Understanding Large-Scale Commercial Mortgage Financing Part 01

If you are looking for a commercial mortgage to support the financing (or refinancing) of large-scale income producing property, you can pretty much forget about banks. While banks will provide construction loans they tend to avoid the permanent mortgage financing in excess of one million dollars because of the risk associated with commercial loans. In fact, a bank will probably not make a construction loan without a formal letter of commitment from a lender guaranteeing the permanent mortgage take-out (a loan designed to cash out the construction loans provided by the bank).

In any case, securing permanent mortgage financing in excess of a million dollars can be tricky business if you are new at this type of activity, have grade B-C credit and marginal cash on hand to support the project. Permanent mortgage lenders want to see a debt coverage ratio at or in excess of 1.2 (debt coverage ratio is the number that results from dividing the net operating income by the sum of annual mortgage payments). Example: Property A generates $120,000.00 per year in net (after expenses) rental income and the total mortgage payment is $100,000.00 then, 120,000/100,000 = 1.2 DCR. The DCR is designed to cover the loan in case of rent vacancies and changes to net operating income. A cushion for the lenders security.

Then you have the task of finding a legitimate lender to provide the permanent mortgage. In a world full of crooked commercial loan brokers and shysters who will take your money and not produce a loan, there are a few quick things to make sure you are headed in the right direction to select a legitimate mortgage broker or banking firm. First, call any commercial bank and speak to the commercial loan officer. They can often provide names of mortgage brokers who specialize in arranging large scale financing and have some track record with the bank. This is not the final acid test but it is a good first place to go for guidance. Attorneys specialized in commercial real estate law are also a good source for referrals and you can find them by contacting your local bar association.

There are primarily two kinds of players in the commercial mortgage business: 1. Commercial mortgage brokers and 2. Commercial mortgage banking firms. A mortgage broker tends to represent mortgage banking firms and mortgage-banking firms tend to represent life insurance companies, who provide the permanent mortgage financing. If you are working with a mortgage broker you want to avoid paying any up front fees to them to "process your loan" which is a common scam amongst unscrupulous operators in the industry. You will pay an application fee at some point in the transaction but it certainly isn't to the first guy who says he can get you a loan. Rather, it will be when you are dealing with a legitimate mortgage-banking firm that is representing the Life Company. Before this happens, however, there will be (at least) representatives from the mortgage banking firm who will meet with you, walk the property and put their eyes on the project before an application is drafted.

Always ask for references from the financial players who you can call to verify them. Ideally, you want names, telephone numbers and addresses to the properties they have funded. You can also ask the mortgage broker for the names of the banking firms where they will seek financing. In this case, you can expect to be forced to sign non-disclosure/non-circumvention agreements to protect the broker. Mortgage banking firms, on the other hand, represent life companies under contract and you, as an individual, cannot approach a life company directly.

Securing a commercial mortgage is a complicated process if you don't know what you are doing and it may pay dividends to keep track of these articles in the near future as I intend on creating a mini series about residential and commercial mortgages. Not sure at this point how deeply they will go but they will help you make better decisions.

To your success!

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Copyright © 2006 James W. Hart, IV All Rights reserved