1 / 21

Commercial Mortgages

Commercial Mortgages. In this section we will discuss the differences between residential and commercial mortgages Loan terms Underwriting Performance Standardization. Commercial Mortgages.

janet
Download Presentation

Commercial Mortgages

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Commercial Mortgages • In this section we will discuss the differences between residential and commercial mortgages • Loan terms • Underwriting • Performance • Standardization

  2. Commercial Mortgages • A commercial mortgage is a mortgage (note+mortgage) where the collateral that is pledged is an income producing commercial property • Major types • Multifamily • Office • Retail • Hotel • Industrial/warehouse

  3. Commercial Properties • Each type of commercial property represents a unique business with its own unique risks and returns • We will focus on the common attribute that for each type of property, the fee simple owner of the property generates income by leasing the real estate to a user in return for periodic lease payments.

  4. Income Statements • The income statement for a commercial property will have the following format: Potential Gross Income (PGI) -Vacancy Effective Gross Income (EGI) -Operating Expenses Net Operating Income (NOI)

  5. NOI • The Net Operating Income from a commercial property is a measure of the property’s income generating capability and hence the owner’s capacity to service debt. • There can be variations in strategies for getting to NOI, but the bottom line is measured by NOI • NOI is often used to get a rough estimate of the value of a commercial property • Cap rates:

  6. Size of Commercial Mortgage Market

  7. Holdings of Commercial Mortgages

  8. Commercial Mortgages • Largest Commercial Lenders • Banks: B of A, Wells Fargo, Citibank, Life Co. Teacher’s Insurance, Prudential, Metropolitan, AETNA • Spreads:Commercial mortgage spreads over US Treasuries: • Range from 75-225 over 10 year • Long Run Average about 150 bp for best loans • Current averages 200-250bp

  9. Underwriting Commercial Loans • “Three C’s” still generally apply • Capacity measured by DSCR • ratio of NOI to required debt service • Higher numbers (>1)indicate greater cushion • Collateral measured by LTV ratio • Appraised value generally based on income approach to valuation • Present value of future income • Credit measured by track record of owner/manager/developer • Current and past operating results

  10. DSCR Ratios by Type and Time

  11. LTV Ratios by Type & Time

  12. Performance • Commercial Loans are generally viewed as having more credit risk • More “ruthless” exercise of the option to default • Generally no effective recourse to other assets of borrower • Frequently the borrower is a special purpose corporation

  13. Overall Average: 12%-15%

  14. Loss Rates by Property Type

  15. Commercial Loan Characteristics • Balloon loans • Commercial mortgages are generally “balloon” loans. • Maturity of 7, 10 or 15 years • Amortization schedule of 25-30 years • Prepayment Provisions • Most commercial loans cannot be prepaid by the borrower at will • Lockout periods • Yield maintenance provisions

  16. Standardization • Residential loans are very homogeneous • Underwriting standards/mortgage documents/ provisions in the notes are dictated by the major secondary ,market agencies FNMA /FHLMC • Commercial loans are less homogeneous • They can be tailored to specific borrower or property needs

  17. Commercial Loans • Participation Loans • A property may need several years of work to reach its potential NOI • Lenders often believe they bear much of the downside risk of a project but the traditional loan does not let them share in the upside potential

  18. Participation Loans • A mortgage loan with a lower then market rate of interest but that provides that the lender shares or participates in some way in the cash flows of the property • Lender can participate in • Gross income • NOI • Cash flow after regular debt service • proceeds from sale of the property

  19. An Example • Consider Handout Example • Lender offers two loans • 10% standard 15 year mortgage • an 8% loan plus • 50% of all NOI> $100,000 • 45% share of gain from sale of property

  20. Interest-Only Loans • Commercial loans can be interest-only • Borrower payment is equal to the interest rate times the principal balance • Loan does not amortize over the maturity • Full loan amount is due and payable at maturity • 7-10 years • Risk to lender • Without amortization, the lender has less protection against declines in property value • Benefit to Borrower • Reduces cash flow requirements • All debt service is tax-deductible

  21. Split-Rate or Accrual Loans • If the borrower’s payment is set below the amount needed to pay interest, the loan will “negatively amortize” • Saw this in ARMs with payment caps • Loans can be set with one rate at which they earn interest for the lender (accrual rate) and a second rate used to determine the payment (pay rate)

More Related