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.
The area encompassing Fountain Valley was originally inhabited by the Tongva people. European settlement of the area began when Manuel Nieto was granted the land for Rancho Los Nietos, which encompassed over 300,000 acres (1,200 km2), including present-day Fountain Valley. Control of the land was subsequently transferred to Mexico upon independence from Spain, and then to the United States as part of the Treaty of Guadalupe Hidalgo.
The city was incorporated in 1957, before which it was known as Talbert (also as Gospel Swamps by residents). The name of Fountain Valley refers to the very high water table in the area at the time the name was chosen, and the many corresponding artesian wells in the area. Early settlers constructed drainage canals to make the land usable for agriculture, which remained the dominant use of land until the 1960s, when construction of large housing tracts accelerated. The first mayor of Fountain Valley was James Kanno, who with this appointment became the first Japanese-American mayor of a mainland United States city.
After the Fall of Saigon in 1975, there was a large influx of Vietnamese refugees settling in Fountain Valley, especially in the late 1970s and throughout the 1980s, forming a large percentage of Asian Americans in the city.
The city is located southwest and northeast of the San Diego Freeway (Interstate 405), which diagonally bisects the city, and is surrounded by Huntington Beach on the south and west, Westminster and Garden Grove on the north, Santa Ana on the northeast, and Costa Mesa on the southeast. Its eastern border is the Santa Ana River.
According to the United States Census Bureau, the city has a total area of 23.4 km2 (9.0 sq mi) 0.14% of which is water.
Fountain Valley is home to Mile Square Regional Park, a 640 acres (2.6 km2) park containing two lakes, three 18-hole golf courses, playing fields, picnic shelters, and a 20-acre (81,000 m2) urban-nature area planted with California native plants, a 55-acre (220,000 m2) recreation center with tennis courts, basketball courts, racquetball courts, a gymnasium, and the Kingston Boys & Girls Club; There is also a community center and a 16,652sq ft senior center that opened in September, 2005. A major redevelopment of the recreation center and city-administered sports fields was completed in early 2009.
Fire protection and emergency medical services are provided by two stations of the Fountain Valley Fire Department. Law enforcement is provided by the Fountain Valley Police Department. Ambulance service is provided by Care Ambulance Service.
The Orange County Sanitation District's administrative offices and primary plant is located in Fountain Valley next to the Santa Ana River. The agency is the third-largest sanitation district in the western United States. Fountain Valley is also home to the offices of the Municipal Water District of Orange County, a member of the Metropolitan Water District of Southern California and of the Orange County Water District. The Orange County Water District manages the groundwater basin in central and northern Orange County and operates the Groundwater Replenishment System, the world's largest water purification plant for groundwater recharge.
Fountain Valley has two fully accredited major medical centers: the Fountain Valley Regional Hospital with 400 beds available, and Orange Coast Memorial Medical Center with 230 beds, a medical clinic, and an outpatient medical building.
Fountain Valley has its own newspaper, the Fountain Valley View, operated by the Orange County Register.
As a suburban city, most of Fountain Valley's residents commute to work in other urban centers. However, in recent years, the city has seen an increase in commercial jobs in the city, with the growth of a commercial center near the Santa Ana River known as the "Southpark" district.
Although the economy of the area was once based mainly on agriculture, the remaining production consists of several fields of strawberries or other small crops, which are gradually being replaced by new office development. Efforts to bolster economic activity are evidenced by the city enacting policies to benefit small businesses, and even going so far as to paint a mural on the facade of a large water treatment building facing the freeway that depicts two shopping bags headlined by the words, "Shop in Fountain Valley."
Fountain Valley is home to the national headquarters of Hyundai Motor America and D-Link Corporation, the global headquarters of memory chip manufacturer Kingston Technology, and the corporate headquarters of Surefire, LLC, maker of military and commercial flashlights. The Southpark commercial area is also home to offices for companies such as D-Link, Starbucks, Satura and the Orange County Register. There are also a limited number of light industrial companies in this area. In addition, Fountain Valley is the location for Noritz, a tankless water heater manufacturer, and the main west coast offices of Ceridian, a professional employer organization.
The increasing commercial growth can be evidenced by the frequent rush-hour traffic bottlenecks on the San Diego (405) Freeway through Fountain Valley.
According to the City's 2009 Comprehensive Annual Financial Report, the top employers in the city are:
Arts and culture
Fountain Valley holds an annual Summerfest in June in Mile Square Park. This event has a car show, rides, music and booths.
There are three high schools, three middle schools, nine elementary schools, one K-12 school, and two K-8 schools. However, some students who live in the city of Fountain Valley actually attend schools in other cities.
Fountain Valley is also home to Coastline Community College. Community colleges in the area include Orange Coast College and Golden West College, located nearby in the cities of Costa Mesa and Huntington Beach, respectively.
High schools in Huntington Beach Union High School District
High schools in Garden Grove Unified School District
Middle schools in Fountain Valley School District
Middle schools in Ocean View Middle School District
Elementary schools in Garden Grove Unified School District
Elementary schools in Fountain Valley School District
In addition to the San Diego Freeway, which bisects the city, Fountain Valley is served by several bus lines operated by the Orange County Transportation Authority. Bus routes 33, 35, 37, 70, 72, 74, and 172 cover the city's major streets.
Most of the major roads are equipped with bicycle lanes, especially around Mile Square Park, which offers wide bike paths along the major streets that mark its boundary. Dedicated bike paths along the Santa Ana River run from the city of Corona to the Pacific Ocean.
The 2010 United States Census reported that Fountain Valley had a population of 55,313. The population density was 6,124.7 people per square mile (2,364.8/km²). The racial makeup of Fountain Valley was 31,225 (56.5%) White (49.2% Non-Hispanic White), 510 (0.9%) African American, 229 (0.4%) Native American, 18,418 (33.3%) Asian, 171 (0.3%) Pacific Islander, 2,445 (4.4%) from other races, and 2,315 (4.2%) from two or more races. Hispanic or Latino of any race were 7,250 persons (13.1%).
The Census reported that 54,876 people (99.2% of the population) lived in households, 257 (0.5%) lived in non-institutionalized group quarters, and 180 (0.3%) were institutionalized.
There were 18,648 households, out of which 6,341 (34.0%) had children under the age of 18 living in them, 11,142 (59.7%) were opposite-sex married couples living together, 2,102 (11.3%) had a female householder with no husband present, 970 (5.2%) had a male householder with no wife present. There were 646 (3.5%) unmarried opposite-sex partnerships, and 108 (0.6%) same-sex married couples or partnerships. 3,451 households (18.5%) were made up of individuals and 1,772 (9.5%) had someone living alone who was 65 years of age or older. The average household size was 2.94. There were 14,214 families (76.2% of all households); the average family size was 3.34.
The population was spread out with 11,643 people (21.0%) under the age of 18, 4,624 people (8.4%) aged 18 to 24, 13,310 people (24.1%) aged 25 to 44, 16,020 people (29.0%) aged 45 to 64, and 9,716 people (17.6%) who were 65 years of age or older. The median age was 42.6 years. For every 100 females there were 94.9 males. For every 100 females age 18 and over, there were 92.2 males.
There were 19,164 housing units at an average density of 2,122.0 per square mile (819.3/km²), of which 13,458 (72.2%) were owner-occupied, and 5,190 (27.8%) were occupied by renters. The homeowner vacancy rate was 0.8%; the rental vacancy rate was 3.8%. 40,718 people (73.6% of the population) lived in owner-occupied housing units and 14,158 people (25.6%) lived in rental housing units.
According to the 2010 United States Census, Fountain Valley had a median household income of $81,212, with 6.7% of the population living below the federal poverty line.
According to the census of 2000, there were 54,978 people, 18,162 households, and 14,220 families residing in the city. The population density was 6,167.8 inhabitants per square mile (2,382.4/km²). There were 18,473 housing units at an average density of 2,072.4 per square mile (800.5/km²). The racial makeup of the city was 64.02% White, 1.11% Black or African American, 0.46% American Indian or Alaskan Native, 10.68% of the population were Hispanic or Latino of any race. 25.76% Asian, 0.40% Native Hawaiian or other Pacific Islander, 3.95% from other races, and 4.3% from two or more races.
There were 18,162 households out of which 34.3% had children under the age of 18 living with them, 63.4% were married couples living together, 10.5% had a female householder with no husband present, and 21.7% were non-families. 16.0% of all households were made up of individuals and 5.5% had someone living alone who was 65 years of age or older. The average household size was 3.00 and the average family size was 3.35.
In the city the population was spread out with 23.5% under the age of 18, 7.9% from 18 to 24, 30.1% from 25 to 44, 27.2% from 45 to 64, and 11.3% who were 65 years of age or older. The median age was 38 years. For every 100 females there were 95.6 males. For every 100 females age 18 and over, there were 93.0 males.
The median income for a household in the city was $78,729, and the median income for a family was $90,335. Males had a median income of $60,399 versus $43,089 for females. The per capita income for the city was $48,521. About 1.6% of families and 2.3% of the population were below the poverty line, including 3.2% of those under age 18 and 3.0% of those age 65 or over.
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