Commercial real estate investors that are involved in renovation projects and or actively seeking new acquisitions should take a hard look at the new commercial second mortgages that have become available. This commercial equity loan can create a significant amount of liquidity in investor’s existing commercial equity. Equity th at was previously dormant can now be “tapped” and used in other projects.
The most common uses that we see investors employ with this loan is as property rehabilitation capital or as down stroke capital for new building acquisitions. Investors that have been involved in traditional commercial construction loans understand the extensive process/reporting requirements and like the idea of avoiding this, by pulling cash out of another property via a commercial second mortgage and use those proceed as the rehab capital on a another property.
Likewise, many investors do not want to tie up cash into an acquisition. Investors can pull cash out of an existing property and use that capital as the down payment on the new purchase, effectively buying the property with 100% leverage.
The concept of a loan that sits in second lien position is certainly not new, but is rare. The vast majority of banks would never sit in second position especially if they do not hold the first mortgage. Said in another way, the significant point of the new commercial second mortgage is that it sits in second lien position behind any existing first mortgage, regardless of the underlying bank/lender.
The other major benefit of the Commercial Second Mortgage, (which will be hard to believe) is that the funding bank incurs the third party costs directly. The borrower does NOT have to pay for an appraisal, title, environmental or any other types of upfront fees. The borrower literally has no cash into loan with the only fee being an origination fee of 1% to 1.5% depending on the loan amount.
Investors need to examine their equity positions to determine if this is an option. The program is limited to a combined loan to value of 75%.
For example, if your existing first mortgage is at 50% loan to value you would be eligible for a 25% loan to value second mortgage. Also, there is a combined debt coverage ratio limitation of 1:1.25. Other requirements include needing to own the existing property for at least one year and the borrower needs a minimum credit score of 680 to qualify (among other less important requirements).
As far as the negatives, by far the most common complaint is the loan is capped at only $500,000 and the property value cannot exceed $3,000,000. Not surprisingly, the interest rate is higher than a typical bank loan and is heavily influenced by the borrower’s credit score.
Another negative is that expenses on the property are taken off the owners schedule E or 8825’s of their tax returns which, for obvious reasons, are typically reported higher than what they really are.
Despite these restrictions the overall program can be an outstanding tool for commercial real estate investors to unlock equity and use these proceeds to grow their overall commercial real estate portfolios.
By: jeff rauth
About the Author:
The most common uses that we see investors employ with this loan is as property rehabilitation capital or as down stroke capital for new building acquisitions. Investors that have been involved in traditional commercial construction loans understand the extensive process/reporting requirements and like the idea of avoiding this, by pulling cash out of another property via a commercial second mortgage and use those proceed as the rehab capital on a another property.
Likewise, many investors do not want to tie up cash into an acquisition. Investors can pull cash out of an existing property and use that capital as the down payment on the new purchase, effectively buying the property with 100% leverage.
The concept of a loan that sits in second lien position is certainly not new, but is rare. The vast majority of banks would never sit in second position especially if they do not hold the first mortgage. Said in another way, the significant point of the new commercial second mortgage is that it sits in second lien position behind any existing first mortgage, regardless of the underlying bank/lender.
The other major benefit of the Commercial Second Mortgage, (which will be hard to believe) is that the funding bank incurs the third party costs directly. The borrower does NOT have to pay for an appraisal, title, environmental or any other types of upfront fees. The borrower literally has no cash into loan with the only fee being an origination fee of 1% to 1.5% depending on the loan amount.
Investors need to examine their equity positions to determine if this is an option. The program is limited to a combined loan to value of 75%.
For example, if your existing first mortgage is at 50% loan to value you would be eligible for a 25% loan to value second mortgage. Also, there is a combined debt coverage ratio limitation of 1:1.25. Other requirements include needing to own the existing property for at least one year and the borrower needs a minimum credit score of 680 to qualify (among other less important requirements).
As far as the negatives, by far the most common complaint is the loan is capped at only $500,000 and the property value cannot exceed $3,000,000. Not surprisingly, the interest rate is higher than a typical bank loan and is heavily influenced by the borrower’s credit score.
Another negative is that expenses on the property are taken off the owners schedule E or 8825’s of their tax returns which, for obvious reasons, are typically reported higher than what they really are.
Despite these restrictions the overall program can be an outstanding tool for commercial real estate investors to unlock equity and use these proceeds to grow their overall commercial real estate portfolios.
By: jeff rauth
About the Author:
Jeff Rauth is President of Commercial Finance Advisors, Inc out of Bloomfield Hills. He specializes in Commercial Real Estate Loans between $100,000 - $5,000,000. Offers unique loan programs such as Commercial 30 Year Fixed, 90% non SBA financing, Commercial Equity Lines and Commercial Second Mortgages. He can be reached at 248 885-8797.
Commercial Second Mortgage or sba 7a loans
commercial real estate loans
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