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.
Lake Forest incorporated as a city on December 20, 1991. Prior to incorporation, the community had been known as El Toro. Following a vote in 2000, Lake Forest expanded its city limits to include the master-planned developments of Foothill Ranch and Portola Hills. This expansion brought new homes and commercial centers to the Northeastern boundary of the city. Lake Forest (along with its neighboring cities Mission Viejo and Irvine) is ranked as one of the safest cities in the country.
Lake Forest has two lakes from which the city gets its name. The lakes are man-made, and condominiums and custom homes ranging from large to small line their shores. Neighborhood associations manage the lakes. Lake 1, known as the Lake Forest Beach and Tennis Club, and Lake 2, the Sun and Sail Club. Each facility features tennis courts, gyms, basketball courts, barbecue pits, volleyball courts, multiple swimming pools, saunas, hot tubs and club houses for social events.
The "forest" for which the city is also named lies in the area between Ridge Route, Jeronimo, Lake Forest and Serrano roads, and consists mostly of Eucalyptus trees. It is also man-made, and was created in the first decade of the 1900s when a local landowner, Dwight Whiting, planted 400 acres (1.6 km2) of Eucalyptus groves in the vicinity of Serrano Creek as part of a lumber operation intended to draw development to the area. In the late 1960s, the Occidental Petroleum company developed a residential community in and around the Eucalyptus groves, which had long since expanded and grown much more dense.
From 1863, the community had been known as El Toro. In 1874 José Serrano and his family occupied eleven thousand hectares of ranch that had been granted to them by the Government of Mexico, and that eventually reached the hands of Dwight Whiting. Whiting was instrumental in bringing the Santa Fe rail line through the region. The Rancho Niguel was granted to Juan B. Alvarado, Juan Avila and his sister Conception, the widow of one Pedro Sánchez. From them it passed to other owners and was divided into plots, including Yorba. In 1874 most of it was owned by Cyrus B. Rawson. Jonathan E. Bacon also owned 1600 acres. In addition to the Serranos, established in Aliso Canyon, there was a group of pioneers who lived in the foothills and several miles above El Toro, many of whom were among the first settlers of this neighborhood.
El Toro Road at the I-5 Freeway was the epicenter of the Saddleback Valley from the late 19th century to the end of the 20th century. However, the area gradually deteriorated, and most of the shops closed or moved to other cities. After years of planning, the city has worked with the property owners of some ageing strip malls and developed the "Arbor at Lake Forest" commercial district. The new center can now compete with large shopping centers in cities that surround Lake Forest.
Notable businesses and organizations
The city is home to the headquarters of eyewear manufacturer Oakley, Inc.; metals company Kaiser Aluminum, in-flight entertainment provider Panasonic Avionics; Karem Aircraft an aircraft company developing UAV's with major aircraft companies; telecommunications software developer Greenlight Wireless Corp.; barbecue retailer Barbeques Galore; restaurant chains Johnny Rockets and Del Taco; medical equipment maker Apria Healthcare; and skateboarding companies Sole Technology, Inc., Etnies, and Tilly's; among others. It is also the home of the corporate headquarters for Eagle Community Credit Union, a credit union focused on serving postal and federal employees who live or work in Orange County.
According to the City's 2012 Comprehensive Annual Financial Report, the top employers in the city are:
Parks and education
Lake Forest Sports Park and Recreation Center opened on November 1, 2014, across the street from Saddleback Church. The 86.2-acre Sports Park, built with fees collected from developers for a "study" that led to the rezoning of surrounding areas, is one of the largest sports parks in Orange County. The Recreation Center houses classrooms/activities rooms and a gymnasium, hosting many education and recreation programs that have previously been hosted at the rented City Hall facility.
Lake Forest is also home to two county parks. Whiting Ranch in the eastern part of the city was the site of an infamous mountain lion mauling in 2004 that captured the attention of the West Coast news media.
Heritage Hill historical park is home to some of the oldest buildings in the county, including the Serrano Adobe, the old El Toro School House, and St. Georges Episcopal Church.
Lake Forest has one high school, El Toro High School. The high school was opened in 1973. It has established itself as one of the top[specify] schools in Southern California, along with the other three comprehensive high schools in the Saddleback Valley Unified School District. The mascot is a bull and its teams are known as the Chargers. School colors are blue and gold.
Lake Forest is served by two branches of the Orange County Public Library system known as OC Public Libraries: the El Toro branch and the Foothill Ranch branch.
According to the United States Census Bureau, the city has a total area of 17.9 square miles (46 km2). 17.8 square miles (46 km2) of it is land and 0.1 square miles (0.26 km2) of it (0.48%) is water.
El Toro/Lake Forest/Portola is located in the heart of the Saddleback Valley. It is also in the northern section of South Orange County.
It has two man-made lakes identified by the clubhouses on the lakes — the Beach and Tennis Club (Hidden Lakes, formerly Lake I) and the Sun and Sail Club (Lake II).
The 2010 United States Census reported that Lake Forest had a population of 77,264. The population density was 4,315.9 people per square mile (1,666.4/km²). The racial makeup of Lake Forest was 54,341 (70.3%) White (57.2% Non-Hispanic White), 1,295 (1.7%) African American, 384 (0.5%) Native American, 10,115 (13.1%) Asian, 191 (0.2%) Pacific Islander, 7,267 (9.4%) from other races, and 3,671 (4.8%) from two or more races. Hispanic or Latino of any race were 19,024 persons (24.6%).
The Census reported that 76,749 people (99.3% of the population) lived in households, 299 (0.4%) lived in non-institutionalized group quarters, and 216 (0.3%) were institutionalized.
There were 26,224 households, out of which 10,407 (39.7%) had children under the age of 18 living in them, 15,603 (59.5%) were married couples, 2,710 (10.3%) had a female householder with no husband present, 1,299 (5.0%) had a male householder with no wife present. There were 1,217 (4.6%) unmarried partnerships, and 201 (0.8%)same-sex couples. 4,883 households (18.6%) were made up of individuals and 1,432 (5.5%) had someone living alone who was 65 years of age or older. The average household size was 2.93. There were 19,612 families (74.8% of all households); the average family size was 3.30.
The population was spread out with 19,115 people (24.7%) under the age of 18, 6,775 people (8.8%) aged 18 to 24, 22,099 people (28.6%) aged 25 to 44, 22,184 people (28.7%) aged 45 to 64, and 7,091 people (9.2%) who were 65 years of age or older. The median age was 37.2 years. For every 100 females there were 98.7 males. For every 100 females age 18 and over, there were 96.5 males.
There were 27,088 housing units at an average density of 1,513.1 per square mile (584.2/km²), of which 18,579 (70.8%) were owner-occupied, and 7,645 (29.2%) were occupied by renters. The homeowner vacancy rate was 1.3%; the rental vacancy rate was 4.3%. 54,082 people (70.0% of the population) lived in owner-occupied housing units and 22,667 people (29.3%) lived in rental housing units.
As of the census of 2000, there were 58,707 people, 20,008 households, and 14,745 families residing in the city. The population density was 4,698.8 inhabitants per square mile (1,814.8/km²). There were 20,486 housing units at an average density of 1,639.7 per square mile (633.3/km²). The racial makeup of the city was 76.02% White, 1.83% African American, 0.50% Native American, 9.70% Asian, 0.20% Pacific Islander, 7.51% from other races, and 4.24% from two or more races. Hispanic or Latino of any race were 18.59% of the population.
There were 20,008 households out of which 39.2% had children under the age of 18 living with them, 59.1% were married couples living together, 10.3% had a female householder with no husband present, and 26.3% were non-families. 19.4% of all households were made up of individuals and 5.1% had someone living alone who was 65 years of age or older. The average household size was 2.89 and the average family size was 3.31.
In the city the population was spread out with 27.0% under the age of 18, 8.0% from 18 to 24, 33.3% from 25 to 44, 23.2% from 45 to 64, and 8.6% who were 65 years of age or older. The median age was 35 years. For every 100 females there were 96.7 males. For every 100 females age 18 and over, there were 93.6 males.
According to a 2007 estimate, the median income for a household in the city was $86,285, and the median income for a family was $96,133. Males had a median income of $52,019 versus $37,100 for females. The per capita income for the city was $28,583. About 3.2% of families and 5.3% of the population were below the poverty line, including 5.0% of those under age 18 and 4.4% of those age 65 or over.
Government and politics
Marine Corps Air Station El Toro was located one mile (1.6 km) from the city of Lake Forest in the city of Irvine. At one time, El Toro was considered a military town, but the city blossomed independently in the 1980s and 1990s before the base closed in 1999.[clarification needed]
Of the 40,352 registered voters in Lake Forest; 25.8% are Democrats and 53.4% are Republicans. The remaining 20.8% either declined to state political affiliation or are registered with one of the many minor political parties. Andrew Hamilton serves as Lake Forest's Mayor and Scott Voigts serves as Mayor Pro Tem. The three other City Council members are Dr. Jim Gardner, Dwight Robinson, and Adam Nick.
State and federal representation
According to 2012 statistics, the estimated median value of a house or condo in Lake Forest is $457,600 compared to $349,400 for the state of California. The median gross rent is $1,611. Mean prices in 2011: All housing units: $485,982; Detached houses: $584,334; Townhouses or other attached units: $340,627; In 2-unit structures: $479,268; In 3-to-4-unit structures: $245,599; In 5-or-more-unit structures: $210,397; Mobile homes: $85,582
The city of Lake Forest puts on an annual summer concert at Pittsford park. Other public events include the Fourth of July 5K run and fireworks display over the lake at the Sun & Sail Club. On Thursdays at 3 there is a farmers market at the Regal town center every week, where locals can go and buy products from the local farmers and vendors.
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