The word “mortgage” is pretty familiar to any home owner. Then what are commercial mortgages? This is a loan which you can get having a piece of land or real estate as a collateral. This is the method to get the loan repaid. It is like a usual mortgage on a residence but the difference lies in what is being offered as collateral. There are two major differences between a residential mortgage and a commercial one.The collateral in the case of the latter is a commercial business property and not any residence property.
Secondly the applicants of a commercial mortgage are not individuals but companies, partnerships, or even corporations. This is where the intricate nature of this kind of mortgage lies. It is far more difficult to judge how suitable a company is for a mortgage than judging an individual. Assessing the credit history of an entire corporation is far more complex than that of an individual.Kinds of a Commercial MortgageThere are two kinds of commercial mortgages that can be offered to the applicants:One is nonrecourse mortgage. With this kind of a loan, if your company fails to pay back the mortgage, the real estate as collateral will be seized. But if there is any amount still left to be paid over, the creditor cannot pursue the borrower for the remaining amount.
Usually the mortgage is such that even if the foreclosed property fails to yield the full amount of the loan then the borrower will still have to make the remaining payment.Why are commercial mortgages used?This form of commercial loans is used by companies to get more real estate through such methods of acquisition.To make an extension of an already existing business property.
It is also a form of investment.Eligibility Criteria The company applying for the commercial mortgage will have to satisfy the eligibility criteria to get a good loan. Firstly, there is a cash ratio which has to be fulfilled. Also, the company has to have a really good credit history. With bad credit you don’t get a good loan that is the rule. Thus the loan to value ratio has to be a really good one.The bank which is giving the loan will also see whether the business is currently stable or not. It also has to have a current profitable run. The bank might ask to see the financial reports and also the financial aims and goals that the company has in mind.Basically the bank needs to be convinced about the fact that your company will be able to pay the loan amounts. There are quite a few kinds of businesses that a bank will never lend to. This is a very tricky area and requires professional help. In case your company is planning to get a commercial mortgage, seek some specialised help.
When a commercial loan is considered to be non bankable, it is termed to be a commercial hard money loan. In these cases, the business for some reason fails to qualify for the standard banking criteria necessary for a commercial loan, but does have assets or real estate that are enough to collateralize the loan for lenders or investors. Therefore, the financing options are left to private lenders. A borrower to renovate and flip a commercial property often uses these loans.It is usual for the commercial loan to have higher risks, not only to the borrower, but for the lender as well. Therefore, these types of loans are typically more expensive than commercial loans. Interest rates for these types of loans will vary between the different lenders and the amount of risk they are considered to be taking.Finding a commercial lender is not always a simple endeavor. Commercial hard money lenders all have money readily available and disposable. However, if the borrower presents too much of a risk, these private money lenders will also decline their appeals for loans, even though the lenders exist for the purpose of helping people who have been turned down by the banks and have no other financial resources readily available to them.Commercial hard money lenders take a different approach from that of conventional banks. Loans tend to be approved (or rejected) very quickly and less paperwork is required of the borrower. The borrower’s credit history is not always taken into consideration during the loan process. If he or she can convince the lender that the proposal makes sense business-wise, then there is an increased likelihood for approval.Commercial hard money loans can be spent on business expansion and for property developments. They can be used as construction loans, real estate transactions and other ventures that require large sums of money. Although private investors make the lion’s share of hard money loans, commercial lenders and private companies also make them.When a potential borrower approaches a commercial hard money lender for a loan, he or she is given a worksheet that is known as a “Scope of Work.” The borrower fills out this sheet with every last details of why the commercial hard money loan is needed. For example, if someone would like to buy a building and convert it into a coffee shop, the Scope of Work would list each and every repair needed, the length of time expected in which the repair could be affected (including waiting periods for permits) and the cost of each repair or renovation step. If the borrower happens to omit a step in the process, it could prove difficult to get the lender to provide funding for that particular repair.While commercial hard money loans can be difficult to come by and more expensive than bank loans, there is no doubt that lenders who deal in hard money commercial loans find ways to make deals happen.
The field of corporate finance deals with the decisions of finance taken by corporations along with the analysis and the tools required for taking such decisions. The principle aim of corporate finance is enhancing the corporate value and at the same time reducing the financial risks of the company. In addition to this, corporate finance also deals in getting the maximum returns on the invested capital of the company. The major concepts of corporate finance are applied to the problems of finance encountered by all type of firms.The discipline of corporate finance can be split into the short term and the long term techniques of decisions. The investments of capital are the long term decisions relating to the projects and the methods required to finance them. On the other hand, the capital management for working is considered as a short term decision that deals with the short term current liabilities and asset balance. The main focus here rests on the management of inventories, cash and, the lending and borrowing on a short term basis.Corporate finance is also associated with the field of investment banking. Here, the role of the investment banker is the evaluation of the various projects coming to the bank and making proper investment decisions regarding them.The Capital Structure:A proper finance structure is required for achieving the set goals of corporate finance. The management has to therefore design a proper structure that has an optimal mix of the different finance options that are available.Generally, the sources of finance will comprise of a mix of equity as well as debt. If a project is financed through debt, it results in causing a liability to the concerned company. Hence in such cases, the flow of cash has various implications regardless of the success of the project. The financing done by equity carries a lower risk regarding the commitments of the flow of cash, but the result of this is the dilution of the earnings and the ownership. The cost involved in equity finance is also higher in the case of debt finance. Hence, it is understood that the finance done through equity, offsets the reduction in the risk of cash flow. The management has to hence have a mix of both the options.The Decisions of Capital Investments:The decisions of capital investments are the long term decisions of corporate finance that are related to the capital structure and the fixed assets. These decisions are based of several criteria that are inter-related. The management of corporate finance attempts to maximize the firm’s value by making investments in the projects that have a positive yield. The finance options for such projects have to be done in a proper manner.
If you are new to financing real estate development you’ll have to change your thinking. No doubt you are very familiar the 15 to 30 year mortgage finance tool.You may even have used a ‘Line of Credit’ as an alternative way of financing as you increase you cash wealth. Both of these methods are used primarily for financing real estate property acquisitions.I can hear some of you say, “But I used these for redeveloping a house or a few apartments.”Well that is not what we, in the development world, mean when we say real estate development; we call that a renovation or a refit.So financing real estate development is financing a completely new development and mortgage financing is not the correct tool for the job.So How Do They Differ?The easiest way is to give you a quick comparison between a mortgage financing and financing real estate development.With a mortgage you essentially are buying property; be it land or a residential house on land, or an apartment … and you are buying it to own for the long term; that is 15 to 30 years.When financing real estate development you are looking at financing an entire project, of which the land is one tangible part and the other part comprise building Plans.At completing of the project you plan to sell all of what you have created and repay the financial institution what you borrowed for financing real estate development.You might ask, “What if I want to keep some of what I have created and not sell everything? Great question.The answer is simple. All the money you get from the sales of your product is paid back to the financial institution and you then take out a long term mortgage for the product you want to own long term.Just to be clear on that pointAll of the products you sell will include a profit. So by careful calculation and planning you can balance the number of products you retain, so that your profit is left as equity in the investment and the amount of mortgage borrowing is minimal.Depending on your taxation rules in your country, leaving money in the investment as suggested, is a way of not ‘realizing’ your profit in a cash form and so attracting tax. But naturally you should check out your local tax laws.Now back to financing real estate development.As mentioned earlier, you are not just buying land when financing real estate development. You are asking the financial institution to approve the purchase of the land, as well as the construction of the whole project.To arrive at the position where you can make a Financing Real Estate Development Application, you will need a set of approved development plans, costings and a Real Estate Development Feasibility Study.Many people who want to get into the development business, make the mistake of finding and buying land ‘first” and borrowing mortgage financing, which is what they are used to doing.Only to find out later that they will have to discharge the mortgage and borrow the correct funds for financing real estate developments all of which costs money.This can be taught to you the right way!