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Commercial Mortgages 101
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Houston Business Journal

“Commercial Mortgages 101” is a useful tool for the business person looking to get into the commercial real estate market while prices are cheap.
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Mr. Reinhard-
I have a quick question for you. I wanted to know if you could shed any light on the general period a commercial loan usually runs for? I am working on the financial portion of my plan, and it was recommended that I have a loan period running for 10 years, as this is a common loan period. However, when I run my calculations, the payments are astronomical and really make a difference between a positive and negative cash flow. In your book, it states the average amortization period is 360 months and I wanted to know if newer companies face shorter loan terms? Any information you can provide will be greatly appreciated. Thanks for your time.

Norman N
Houston, TX

Norman:
Don’t get the phrase “loan term“ confused with the term “amortization period”.  The “loan term” specifically refers to the length of time the lender gives you to make payments until the loan expires or in other words the life expectancy of the loan. So yes the average or typical loan term is 10 years but the amortization maybe 25 or 30 years.  So if you are trying to calculate payments using a 10 year amortization you are affectively trying to fully amortize over 10 years.  You should amortize 30 years (360 months) to calculate the monthly payment though it is has a 10 year maturity, meaning a balloon payment at the end of 10 years. Commercial real estate loans are seldom fully amortizing in contrast to a residential 30 year loan. Again your loan period can be for 5, 7 or 10 years meaning that the loan will be fully due at the end of 10 years but use an amortization of 25 to 30 years.  Older properties are usually amortized 25 years and newer ones amortized 30 years. Hopefully, that clarifies the “loan term” versus the “amortization period”.


Mr. Reinhard-
I have a potential lender for a commercial property loan and I have submitted all of the property financial statements and information in order to get a loan quote in writing. After a few days this potential lender sent me a Letter of Interest which includes a request for upfront fees in the amount of $10,000 for in-house processing, package review and tax return analysis plus an $8,000 independent third-party underwriting fee. Are these upfront fees reasonable, customary and necessary for this type of loan, if so in the event that the loan is declined are these fees typically refundable.

Andrew B
Houston, TX

Andrew:
Lenders who issue Letters of Interest or Letters of Intent (LOIs) are not contractual commitments to loan the money, therefore a borrower should proceed cautiously when remitting deposits or fees to the lender. The only fee or deposit that should be sent to a lender is for third-party reports such as for the cost of the appraisal, environmental phase I and property/engineering report. Depending on the size of the loan the average good faith deposit (GFD) ranges between $10,000 and $20,000. Again, the operative word here should be good-faith-deposit. Beware of words like fees, which may not refundable. In your case, I would be very suspicious of these fees. Legitimate lenders never ask for processing, underwriting, commitment and inspections fees upfront. The good faith deposit that a lender requires is to cover their cost of the third-party reports. If the lender doesn’t collect the money for the cost of the reports upfront they risk losing money if the borrower disappears or if loan committee decides the loan is too risky and declines the loan request.

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