FAQs about Commercial Real Estate Finance
+ What is a Loan-to-Value Ratio?
Loan-to-Value, or LTV, is a ratio calculated by dividing the amount of the mortgage by the value of the property. Most lenders cap the LTV at 75-80%, meaning that you will need 20-25% down for an acquisition. This will also affect your options when it comes time to refinance.
+ What is a prepayment penalty, and can I avoid paying one?
A prepayment penalty, or exit penalty, is the fee paid by a borrower for the "early retirement" of a loan (paying your loan off before maturity). Lenders like to be reasonably sure of the yield they will receive from a loan, and these penalties ensure that loans will remain outstanding for a certain period of time.
There are several types of prepayment penalties, each of which has certain considerations and consequences for the borrower. The effect of a prepayment penalty depends greatly on the borrower's short and long term plans for the property in question; it is strongly advised that you consult with an experienced mortgage banker to get an assessment of your portfolio and to discuss the potential impact that a prepayment penalty can have.
+ What is the difference between non-recourse and limited recourse or full recourse loans?
Non-recourse means that in the event that a borrower defaults on a loan, the lender has no claim on the assets of the borrower beyond the property that is mortgaged. There are generally clauses in non-recourse agreements known as "carve-outs" that hold a borrower responsible in cases of material fraud, environmental liability, destruction of a building (waste), and, in some cases, bankruptcy. Non-recourse loan options are not typically offered by banks, but are more common with life insurance company loans.
Limited-recourse is normally stated as a percentage of a loan (i.e., 50% limited-recourse), and states once a loan balance is below a certain percentage of the original amount, the loan is not subject to recourse by the lender. In calculating recourse, attorney's fees related to foreclosure and property recovery and any prepayment penalties incurred are added to the remaining loan balance.
Full-recourse loans subject the borrower to a guarantee that no matter what occurs, the borrower will be responsible for the debt obligation to the lender.
+ What happens if I want to pay off my loan before the maturity date?
Our in-house servicing team will check your loan documents for payoff requirements and prepayment language, then provide you with an explanation of said requirements and a payoff figure. We'll work together to coordinate with the lender to ensure the most beneficial course of action is taken.
+ Why should I consider the Pros and Cons when seeking CMBS financing for my commercial real estate project?
There are many compelling reasons to consider CMBS, includiing:
- High Loan-to-Value Ratios
- Long-Term Fixed Pricing
- 30 Year Amortizations With these loans, borrowers can lock in long term rates and maximize cash flow. Additionally, CMBS loans are non-recourse, an attractive option for those looking to limit liability or for borrowers with complex ownerships structures.
Servicing is frequently the biggest concern for borrowers when CMBS is mentioned as an option: borrowers need approval from primary servicers for issues as simple as a lease reivew, and what should be a short, striaght-forward process has been known to take up to a month! The borrower is forced to go through indirect channels and, ultimately, call a 1-800 number to speak to a representative who is 1) unfamiliar with the property and borrower and, therefore, 2) not incentivized to give good customer service in a timely manner; in this scenario, the primary servicer sees the borrower as a nothing more than a number.
Venture Mortgage and Strategic Alliance Mortgage (SAM) know we have to act on behalf of our clients to address these issues head-on. Through our affiliation with SAM, we are able to act as the primary servicer on all CMBS loans that we originate. Because we have a personal connection to all loans that we originate and service, we respond quickly, act with our client's time and best interests in mind, and treat borrowers as respected clients rather than numbers.
Our servicing team is second to none: in addition to our dedication to superior customer service, we know that our clients want to smoothly and seamlessly manage their properties and we seek to be as unobstrusive as possible in the process and avoid disruptions caused by poor servicing. We are always available and our entire team, including our local, in-house servicing, is always just a phone call away.
+ How does Venture Mortgage's servicing compare with other lending sources?
Venture Mortgage takes pride in treating each borrower as a person, not just a number. We are always just a phone call away, and we will never give you a 1-800 number to talk to a machine: our in-house servicing team is more than happy to assist with anything that might come up throughout the life of a loan, and will address all questions and concerns according to your needs and timeline.
+ What is a cap rate, and how is it used?
A cap rate, or capitalization rate, is the rate of return used to derive the capital value of an income stream, and helps us to evaluate a real estate investment. To find the value of a commercial real estate property, we use the formula (annual income/cap rate)= value. So, how do we know which cap rate applies to a particular property we are evaluating? Cap rate= (annual net operation income/value). We can see here that the value depends on the cap rate and the cap rate depends on the cost; therefore, when evaluating a loan package, lenders and appraisers will apply a particular cap rate based on property type and condition, the perceived risk of said property type, and market conditions.
+ What third party reports are required during closing? How long does closing normally take?
Generally, lenders will require the following third-party reports: an appraisal, a property condition assessment (PCA), and environmental audit/engineering report, title search, and land survey. Every close is different, but clients generally are able to obtain and close a loan within 45-60 days.