Key Mortgage Terms
Key Terms to Consider When Choosing a
Mortgage Solution
Many of the commercial mortgage loans Enterprise Financial Partners offers
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 these loans, 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 financing arrangement:
Interest Rates
Interest rates on the more popular fixed rate
real estate loan programs are typically set at
market spreads over corresponding treasuries, such as the 10-year Treasury note.
However, they’re normally only available through select lenders with more
restrictive underwriting criteria and cover only certain property types. The
result of using treasuries is often a very attractive interest rate as compared
to more traditional pricing options. Most other loans are typically 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 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 the upper end
of this range. Additional financing options may be available, such as mezzanine
loans, to bridge funding gaps in certain situations.
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Minimum Debt Coverage Ratios
Most commercial real estate term loan programs require a company to maintain a minimum debt-service
coverage ratio, which is the ratio of the 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 may be higher or lower for a specific property type and will
ultimately depend on the lender and the financial strength of the occupying
tenants and owners/sponsors, among other considerations.
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Recourse vs. Non-Recourse Loans
For many income property term loans, transactions 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; all other loans usually require full
recourse of the principal owners/sponsors.
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Prepayment Provisions
Prepayment limitations and penalties are typically included as a standard
provision in most fixed rate commercial real estate loans and certain other loans. In addition to
a lockout period, additional limitations may include defeasance requirements on
certain capital market loans. Actual prepayment penalties on other loans may
equal a certain percentage of the loan’s principal balance (e.g., 2 percent of
the loan balance) or be determined through the use of a yield-maintenance
formula.
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Assumptions
Many of the commercial real estate lenders offering term loans allow their loans to be assumed by a
qualified third party for a fee—usually one percent—provided the 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 should
make sure this option is available to them through their lender.
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