A commercial mortgage (or commercial property lending) is a mortgage loan secured by a commercial property, i.e. an office building, shopping centre, industrial warehouse, or apartment complex. The reasons for getting such a mortgage are normally for the purposes of acquiring, refinancing or developing the commercial property further.
Generally subject to extensive underwriting and due diligence prior to closing, commercial mortgages are much more intensively researched compared to their residential counterpart. The lender’s underwriting process normally includes a detailed financial review of the property and the property owner, as well as various other third-party reports, such as an appraisal.
Some commercial mortgages are slated as non-recourse. This means that if the borrower fails to pay the mortgage, a lender can only claim the commercial property as repayment, and cannot seize anything else from the borrower.
Typically speaking the repayment structures for commercial mortgages have two basic components:
- The amortisation of the loan, which, as with a residential loan, is the loan term of the mortgage. This is what’s used to calculate the monthly payment
- The balloon payment, after which time the borrower has to either pay the remaining balance in full, refinance, or sell the property.
Commercial mortgages do offer some important advantages over rental of property or land.
Advantages of commercial mortgages
- The borrower gets to keep ownership of the business and premises. Other investment options usually involve giving up some part of the business ownership
- Substantial capital gains can be accrued – This can be a great way of realising capital growth over a long period
- Commercial mortgages are normally not subject to rental fluctuations of residential properties allowing for a much more stable business planning and strategy driven environment.
- With lower interest rates than other unsecured loans/overdrafts, commercial mortgages offer lower monthly costs. Also, they can be fixed which can help in managing cash flow finances more accurately.
- Commercial mortgage interest payments are tax deductible. This can contribute to reduced annual tax overheads for businesses.
- Commercial mortgage payment plans normally extend for a number of years letting a business focus on profit and loss and cash flow matters. Also, providing the lender agrees, borrowers have the options of sub-letting some of the business premises, allowing for further revenue generation opportunities down the line.
Potential Pitfalls of Commercial Mortgages
Whereas the benefits of going for a commercial mortgage are definitely worthwhile, there are also potential pitfalls that need to be understood:
- The upfront deposit needed for such a mortgage can be high. This represents money which could be used in other business operations
- If the premises is owned (As is normally the case with commercial mortgages), it can be harder to move the business. With property rentals, users can often negotiate ending the rent agreement or finding another business to take up the tenancy.
- In case of variable rate mortgage, borrowers can leave themselves vulnerable to interest rate increases
- The owner is completely responsible for maintenance, insurance and security of the property at all times!
- If the property loses value, the business/owner is hit directly with a reduction in the overall capital.
Commercial mortgages are widely used throughout the world, and whereas there are benefits and drawbacks, if settled properly and with due diligence, they can be of great assistance and benefit overall!
About the Author: Dominic Lambrinos
Dominic Lambrinos is a financial expert who provides professional business finance solutions, commercial financial engineering, expert review of financial submissions, negotiation, equity raising, business sales, and trade financing. Dominic is also a sought after finance business trainer, and accomplished public speaker.
Under Dominic’s guidance , his team can also prepare professional financial submissions, review financial statements, provide financial accounting, business administration, development of information systems, marketing and sales skills, computer and Internet sales skills.