Commercial Mortgage Loans

Commercial mortgage loans are for businesses. Even Donald Trump gets commercial loans through his corporate business entities, but not personally. Businesses obtain commercial mortgage loans to buy business property.

Commercial Property

Business properties are acquired specifically for business profitability. Some examples of business properties obtained with commercial mortgages are:

• Office Buildings
• Industrial Facilities
• Mini-Storage Buildings
• Retail Store Fronts
• Rental Units
• Hotels / Motels
• Golf Courses
• Campgrounds
• Amusement Parks
• Gas Stations
• Warehouses
• Railroad Transportation Land
• Farm Land

Home Mortgage Loans, for individuals, have some things in common with commercial mortgage loans. However, commercial loans differ and entail many more details requiring a more complex means of lender approval. The properties sought after by businesses through commercial financing carry much larger price tags than do the average personal home property. Therefore, commercial mortgages will provide a very high principal amount, often millions of dollars.

Loan Principal Ranges

Generally, when a company is shopping for a commercial mortgage loan, they sift through sales materials that place this type of loan into different sized loans, typically small, medium and large principal amounts. Here's an example of commercial principal ranges:

• SMALL: from $100,000 to $3 million.
• MEDIUM-SIZED: from over $3 million to $8 million.
• LARGE: from over $8 million to $100 million.

Principal amount rages vary somewhat between commercial lenders.

The process of obtaining a commercial loan is very complex and involves a high degree of business knowledge. Usually, a team of qualified company employees or associates work together to shop and then solidify the deal.

Commercial Compared to Home Mortgages

A personal home mortgage loan, for a home buyer, is based on these items from the perspective of the lender:

• The value of the property.
• The home buyer's current debt.
• The potential of the buyer's household income to reasonably pay for both property mortgage and current debt.

Business mortgage loans are based on these items from the perspective of the lender:

• The value of the property.
• The company's profit-worthiness, income less expenses (expenses include current debt).
• The potential of the company's profitability to reasonably pay for property mortgage, expenses and current debt.

In both cases, before providing principal to the buyer, the lender wants to know if the property buyer's income-to-debt will allow them to sustain making regular payments throughout the mortgage loan's duration.

The lender's requirements ask a simple question: "How much risk is associated with this buyer's ability to pay back the principle and interest through time?" This applies to both home buyer and business loans. Low risk allows for loan approval at a low interest rate while high risk brings either higher interest rate or disapproval.

Getting Commercial Mortgage Approval

Determining a company's profitability is key to the approval of a good commercial mortgage loan deal and is much more complex than determining a personal home buyer's income-to-debt. Two scenarios exist when talking about companies wanting to buy commercial property.

• New business ventures.
• Companies that are pre-existing.

Profitability is determined by either a business plan (a projection of future profitability – no history) or the length of time a business has been successfully profitable (historical profitability).

Mortgages for the New Business Venture

For a new the business venture, there is no income or profitability history that the lender can reference for determining lending risk. The best that a new business venture can do is make a best guess about their profitability in the form of a business plan. The business plan points to the future potential of a company's operations to produce profit, in this case, enough profit to support paying back a commercial mortgage loan. Rarely will a lender approve a new business venture since there exists no real proof of profitability. Solid proof is needed for placing trust in the risk associated with an unproven business venture, and while a business plan provides a good guestimation, it is not proof.

Mortgages for a Pre-Existing Business

The pre-existing business can submit historical financial statements for several years showing proven levels of business profitability. The profit/loss statement and other historical documentation are given to a commercial mortgage lender during the loan application procedures. This shows lenders the company track record as a means of proving their future potential for paying back loan principal and interest. An indication of future business profitability is partially determined by evaluating the financial statements prepared during past years. This is, however, only the tip of the iceberg in the approval process. Many other factors beyond company historical profitability will be scrutinized by the lender before issuing a commercial loan.

Historical financial statements are favored by lenders over a business plan. Usually, several years of historical business operations is the minimum for being considered by a commercial lender. The more years a company can show profitability to the lender, the better.

Other Commercial Mortgage Loan Particulars

Loan fee and exit fees apply. Loan terms vary widely. Floating interest rates may apply. Some loan purposes are acquisition, repositioning, rehab. Customized solutions are usually available. LIBOR is one standard basis. Some commercial loans are assumable. Some can have an 80% LTV. Commercial lending vocabulary extends beyond that of home mortgages loans. Commercial mortgage calculations extend beyond those of home mortgages. Current interest rates for commercial loans differ from home mortgages.

Summary

The complexities of commercial mortgage loans should be investigated by individuals who have been trained and have had experience in business loan acquisitions. The home mortgage expert would not be an appropriate choice for getting a commercial loan.

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