Building A Case for Commercial Mortgage loans

Commercial property financing has become more popular over the last five years, and even more so in the last eighteen months. The popularity of this type of mortgage loan can be attributed to events that devasted the residential mortgage market due to the subprime meltdown.

For many years the mortgage industry thrived on the purchase and refinance of residential properties until about eighteen months ago when mortgage lenders began to close down. Due to the implosion of some high profile  mortgage lenders and subsequent tightening of regulations governing residential real estate financing, more mortgage professionals have set their sights on the commercial mortgage loan as a means of replacing lost revenue they experienced as a result of the collapse of the residential market.
The commercial property tells a unique story


The commercial property represents to the purchaser, broker and  lender whether or not it is mortgageable and, in many cases, how it should be mortgaged. Whether a short term Interest Only Balloon loan or a longer term amortized loan is more suitable based on the property's historical performance.

Unlike residential property financing when the borrower's income, employment history, credit history and personal assets are the determining factors in the mortgage approval process the commercial will usually be approved or disapproved by utilizing the income & expense history of the building. In fact, the borrower in a commercial mortgage transaction need not be an individual but can be an entity like a corporation, partnership or other legally established entity.

The term "Net Cash Flow" creates a lot of interest 


It is a term commonly used in the qualifying process of commercial properties. The term is relatively simple to understand because it is really self explanatory, but what is not so simple to understand is how to calculate the Net Cash Flow (NCF) of any particular property.

 The NCF of a property, in most cases, is the key factor in the qualifying process of a commercial mortgage loan. Simply put, it is the difference between Effective Gross Income (EGI) of a building and the Operating Expenses (OE) and is calculated over a period of time - generally 2 to 3 years - to determine a growth or regression. It is therefore very important for a prospective purchaser of commercial property to know NCF Growth rate and whether or not the building is operating in the black.

Purchasing with your head, not over it


Although a building may present a beautiful exterior, excellent curb appeal and exquisite decor which would attract most prospective purchasers of residential property, the purchaser of commercial or investment properties must avoid the temptation to "follow your heart" in their decisions to purchase because that seemingly ideal building may present a totally different picture if it fails to service the debt that will inevitably result from the purchase.

Let the numbers tell the story. Debt Service Coverage Ratios (DSCR), Vacancy Factors (VF), Net Operating Income (NOI) and other ratios and factors are important calculations which will assist the decision making process of the purchaser but, equally as important, the same numbers are relied upon by the broker and the lender's underwriter when qualifying the building for financing. If the numbers don't add up to support a positive cash flow, the purchaser may be getting in over his or her head.

Transitioning from sluggish residential to vibrant commercial


When events change the way things are customarily done, there is generally a transition period which is created that we must employ to acclimate ourselves with the "newness" of habits and systems we are thrusted into. These new habits and systems are comprised of education through touch, feel, trial & error, unfamiliar activity and in many cases, failure.

It all happens in a very short period of time because circumstances do not provide a convenient schedule; but ultimately our successes relate directly to those transitional experiences.There are many in the mortgage industry who are presently going through that transitional period from the residential mortgage business as a primary income source to the pursuit of acceptable competency in the commercial mortgage arena and ultimate success as a commercial mortgage professional.

Success begins with effective communication - Language


Commercial, Real Estate, Mortgages, Net Cash Flow, Investment and Debt Service are only a few of the terms that are used in the commercial mortgage business which many people are already familiar with, and if we can agree that one of the more important requirements of any given field is knowledge of the vocabulary and terms specific to that field, then we should also agree that the first steps one should take when entering a new field is to learn the language.

Although I'm not prepared to delve into an explanatary excerciseon the language of the commercial mortgage industry, I can suggest that anyone who wishes  to learn more about this subject will find  C-Loans to be an abundance of information . For those who already participate in the commercial mortgage market and would like to share experiences or offer pros and cons on the industry by writing  articles , you are welcome to free software that really simplify the writing and publishing process. To download the software, please clink on the “articles” link above.


About the writer


This writer is a loan officer specializing in commercial mortgage financing. My time spent in the mortgage industry dates back to 1992 and prior to that, in the real estate brokerage business which began in 1979. My career has been rewarding, but was not without challenges and yet there is no business I would rather do than commercial mortgage business. I occassionally write an article or blog and have created a few websites relating to the subject of real estate and the various financing methods used to purchase or refinancing it.

My articles are written under the name of Javeton, my pen name. The company I'm associated with in my professional capacity is United Northern Mortgage Bankers of Long Island New York. More information relating to the mortgage industry is published on other pages of this site which may provide answers to some real estate questions you may have.


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