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The following article was published in our article directory on September 23, 2015.
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What is Commercial Property Mortgage?

Article Category: Real Estate

Author Name: Michael McGovern

A commercial property mortgage refers to the loan issued by banks or private lending institutions for people and business to obtain commercial building or lands. Aside from the purpose of getting a commercial property, a business can also apply for a commercial mortgage to finance the development of a land or a building.
Most commercial mortgages are considered nonrecourse, meaning the lender can only seize the commercial property that is being financed as repayment just in case the borrower defaults on the mortgage, and cannot seize ownership of anything else. However, there are numerous laws established to prevent a lender from going after a borrower due to failure of payment.
Because of this, many businesses are amenable to the agreement that they will still pay the remaining balance even after the seizure of the property. A clause may be required just in case the commercial mortgage is structured for sale as a bond, in order to enable the lender to reclaim ownership of the property even before a declaration of bankruptcy has been issued by the borrower.
Residential vs. Commercial Mortgages
The only similarity between residential and commercial property mortgages is they are both loans issued by a bank or a private lending institution. Another thing to note is that commercial property mortgages are only applicable in commercial zones. Therefore, you cannot build a property in areas that are zoned for residential purposes.
The repayment structures for commercial mortgages are also different. In a conventional residential mortgage, you will need to agree with the terms of the loan. You will then repay it over a set amount of years depending on what both parties have agreed on. However, commercial property mortgages have two different components:
Amortization

Similar to residential loans, the amortization in a commercial loan refers to the loan term of the mortgage. This is used to calculate the payment that you need to render on a monthly basis.

Balloon Payment

The balloon payment refers to the scheme wherein the borrower can choose to pay the remaining balance either through refinancing, paying in full, or selling the property.
What Lenders are Looking for in a Commercial Mortgage
Any commercial entity can apply for a commercial property mortgage, may the business be an LLC, a partnership or incorporated business. Before approving the application, a lender will need to look into numerous factors when considering a commercial property mortgage:
Debt Service Coverage Ration

This refers to the available cash to the required loan payment.

Loan-to-Value Ratio

This refers to value of the mortgage when compared to the assessed value of the property that is being financed. Majority of residential mortgages can have an 80% or higher loan-to-value ratio, whereas commercial mortgages have a loan to value ratio of between 55% and 70%.

The Potential of the Business

The lender will need to take a closer look of the business� potential. The business needs to be profitable and stable. Therefore, most lenders may ask the business to render their business plans, financial statements and business projections. New and struggling business will likely find it hard to qualify for a commercial loan. Financially unstable and heavily indebted businesses are also at risk of not qualifying for a loan.

Individuals in the Business

The person in the business who takes out the loan needs to have a solid credit history in order to qualify for commercial property loans.
Since commercial property mortgages have numerous risks involved, the lender will subject applicants to strict scrutiny. If it is your first time applying for commercial property loans in New York, don�t expect it to come easily.

Keywords: commercial property mortgage, commercial property loans

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