Commercial Real Estate Investors Need to Examine New Commercial Second Mortgage
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 Mortgage. This loan program can create a significant amount of liquidity in investors existing commercial equity. Equity that was previously dormant can now be "tapped" and used in other projects.
The most common uses that investors employ are property rehabilitation capital or as the down stroke for new acquisitions. Investors that have been involved in traditional commercial construction loans understand the extensive process to meet the reporting requirements and like the idea of avoiding this, by pulling cash out of another property to use as the rehab capital. Likewise, many investors do not want to tie up more 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 extremely rare. The vast majority of banks would never sit in second position if they do not hold the first mortgage. Said in another way, the significant point of the 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 this program, (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. Other requirement 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. For example, on the commercial equity line, the difference in rate for a borrower with 720 plus credit would be Prime +1.25% vs. Prime + 3.5% for a borrower with a 680(as of 10/15/07). The rate difference on the commercial fixed rate program, with the same scenario would be 8.35% vs. 10.29%.
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.
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 and 90% non SBA financing, Commercial Private Money, Commercial Equity Lines and Commercial Second Mortgages. He can be reached at 248 990-7602. http://www.cfa-commercial.com or http://www.commercial-second-mortgage.com .
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