Commercial mortgages are generally subject to extensive underwriting and due diligence prior to closing.
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 have an interest-only period at the beginning of the loan term during which time the borrower only pays interest.
A commercial mortgage is typically taken in 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.
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.
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.
Debt yield is defined as the net operating income (NOI) of a property divided by the amount of the mortgage.
According to the Federal Reserve, banks held $1.5 trillion of commercial mortgages on their books as of June 30, 2013.
Approximately $560 billion of commercial mortgages were held by issuers of CMBS as of June 30, 2013, according to the Federal Reserve.
[2] 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.
This makes the resultant securities more attractive to investors, because they know that the commercial mortgages will remain outstanding even if interest rates decline.
Analysis of HM Revenue and Customs data for property transaction completions in the United Kingdom between 2005 and 2013 shows that, unlike residential lending, mortgage lending for non-residential property was on the decline prior to the 2008–2009 global recession.
Gross commercial and residential lending began picking up at a similar pace from 2009 onwards, exhibiting 16.2% and 18.2% non-inflation adjusted growth respectively between 2009 and 2013.
[5] Regulations introduced in 2013 by the Financial Services Authority (FSA) required banks to hold a risk-weighted amount of capital against commercial mortgages – ranging from 50% to 250% of the loan amount – in order to limit their exposure to commercial property assets.
[7] As regulated mortgage contracts are defined as relating to properties that will be used “as or in connection with a dwelling by the borrower… or a related person”, individual commercial mortgage contracts and the sale thereof are not regulated by the Financial Conduct Authority (FCA).
[8] By March 2016, however, the UK will be required to have implemented new rules to comply with the pan-European Mortgage Credit Directive, which does not draw a distinction between commercial and semi-commercial properties; it is therefore currently unclear whether all mixed-use properties will be brought under FCA regulation when the new regulations take effect, irrespective of the proportion that is used for residential purposes.