Commercial Real Estate Loans Refinancing Commercial Real Estate Commercial Mortgage 10 Year Fixed Rate 30 Year Amortization
A commercial mortgage is a mortgage loan secured by commercial property, such as an office building, shopping center, industrial warehouse, or apartment complex. The proceeds from a commercial mortgage are typically used to acquire, refinance, or redevelop commercial property.
Commercial mortgages are structured to meet the needs of the borrower and the lender. Key terms include the loan amount (sometimes referred to as "loan proceeds"), interest rate, term (sometimes referred to as the "maturity"), amortization schedule, and prepayment flexibility. Commercial mortgages are generally subject to extensive underwriting and due diligence prior to closing. The lender's underwriting process may include a financial review of the property and the property owner (or "sponsor"), as well as commissioning and review of various third-party reports, such as an appraisal.
There were $3.1 trillion of commercial and multifamily mortgages outstanding in the U.S. as of June 30, 2013. Of these mortgages, approximately 49% were held by banks, 18% were held by asset-backed trusts (issuers of CMBS), 12% were held by government-sponsored enterprises and Agency and GSE-backed mortgage pools, and 10% were held by life insurance companies.
Commercial mortgages can be structured as first liens or, if a greater loan amount is desired, the borrower may be able to obtain subordinate financing as well, sometimes structured as a mezzanine note or as preferred equity, which generally carries a higher interest rate.
Interest rates for commercial mortgages may be fixed-rate or floating rate. Fixed-rate mortgages on stabilized commercial real estate are generally priced based on a spread to swaps, with the swap spread matched to the term of the loan. Market interest rates as well as underwriting factors greatly affect the interest rate quoted on a particular piece of commercial real estate. Interest rates for commercial mortgages are usually higher than those for residential mortgages.
Many commercial mortgage lenders require an application fee or good-faith deposit, which is typically used by the lender to cover underwriting expenses such as an appraisal on the property. Commercial mortgages may also have origination or underwriting fees (paid at close as a reduction in loan proceeds) and/or exit fees (paid when the loan is repaid).
The term of a commercial mortgage is generally between five and ten years for stabilized commercial properties with established cash flows (sometimes called "permanent loans"), and between one and three years for properties in transition, for example, newly opened properties or properties undergoing renovation or repositioning (sometimes called "bridge loans"). Mortgages on multifamily properties that are provided by a government-sponsored enterprise or government agency may have terms of thirty years or more. Some commercial mortgages may allow extensions if certain conditions are met, which may include payment of an extension fee. Some commercial mortgages have an "anticipated repayment date," which means that if the loan is not repaid by the anticipated repayment date, the loan is not in default.
Commercial mortgages frequently amortize over the term of the loan, meaning the borrower pays both interest and principal over time, and the loan balance at the end of the term is less than the original loan amount. However, unlike residential mortgages, commercial mortgages generally do not fully amortize over the stated term, and therefore frequently end with a balloon payment of the remaining balance, which is often repaid by refinancing the property. Some commercial mortgages have an interest-only period at the beginning of the loan term during which time the borrower only pays interest.
Commercial loans vary in their prepayment terms, that is, whether or not a real estate investor is allowed to refinance the loan at will. Some portfolio lenders, such as banks and insurance companies, may allow prepayment flexibility. In contrast, for a borrower to prepay a conduit loan, the borrower will have to defease the bonds, by buying enough government bonds (treasuries) to provide the investors with the same amount of income as they would have had if the loan was still in place.
A commercial mortgage is typically taken on by a special purpose entity such as a corporation or an LLC created specifically to own just the subject property, rather than by an individual or a larger business. This allows the lender to foreclose on the property in the event of default even if the borrower has gone into bankruptcy, that is, the entity is "bankruptcy remote".
Commercial mortgages may be recourse or non-recourse. A recourse mortgage is supplemented by a general obligation of the borrower or a personal guarantee from the owner(s) of the property, which makes the debt payable in full even if foreclosure on the property does not satisfy the outstanding balance. A nonrecourse mortgage is secured only by the commercial property that serves as collateral. In an event of default, the creditor can foreclose on the property, but has no further claim against the borrower for any remaining deficiency.
If a sponsor is seeking financing on a portfolio of commercial real estate properties, rather than a single property, the sponsor may choose to take out a cross-collateralized loan, in which the all of the properties collateralize the loan.
Lenders may require borrowers to establish reserves to fund specific items at closing, such as anticipated tenant improvement and leasing commission (TI/LC) expense, needed repair and capital expenditure expense, and interest reserves.
Lenders usually require a minimum debt service coverage ratio which typically ranges from 1.1 to 1.4; the ratio is net cash flow (the income the property produces) over the debt service (mortgage payment). As an example if the owner of a shopping mall receives $300,000 per month from tenants, pays $50,000 per month in expenses, a lender will typically not give a loan that requires monthly payments above $227,273 (($300,000-$50,000)/1.1)), a 1.1 debt cover.
Lenders also look at loan to value (LTV). LTV is a mathematical calculation which expresses the amount of a mortgage as a percentage of the total appraised value. For instance, if a borrower wants $6,000,000 to purchase an office worth $10,000,000, the LTV ratio is $6,000,000/$10,000,000 or 60%. Commercial mortgage LTV's are typically between 55% and 70%, unlike residential mortgages which are typically 80% or above.
Lenders look at rents per square foot, cost per square foot and replacement cost per square foot. These metrics vary widely depending on the location and intended use of the property, but can be useful indications of the financial health of the real estate, as well as the likelihood of competitive new developments coming online.
Since the financial crisis, lenders have started to focus on a new metric, debt yield, to complement the debt service coverage ratio. Debt yield is defined as the net operating income (NOI) of a property divided by the amount of the mortgage.
Lenders typically do thorough extreme due diligence on a proposed commercial mortgage loan prior to funding the loan. Such due diligence often includes a site tour, a financial review, and due diligence on the property's sponsor and legal borrowing entity. Many lenders also commission and review third-party reports such as an appraisal, environmental report, engineering report, and background checks.
Providers of commercial mortgages
Banks, large and small, are traditional providers of commercial mortgages. According to the Federal Reserve, banks held $1.5 trillion of commercial mortgages on their books as of June 30, 2013.
Conduit lenders originate commercial mortgages and hold them as investments for a short period of time before securitizing the loans and selling CMBS secured by the underlying commercial mortgage loans. Conduit lenders include both banks and non-bank finance companies. Approximately $560 billion of commercial mortgages were held by issuers of CMBS as of June 30, 2013, according to the Federal Reserve.
Securitization of commercial mortgages in its current form began with the Resolution Trust Corporation's (or RTC's) commercial securitization program in 1992-1997. The RTC applied an approach similar to the one it had begun successfully using with residential mortgages, issuing multiple tranches of securities secured by diversified pools of commercial mortgage loans. Following the introduction of the securitization methods by the RTC, private banks began to originate loans specifically for the purpose of turning them into securities. These loans are typically structured to forbid prepayment beyond a specified amortization schedule. This makes the resultant securities more attractive to investors, because they know that the commercial mortgages will remain outstanding even if interest rates decline.
New CMBS issuance peaked in 2007 at $229 billion. Then, the subprime mortgage crisis and the resultant global financial crisis caused CMBS prices to fall dramatically, and new issuances of CMBS securities came to a virtual halt in 2008-2009. The market has begun to recover, with $12 billion in new issuance in 2010, $37 billion in new issuance in 2011, and $48 billion in new issuance in 2012.
Government-sponsored enterprises such as Fannie Mae and Freddie Mac, as well as government corporations such as Ginnie Mae, are active lenders for multifamily commercial real estate (that is, apartment buildings) in the United States. Approximately $390 billion of multifamily residential mortgages were held by government-sponsored enterprises or Agency and GSE-backed mortgage pools as of June 30, 2013, representing 12% of total commercial mortgages outstanding and 43% of multifamily commercial mortgages outstanding at that time.
Insurance companies are active investors in commercial mortgages, and hold approximately $325 billion of commercial mortgages as of June 30, 2013.
Mortgage brokers do not provide commercial mortgage loans, but are often used to obtain multiple quotes from different potential lenders and to manage the financing process.
Correspondent Lenders do not loan their own money, but provide front end services such as origination, underwriting, and loan servicing for lenders that utilize these types of companies. The correspondent often represents lenders in a particular geographic area.
Costa Mesa is a city in Orange County, California. The population was 109,960 at the 2010 United States Census. Since its incorporation in 1953, the city has grown from a semi-rural farming community of 16,840 to a primarily suburban and edge city with an economy based on retail, commerce, and light manufacturing.
Members of the Gabrieleño/Tongva and Juaneño/Luiseño nations long inhabited the area. After the 1769 expedition of Gaspar de Portolà, a Spanish expedition led by Junípero Serra named the area Vallejo de Santa Ana (Valley of Saint Anne). On November 1, 1776, Mission San Juan Capistrano became the area's first permanent European settlement in Alta California, New Spain.
In 1801, the Spanish Empire granted 62,500 acres (253 km2) to Jose Antonio Yorba, which he named Rancho San Antonio. Yorba's great rancho included the lands where the communities of Olive, Orange, Villa Park, Santa Ana, Tustin, Costa Mesa and Newport Beach stand today.
After the Mexican-American war, California became part of the United States and American settlers arrived in this area and formed the town of Fairview in the 1880s near the modern intersection of Harbor Boulevard and Adams Avenue. An 1889 flood wiped out the railroad serving the community, however, and it shriveled.
To the south, meanwhile, the community of Harper had arisen on a siding of the Santa Ana and Newport Railroad, named after a local rancher. This town prospered on its agricultural goods. On May 11, 1920, Harper changed its name to Costa Mesa, which literally means "coast table(land)" in Spanish. This is a reference to the city's geography as being a plateau by the coast.
Costa Mesa surged in population during and after World War II, as many thousands trained at Santa Ana Army Air Base and returned after the war with their families. Within three decades of incorporation, the city's population had nearly quintupled.
Costa Mesa's local economy relies heavily on retail and services. The single largest center of commercial activity is South Coast Plaza, a shopping center noted for its architecture and size. The volume of sales generated by South Coast Plaza, on the strength of 322 stores, places it among the highest volume regional shopping centers in the nation. It generates more than one billion dollars per year. Some manufacturing activity also takes place in the city, mostly in the industrial, southwestern quarter, which is home to a number of electronics, pharmaceuticals and plastics firms. Business services company Experian is the largest employer in the city and has their North American Headquarters in Costa Mesa.
The commercial district surrounding South Coast Plaza, which contains parts of northern Costa Mesa and southern Santa Ana, is sometimes called South Coast Metro.
A local newspaper, the Daily Pilot, is owned, operated, and printed by the Los Angeles Times. Ceradyne, El Pollo Loco, Emulex, Hurley, RVCA, Toyota Racing Development, the Trinity Broadcasting Network, and Volcom are among the businesses headquartered in Costa Mesa.
Costa Mesa offers 26 parks, a municipal golf course, 26 public schools and 2 libraries.
According to the City's 2015 Comprehensive Annual Financial Report, the top employers in the city are:
Arts and culture
Annual cultural events
The Orange County Fair takes place at the fairgrounds in Costa Mesa each July. The Fair receives more than one million visitors each year.
The Annual Scarecrow & Pumpkin Festival was first held in 1938, went on hiatus for seven decades, and then was restarted in 2013.
A general law city, Costa Mesa has a council-manager form of government. Voters elect a five-member City Council, all at-large seats, who in turn select a mayor who acts as its chairperson and head of the government. Day to day, the city is run by a professional city manager and staff of approximately 600 full-time employees.
Management of the city and coordination of city services are provided by:
The 9.5 acre (38,000 m²) Costa Mesa Civic Center is located at 77 Fair Drive. City Hall is a five-story building where the primary administrative functions of the city are conducted. Also contained in the Civic Center complex are Council Chambers, the Police facility, Communications building and Fire Station No. 5.
Fire protection is provided by the Costa Mesa Fire Department. Law enforcement is the responsibility of the Costa Mesa Police Department. Emergency Medical Services are provided by the Costa Mesa Fire Department and Care Ambulance Service.
State and federal representation
Costa Mesa is served by several bus lines of the Orange County Transportation Authority (OCTA), but most transportation is by automobile. Two freeways terminate here, State Route 73 and State Route 55 (also known as the Costa Mesa Freeway). The San Diego Freeway, Interstate 405, also runs through the city.
Costa Mesa is located 37 miles (60 km) southeast of Los Angeles, 88 miles (142 km) north of San Diego and 425 miles (684 km) south of San Francisco, Costa Mesa encompasses a total of 16 square miles (41 km2) with its southernmost border only 1-mile (1.6 km) from the Pacific Ocean. According to the United States Census Bureau, the city has a total area of 15.7 square miles (41 km2). 15.7 square miles (41 km2) of it is land and 0.05 square miles (0.13 km2) of it (0.29%) is water.
Costa Mesa has a Mediterranean climate with mild temperatures year round. Rain falls primarily in the winter months, and is close to nonexistent during the summer. Morning low clouds and fog are common due to its coastal location. (Köppen climate classification Csa).
The 2010 United States Census reported that Costa Mesa had a population of 109,960. The population density was 7,004.0 people per square mile (2,704.3/km²). The racial makeup of Costa Mesa was 75,335 (68.5%) White (51.8% Non-Hispanic White), 1,640 (1.5%) African American, 686 (0.6%) Native American, 8,654 (7.9%) Asian, 527 (0.5%) Pacific Islander, 17,992 (16.4%) from other races, and 5,126 (4.7%) from two or more races. Hispanic or Latino of any race were 39,403 persons (35.8%).
The Census reported that 106,990 people (97.3% of the population) lived in households, 2,232 (2.0%) lived in non-institutionalized group quarters, and 738 (0.7%) were institutionalized.
There were 39,946 households, out of which 12,298 (30.8%) had children under the age of 18 living in them, 16,478 (41.3%) were opposite-sex married couples living together, 4,369 (10.9%) had a female householder with no husband present, 2,392 (6.0%) had a male householder with no wife present. There were 3,013 (7.5%) unmarried opposite-sex partnerships, and 281 (0.7%) same-sex married couples or partnerships. 10,963 households (27.4%) were made up of individuals and 2,775 (6.9%) had someone living alone who was 65 years of age or older. The average household size was 2.68. There were 23,239 families (58.2% of all households); the average family size was 3.30.
The population was spread out with 23,682 people (21.5%) under the age of 18, 12,847 people (11.7%) aged 18 to 24, 38,211 people (34.7%) aged 25 to 44, 25,106 people (22.8%) aged 45 to 64, and 10,114 people (9.2%) who were 65 years of age or older. The median age was 33.6 years. For every 100 females there were 103.7 males. For every 100 females age 18 and over, there were 102.7 males.
There were 42,120 housing units at an average density of 2,682.9 per square mile (1,035.9/km²), of which 15,799 (39.6%) were owner-occupied, and 24,147 (60.4%) were occupied by renters. The homeowner vacancy rate was 1.2%; the rental vacancy rate was 5.9%. 42,517 people (38.7% of the population) lived in owner-occupied housing units and 64,473 people (58.6%) lived in rental housing units.
During 2009–2013, Costa Mesa had a median household income of $65,830, with 15.1% of the population living below the poverty line.
As of the census of 2000, there were 108,724 people, 39,206 households, and 22,778 families residing in the city. The population density was 6,956.3 inhabitants per square mile (2,685.8/km²). There were 40,406 housing units at an average density of 2,585.2 per square mile (998.1/km²). The racial makeup of the city was 69.48% White, 1.40% Black or African American, 0.78% Native American, 6.90% Asian, 0.60% Pacific Islander, 16.57% from other races, and 4.27% from two or more races. 31.75% of the population were Hispanic or Latino of any race.
There were 39,206 households out of which 29.2% had children under the age of 18 living with them, 42.8% were married couples living together, 10.3% had a female householder with no husband present, and 41.9% were non-families. 28.1% of all households were made up of individuals and 6.3% had someone living alone who was 65 years of age or older. The average household size was 2.69 and the average family size was 3.34.
In the city the population was spread out with 23.2% under the age of 18, 11.2% from 18 to 24, 39.0% from 25 to 44, 18.1% from 45 to 64, and 8.4% who were 65 years of age or older. The median age was 32 years. For every 100 females there were 105.0 males. For every 100 females age 18 and over, there were 103.9 males.
The median income for a household in the city was $50,732, and the median income for a family was $55,456. Males had a median income of $38,670 versus $32,365 for females. The per capita income for the city was $23,342. About 8.2% of families and 12.6% of the population were below the poverty line, including 16.0% of those under age 18 and 6.2% of those age 65 or over.
Institutions of higher learning located in Costa Mesa include Orange Coast College, Vanguard University (affiliated with the Assemblies of God), Whittier Law School (a satellite of Whittier College) and National University (a private university based in La Jolla, California).
Costa Mesa has two high schools, Costa Mesa High School and Estancia High School. Costa Mesa has two public middle schools; Tewinkle Middle School, which was named after Costa Mesa's first mayor, and Costa Mesa Middle School which shares the same campus as Costa Mesa High School. Costa Mesa also has two alternative high schools that share the same campus, Back Bay High School and Monte Vista High School and another, Coastline Early College High School which is on its own facility. Olympic high jumper, Sharon Day, graduated from Costa Mesa High School in 2003.
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