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.
Los Angeles County, officially the County of Los Angeles, with a population of more than ten million people, is the most populous county in the United States. It has 88 incorporated cities and many unincorporated areas and at 4,083 square miles (10,570 km2) it is larger than the combined areas of the U.S. states of Delaware and Rhode Island. The county contains more than one quarter of all California residents and is one of the most ethnically diverse counties in the U.S. Its county seat is the city of Los Angeles, which is the second most populous city in the nation and the most populous that lies entirely in a single county.
See also: History of Los Angeles
Los Angeles County is one of the original counties of California, created at the time of statehood in 1850. The county originally included parts of what are now Kern, San Bernardino, Riverside and Orange counties. As the population increased, sections were split off to organize San Bernardino County in 1853, Kern County in 1866, and Orange County in 1889.
According to the U.S. Census Bureau, the county has an area of 4,751 square miles (12,310 km2), of which 4,058 square miles (10,510 km2) is land and 693 square miles (1,790 km2) (15%) is water. Los Angeles County borders 70 miles (110 km) of coast on the Pacific Ocean and encompasses mountain ranges, valleys, forests, islands, lakes, rivers, and desert. The Los Angeles River, Rio Hondo, the San Gabriel River and the Santa Clara River flow in Los Angeles County, while the primary mountain ranges are the Santa Monica Mountains and the San Gabriel Mountains. The western extent of the Mojave Desert begins in the Antelope Valley, in the northeastern part of the county. Most of the population of Los Angeles County is located in the south and southwest, with major population centers in the Los Angeles Basin, San Fernando Valley and San Gabriel Valley. Other population centers are found in the Santa Clarita Valley, Pomona Valley, Crescenta Valley and Antelope Valley.
The county is divided west-to-east by the San Gabriel Mountains, which are part of the Transverse Ranges of southern California, and are contained mostly within the Angeles National Forest. Most of the county's highest peaks are in the San Gabriel Mountains, including Mount San Antonio 10,068 feet (3,069 m)) at the Los Angeles-San Bernardino county lines, Mount Baden-Powell 9,399 feet (2,865 m), Mount Burnham 8,997 feet (2,742 m) and Mount Wilson 5,710 feet (1,740 m). Several lower mountains are in the northern, western,and southwestern parts of the county, including the San Emigdio Mountains, the southernmost part of Tehachapi Mountains and the Sierra Pelona Mountains.
Lakes and reservoirs
Major divisions of the county
National protected areas
Main article: Demographics of Los Angeles County
Los Angeles County had a population of 9,818,605 in the 2010 United States Census. The racial makeup of Los Angeles County was 4,936,599 (50%) White, 1,346,865 (13.7%) Asian, 856,874 (9%) African American, 72,828 (0.7%) Native American, 26,094 (0.3%) Pacific Islander, 2,140,632 (21.8%) from other races, and 438,713 (4.5%) from two or more races.
Non-Hispanic whites numbered 2,728,321, or 28% of the population. Hispanic or Latino residents of any race numbered 4,687,889 (48%); 36% of Los Angeles County's population was of Mexican ancestry; 3.7% Salvadoran, and 2.2% Guatemalan heritage.
The county has a large population of Asians, being home to the largest concentration of immigrants who are Burmese, Cambodian, Chinese, Filipino, Indonesian, Korean, Sri Lankan, Taiwanese, and Thai in the world. The largest Asian groups of the 1,346,865 (13.7%) Asians in Los Angeles County are 4.0% Chinese, 3.3% Filipino, 2.2% Korean, 1.0% Japanese, 0.9% Vietnamese, 0.8% Indian, and 0.3% Cambodian.
Race and ancestry
The racial makeup of the county is 48.7% White, 11.0% African American, 0.8% Native American, 10.0% Asian, 0.3% Pacific Islander, 23.5% from other races, and 4.9% from two or more races. 44.6% of the population are Hispanic or Latino of any race. The largest European-American ancestry groups are German (6%), Irish (5%), English (4%) and Italian (3%). 45.9% of the population reported speaking only English at home; 37.9% spoke Spanish, 2.22% Tagalog, 2.0% Chinese, 1.9% Korean, and 1.87% Armenian.
The county has the largest Native American population of any county in the nation: according to the 2000 census, it has more than 153,550 people of indigenous descent, and most are from Latin America.
As estimated by the Public Policy Institute of California in 2008, Los Angeles County is home to more than one-third of California's illegal immigrants, who make up more than ten percent of the population.
At the census of 2000, there were 9,519,338 people, 3,133,774 households, and 2,137,233 families residing in the county. The population density was 2,344 people per square mile (905/km²). There were 3,270,909 housing units at an average density of 806 per square mile (311/km²).
There were 3,133,774 households out of which 37% had children under the age of 18 living with them, 48% were married couples living together, 15% had a female householder with no husband present, and 32% were non-families. 25% of all households were made up of individuals and 7% had someone living alone who was 65 years of age or older. The average household size was 2.98 and the average family size was 3.61.
In the county the population was spread out with 28% under the age of 18, 10% from 18 to 24, 33% from 25 to 44, 19% from 45 to 64, and 10% who were 65 years of age or older. The median age was 32 years. For every 100 females there were 97.7 males. For every 100 females age 18 and over, there were 95.0 males.
The median income for a household in the county was $42,189, and the median income for a family was $46,452. Males had a median income of $36,299 versus $30,981 for females. The per capita income for the county was $20,683. There are 14.4% of families living below the poverty line and 17.9% of the population, including 24.2% of under 18 and 10.5% of those over 64. Los Angeles County has the highest number of millionaires of any county in the nation, totaling 261,081 households as of 2007.
The homeownership rate is 47.9%, and the median value for houses is $409,300. 42.2% of housing units are in multi-unit structures. Los Angeles County has the largest number of homeless people, with "48,000 people living on the streets, including 6,000 veterans."
In 2000, there were hundreds of Christian churches, 202 Jewish synagogues, 145 Buddhist temples, 48 Muslim mosques, 44 Bahai worship centers, 37 Hindu temples, 28 Tenrikyo churches and fellowships, 16 Shinto worship centers, and 14 Sikh gurdwaras in the county. The Los Angeles Archdiocese has approximately 5 million members and is the largest in the United States.
Law, government and politics
Main article: Government of Los Angeles County
The Government of Los Angeles County is defined and authorized under the California Constitution, California law and the Charter of the County of Los Angeles. Much of the Government of California is in practice the responsibility of local governments such as the Government of Los Angeles County.
The county's voters elect a governing five-member Los Angeles County Board of Supervisors. The small size of the board means each supervisor represents over 2 million people. The board operates in a legislative, executive, and quasi-judicial capacity. As a legislative authority, it can pass ordinances for the unincorporated areas (ordinances that affect the whole county, like posting of restaurant ratings, must be ratified by the individual city). As an executive body, it can tell the county departments what to do, and how to do it. As a quasi-judicial body, the Board is the final venue of appeal in the local planning process, and holds public hearings on various agenda items.
As of 2008, the Board of Supervisors oversees a $22.5 billion annual budget and approximately 100,000 employees. The county government is managed on a day-to-day basis by a Chief Executive Officer, William T Fujioka, and is organized into many departments, each of which is enormous in comparison to equivalent county-level (and even many state-level) departments anywhere else in the United States. Some of the larger or better-known departments include:
The Los Angeles County Metropolitan Transportation Authority, despite its name, is not a County department. Technically it is a state-mandated county transportation commission that also operates bus and rail.
Main article: Politics of Los Angeles County
Los Angeles County has voted for the Democratic candidate in most of the presidential elections in the past four decades, although it did vote twice for Dwight Eisenhower (1952, 1956), Richard Nixon (1968, 1972), and Ronald Reagan (1980, 1984) the latter two of whom were Californians. From 1920 to 1984 it was a bellwether county that always voted for the eventual national winner. It then has gone against the national popular vote winner in 1988 and 2004. In 2008 and 2012 approximately 69% of the electorate voted for Democrat Barack Obama.
In the United States House of Representatives, Los Angeles County is split between 18 congressional districts: In the California State Senate, Los Angeles County is split between 15 legislative districts: In the California State Assembly, Los Angeles County is split between 24 legislative districts:
On November 4, 2008, Los Angeles County was almost evenly split over Proposition 8 which amended the California Constitution to ban same-sex marriages. The county voted for the amendment 50.1% with a margin of 2,385 votes.
Further information: Superior Court of Los Angeles County
The Los Angeles Superior Court, has jurisdiction over all cases arising under state law, while the U.S. District Court for the Central District of California hears all federal cases. Both are headquartered in a large cluster of government buildings in the city's Civic Center.
Historically, the courthouses were county-owned buildings that were maintained at county expense, which created significant friction since the trial court judges, as officials of the state government, had to lobby the county Board of Supervisors for facility renovations and upgrades. In turn, the state judiciary successfully persuaded the state Legislature to authorize the transfer of all courthouses to the state government in 2008 and 2009 (so that judges would have direct control over their own courthouses). Courthouse security is still provided by the county government under a contract with the state.
Unlike the largest city in the United States, New York City, all of the city of Los Angeles and most of its important suburbs are located within a single county. As a result, both the county superior court and the federal district court are respectively the busiest courts of their type in the nation.
Many celebrities like O. J. Simpson have been seen in Los Angeles courts. In 2003, the television show Extra (based in nearby Glendale) found itself running so many reports on the legal problems of local celebrities that it spun them off into a separate show, Celebrity Justice.
State cases are appealed to the Court of Appeal for the Second Appellate District, which is also headquartered in the Civic Center, and then to the California Supreme Court, which is headquartered in San Francisco but also hears argument in Los Angeles (again, in the Civic Center). Federal cases are appealed to the Court of Appeals for the Ninth Circuit, which hears them at its branch building in Pasadena. The court of last resort for federal cases is the U.S. Supreme Court in Washington, D.C.
The following table includes the number of incidents reported and the rate per 1,000 persons for each type of offense.
Cities by population and crime rates
Crime in 2008 (reported by the sheriff's office or police)
Crime in 2013
See also: Los Angeles Chamber of Commerce
Los Angeles County is commonly associated with the entertainment industry; all six major film studios—Paramount Pictures, 21st Century Fox, Sony, Warner Bros., Universal Pictures, and Walt Disney Studios—are located within the county. Beyond motion picture and television program production, other major industries of Los Angeles County are international trade supported by the Port of Los Angeles and the Port of Long Beach, music recording and production, aerospace, and professional services such as law and medicine.
The following major companies have headquarters in Los Angeles County:
The Los Angeles County Office of Education provides a supporting role for school districts in the area. The county office also operates two magnet schools, the International Polytechnic High School and Los Angeles County High School for the Arts. There are a number of private schools in the county, most notably those operated by the Los Angeles Archdiocese.
Sites of interest
The county's most visited park is Griffith Park, owned by the city of Los Angeles. The county is also known for the annual Rose Parade in Pasadena, the annual Los Angeles County Fair in Pomona, the Los Angeles County Museum of Art, the Los Angeles Zoo, the Natural History Museum of Los Angeles County, the La Brea Tar Pits, the Arboretum of Los Angeles, and two horse racetracks and two car racetracks (Pomona Raceway and Irwindale Speedway), also the RMS Queen Mary located in Long Beach, and the Long Beach Grand Prix, and miles of beaches—from Zuma to Cabrillo.
Venice Beach is a popular attraction where its Muscle Beach used to find throngs of tourists admiring "hardbodies". Today, it is more arts-centered. Santa Monica's pier is a well known tourist spot, famous for its ferris wheel and bumper car rides, which were featured in the introductory segment of the television sitcom Three's Company. Further north in Pacific Palisades one finds the beaches used in the television series Baywatch. The fabled Malibu, home of many a film or television star, lies west of it.
In the mountain, canyon, and desert areas one may find Vasquez Rocks Natural Area Park, where many old westerns were filmed. Mount Wilson Observatory in the San Gabriel Mountains is open for the public to view astronomical stars from its telescope, now computer-assisted. Many county residents find relaxation in water skiing and swimming at Castaic Lake Recreation Area – the county's largest park by area – as well as enjoying natural surroundings and starry nights at Saddleback Butte State Park in the eastern Antelope Valley – California State Parks' largest in area within the county. The California Poppy Reserve is located in the western Antelope Valley and shows off the State's flower in great quantity on its rolling hills every spring.
Main article: Transportation of Los Angeles
Los Angeles International Airport (LAX), located in the Westchester district, is the primary commercial airport for commercial airlines in the county and the Greater Los Angeles Area. LAX is operated by Los Angeles World Airports, an agency of the City of Los Angeles. Other important commercial airports in Los Angeles County include:
The following general aviation airports also are located in Los Angeles County:
Los Angeles is a major freight railroad transportation center, largely due to the large volumes of freight moving in and out of the county's port facilities. The ports are connected to the downtown rail yards and to the main lines of Union Pacific and Burlington Northern Santa Fe headed east via a grade-separated, freight rail corridor known as the Alameda Corridor.
Amtrak has the following intercity Amtrak service at Union Station in the city of Los Angeles.
Union Station is also the primary hub for Metrolink commuter rail, which serves much of the Greater Los Angeles Area.
Light rail, subway (heavy rail), and long-distance bus service are all provided by the Los Angeles County Metropolitan Transportation Authority (Metro).
The county's two main seaports are the Port of Los Angeles and the Port of Long Beach. Together they handle over a quarter of all container traffic entering the United States, making the complex the largest and most important port in the country, and the third-largest port in the world by shipping volume.
The Port of Los Angeles is the largest cruise ship center on the West Coast, handling more than 1 million passengers annually.
The Port of Long Beach is home to the Sea Launch program, which uses a floating launch platform to insert payloads into orbits that would be difficult to attain from existing land-based launch sites.
Main article: List of cities in Los Angeles County, California
There are 88 incorporated cities in Los Angeles County. According to the 2010 U.S. Census, the most populous are:
Census designated places
The population ranking of the following table is based on the 2010 census of Los Angeles County.
† county seat
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