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.
Garden Grove is a city in northern Orange County in the U.S. state of California, 34 miles (55 km) south of Los Angeles. The population was 170,883 at the 2010 United States Census. State Route 22, also known as the Garden Grove Freeway, passes through the city in an east-west direction. For information on West Garden Grove, see West Garden Grove.
Garden Grove was founded by Alonzo Cook in 1874. A school district and Methodist church were organized that year. It remained a small rural crossroads until the arrival of the railroad in 1905. The rail connection helped the town prosper with crops of orange, walnuts, chili peppers and later strawberries.
In 1933, much of the town's central business district was destroyed by the Long Beach earthquake, and one person was killed at the high school. The post-World War II boom led to rapid development, and Garden Grove was incorporated as a city in 1956 with about 44,000 residents.
By 1960, the population had grown to 85,000; by 1970 it was 120,000. After the Fall of Saigon in 1975, there was a large influx of Vietnamese refugees settling in Garden Grove, especially in the late 1970s and throughout the 80s, forming a large percentage of Asians in the city.
An annual event held over Memorial Day weekend, the Garden Grove Strawberry Festival is one of the largest community festivals in the western United States, attracting an estimated 250,000 visitors. It began in 1958 and celebrates the city's agricultural past, which includes cultivating crops such as chili peppers, oranges, walnuts and strawberries. Part of the festivities include the cutting of the world's largest strawberry shortcake, carnival rides and vendors and a celebrity-filled parade. Numerous Garden Grove organizations, including the Miss Garden Grove Scholarship Program, are part of the Memorial Day weekend festivities every year. In commemoration of Garden Grove's 50th anniversary, the city painted some of its fire hydrants with a design that featured a strawberry, recognizing the festival as a big part of Garden Grove's history.l
The 2010 United States Census reported that Garden Grove had a population of 170,883. The population density was 9,515.3 people per square mile (3,673.9/km²). The racial makeup of Garden Grove was 68,149 (39.9%) White, 2,155 (1.3%) Black, 983 (0.6%) Native American, 63,451 (37.1%) Asian, 1,110 (0.6%) Pacific Islander, 28,916 (16.9%) from other races, and 6,119 (3.6%) from two or more races. Hispanic or Latino of any race were 63,079 persons (36.9%). Non-Hispanic Whites were 22.6% of the population, down from 90.6% in 1970. Vietnamese Americans numbered 47,331 of the population. At 27.7% this was the highest concentration of any city in the U.S. except for neighboring Westminster.
The Census reported that 168,942 people (98.9% of the population) lived in households, 1,234 (0.7%) lived in non-institutionalized group quarters, and 707 (0.4%) were institutionalized.
There were 46,037 households, out of which 21,361 (46.4%) had children under the age of 18 living in them, 26,659 (57.9%) were opposite-sex married couples living together, 6,866 (14.9%) had a female householder with no husband present, 3,588 (7.8%) had a male householder with no wife present. There were 2,025 (4.4%) unmarried opposite-sex partnerships, and 269 (0.6%) same-sex married couples or partnerships. 6,491 households (14.1%) were made up of individuals and 2,842 (6.2%) had someone living alone who was 65 years of age or older. The average household size was 3.67. There were 37,113 families (80.6% of all households); the average family size was 3.94.
The population was spread out with 43,763 people (25.6%) under the age of 18, 17,383 people (10.2%) aged 18 to 24, 49,105 people (28.7%) aged 25 to 44, 42,106 people (24.6%) aged 45 to 64, and 18,526 people (10.8%) who were 65 years of age or older. The median age was 35.6 years. For every 100 females there were 99.6 males. For every 100 females age 18 and over, there were 7.7 males.
There were 47,755 housing units at an average density of 2,659.1 per square mile (1,026.7/km²), of which 26,240 (57.0%) were owner-occupied, and 19,797 (43.0%) were occupied by renters. The homeowner vacancy rate was 1.2%; the rental vacancy rate was 4.6%. 96,308 people (56.4% of the population) lived in owner-occupied housing units and 72,634 people (42.5%) lived in rental housing units.
According to the 2010 United States Census, Garden Grove had a median household income of $59,988, with 15.5% of the population living below the federal poverty line.
Garden Grove uses a council-manager form of government. The city council consists of mayor Bao Nguyen, mayor pro tem Steve Jones, Phat Bui, Kris Beard, and Christopher Phan. According to the city's most recent Comprehensive Annual Financial Report, the city's various funds had $206.0 million in Revenues, $193.0 million in expenditures, $1,098.9 million in total a ssets, $251.5 million in total liabilities, and $196.3 million in cash and investments. The structure of the management and coordination of city services is:.
The following list is current as of February 2016.
Of the 63,190 registered voters in Garden Grove; 35.1% are Republicans and 36.8% are Democrats. The remaining 24.2% either declined to state political affiliation or are registered with one of the many smaller political parties.
Fire protection in Garden Grove is provided by the Garden Grove Fire Department with ambulance transport by Care Ambulance Service. The Garden Grove Police Department provides law enforcement with mutual aid assistance offered at times by the Anaheim Police Department's helicopter, and the Orange County Sheriff's Department Air Unit.
State and federal representation
In the California State Assembly, Garden Grove is split between the the 65th Assembly District, represented by Republican Young Kim, the 69th Assembly District, represented by Democrat Tom Daly, and the 72nd Assembly District, represented by Republican Travis Allen.
In the United States House of Representatives, Garden Grove is split between California's 46th, 47th, and 48th congressional districts, which are represented by Loretta Sanchez (DSanta Ana), Alan Lowenthal (DLong Beach), and Dana Rohrabacher (RCosta Mesa) respectively.
According to the City's 2015 Comprehensive Annual Financial Report, the top employers in the city are:
The Garden Grove Unified School District serves most of the city.
Arts and culture
Garden Grove is home to two stage theaters, the Gem Theater and the Festival Amphitheater. The Festival Amphitheater hosts Shakespeare Orange County, which presents an annual Shakespeare Festival each summer. Both venues are owned by the City of Garden Grove, but operated by outside entities. The Gem Theater is currently operated by Damien Lorton and Nicole Cassesso of 'One More Productions'. The Festival Amphitheater is managed by Thomas Bradac, the producing artistic director of Shakespeare Orange County.
The Garden Grove Playhouse used to be an active theatre, now closed down. It was operated by a non-profit group of the same name.
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