Important facts about First Commercial Mortgage Notes.

 

There are two types of mortgage notes available in the market today and we will focus on the first commercial mortgage notes in this article.  Before you try to get involve with this note, it is good to know some basic facts about it.

1. Unlike the residential mortgage, the lender in a commercial mortgage notes will look first into the property and its capability to service the loan, thru its income. The lender may ask for proof of income for the past two years and may also ask pictures of the internal and external part of the property. The lender would want to know, if the property can sustain the cash flow needed to pay for the loan. The lender may also ask other parties for their assessment not only for the property but, also for the surrounding environment.  They are using the surrounding as gauge if the property has a possibility to increase its possible earnings in the near future.  If there is development in the surrounding, the property will increase in its value.

2. The borrower should have a very strong credit ratings and financial history, but, still the lender focuses more on the property itself. How it can generate cash flow, enough to pay the monthly amortization.

3. There are several sources for commercial borrowing;

  • Portfolio Lenders – composed mostly of banks and corporations
  • Government Lenders – This are companies with authorization from the government to sell government funded products.
  • CMBS Lenders
  • Insurance Companies
  • Private Money/Hard Money Lenders
  • SBA Loans

4. Commercial Loans are either recourse or non-recourse. In a recourse loan, the borrower will take the responsibility of paying the loan, just in case the proceeds of the property is not enough to pay for the loan.  While in a non-recourse loan, the borrower has no responsibility in whatsoever, if the property is foreclosed.

In most cases, during the negotiation, the borrower will prefer the non-recourse loan, while, the lender will prefer for the recourse loan.  With the situation, there maybe a deadlock in the negotiation and the deal may not push through.