Info about commercial property mortgage

A commercial mortgage is a loan made using real estate as collateral to secure repayment.

A commercial mortgage is similar to a residential mortgage, except the collateral is a commercial building or other business real estate, not residential property. In addition, commercial mortgages are typically taken on by businesses instead of individual borrowers. The borrower may be a partnership, incorporated business, or limited company, so assessment of the creditworthiness of the business can be more complicated than is the case with residential mortgages.

Applications of commercial property mortgage loans:

Common applications of commercial mortgage loans include acquiring land or commercial properties, expanding existing facilities or refinancing existing debt. Common commercial properties are zoned for office, retail, & industrial purposes.

Commercial premises are purchased for many reasons. One may require bigger premises to cope with expansion, or you may be buying property, whereby the property is directly linked to a business e.g. a hotel. Commercial Mortgages are usually made with terms less than 10 years, but may be much longer than this. The Property itself is usually at risk if payments are not made on time.

Interest rates:

Interest rates for commercial mortgages are usually higher than those for residential mortgages.

The most common commercial mortgage is a fixed-rate loan, where the interest rate remains constant throughout the term. This must not be confused with the typical residential loan which uses the term to denote a 30 year term mortgage that comes with a rate fixed for 30 years. Most commercial loans have fixed periods between 3 and 10 years. The biggest for this is the source of funds. Many banks borrow their money to lend from the Federal Government with a wholesale cost and repackage the money for retail lending. Since the Fed Rate can change every 3 months or so, banks typically do not want to run the risk of their funds costs exceeding the income derived from interest through a loan made to consumer. These loans are typically based on the yields of treasuries, swaps, corporate bonds, or CMBS rates. Loans can also be variable or capped. These rates are usually based on an index such as LIBOR.

Conduit mortgages:

In the early 1980s, Investment Banks such as Salomon Brothers worked with banks and the government sponsored entities Fannie Mae and Freddie Mac to develop ways for banks to be able to sell their home mortgage loans as bonds into the bond market. By doing this, banks would free up funds to continue to make more loans, as well as earn fees upon the sale of the loans while leaving little or no of their own money at risk. However, similar developments in commercial mortgages were slow in appearing. The first movement in this area came with the savings and loan failures: the government set up a company known as the "resolution trust company" which would buy commercial mortgages from failed savings and loans and then turn them into bonds. In the early to mid nineties this led the staff of the Japanese Investment Bank Nomura in San Francisco to develop programs to convert commercial mortgages into bonds, primarily by making new commercial mortgage loans with clauses and structures which make them more like what bond investors want to invest in.