: 1.20x for multifamily, retail, office, industrial and manufactured home communities; 1.30x for self-storage; and 1.40x for hotels. The actual ratio of a given commercial mortgage loan may be higher or lower than the foregoing examples and will ultimately depend on the commercial mortgage loan lender and the financial strength of the occupying tenants and owners/sponsors, among other considerations.

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Guaranties

In certain circumstances, a commercial mortgage loan can be non-recourse to the property’s owners/sponsors, except for the so-called standard carve-outs, such as fraud and environmental contamination. In other cases, such as when the loan-to-value of an owner-occupied property is relatively low, a client may only be required to provide a partial guaranty on a commercial mortgage loan. In all other situations, the commercial lender extending the commercial mortgage loan will normally require full guaranties of the principal owners/sponsors of the property in question.

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Prepayment

Prepayment limitations and penalties are usually included as a standard provision on a fixed rate commercial mortgage loan, as well as certain other types of loans. In addition to a lockout period, additional limitations may include defeasance requirements such as the case with a commercial mortgage loan constituting a capital market loan. Actual prepayment penalties in other commercial mortgage loan situations may equal a certain percentage of the loan’s principal balance (e.g., 2 percent of the commercial mortgage loan balance) or be determined through the use of a yield-maintenance formula.

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Assumptions

Many of the commercial mortgage loan lenders offering permanent loans allow their commercial mortgage loans to be assumed by a qualified third party for a fee—usually one percent—provided the commercial mortgage loan has been in place for a specified period of time (e.g., two or more years). Businesses, commercial real estate investors and developers who need this type of flexibility with their commercial mortgage loan should make sure this option is available to them through their ultimate lender.

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