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Understanding Commercial Mortgages

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Understanding Commercial Mortgage Loans

 

Commercial Mortgage Qualification

 

Before we look at the criteria a lender uses to qualify a guarantor, lets make it perfectly clear what and who is a guarantor.  A guarantor for a commercial loan or apartment loan is: An individual or other that signs the loan note stating that in the event of default by the borrower, the guarantor will step up and make good on the borrower's obligation to repay the commercial loan note.

 

Crefcoa recommends for commercial real estate that you structure your request for a commercial loan, apartment loan, or conduit loan as such:

 

Borrower:  The borrower 99.9% of the time is a company or corporation formed by the individual owner(s) for the specific purpose of acquiring the subject property.  This structure is advantageous primarily to reduce personal liability and take advantage of certain tax benefits of corporate ownership.

 

Guarantor:  The guarantor for a commercial loan or apartment loan is the individual(s) purchasing the commercial real estate, or the principal owners of the borrowing entity.

 

The typical manner in which to apply for a commercial loan is as follows:

 

Betty Boop and Johnny Jones decide to purchase a 16 unit apartment building.  Betty and Johnny form a limited liability corporation (Boop Jones LLC.) to take ownership of their new apartment building.

 

Johnny and Betty structure the ownership of the corporation equally having 50% ownership interest each.

 

Betty and Johnny apply for their apartment loan with a lender.  The borrower would be Boop Jones LLC., and the guarantors would be the principal owners of Boop Jones LLC. or Betty Boop and Johnny Jones.

 

A common misconception. 

 

Before we continue, we need to clear the air on a very common misconception: To qualify for a commercial loan the corporation must have been in business for two (2) years.  WRONG.  A company must be in business for two (2) years only if the business is the source of repayment for the commercial loan.  For example: Johnny Jones owns a single stand alone building housing his company, Johnny's Gym.  If Johnny's Gym is the source of repayment for the commercial loan then the business should have a two (2) year operating history so that we can determine is Johnny's Gym is likely to have the cash flow available to service the debt.

 

So, if Boop Jones LLC., is a newly formed corporation for the sole purpose of acquiring a 16 unit apartment building, the two (2) year requirement of operating history is not necessary.  The apartment building is the source of repayment or more accurately, the rents on the building are the source of repayment for the apartment loan made to Boop Jones LLC.  And yes, most commercial lenders will request 2 years of operating statements on the apartment building to determine eligibility, not Boop Jones LLC. 

 

The guarantor and commercial loans

 

The guarantor of a commercial loan, conduit loan, or apartment loan is usually an individual(s) and must have a principal interest in the borrowing entity.  Or more easily said, the guarantor for a commercial loan is the person that owns or has an ownership interest in the borrowing entity.  In fact, most commercial lenders and commercial mortgage banking firms require any individual with more than a 10% ownership interest in the borrowing entity to be a co-guarantee for the commercial loan.

 

Commercial real estate is the primary source of collateral and repayment for commercial loans and carries more weight compared with the guarantor during the commercial loan underwriting process.  The guarantor(s) strength and/or weaknesses will however impact the ultimate approval or denial of the commercial loan or apartment loan request.

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