Commercial Mortgage Loan Types

Fixed Rate

This is a long term loan for a property at stabilized occupancy. This loan has a fixed rate and a fixed payment, generally for a long period (10 years is typical). It is used by owners who desire to hold onto the property as an investment and the properties are at stabilized occupancy. Commercial real estate fixed rate loans are very difficult to pre-pay before the end of the term. The loans often (but not always) have a minimum period where they are not allowed to be pre-paid (the lock-in period). Once pre-payment is allowed, a pre-payment penalty is usually required to insure a mortgage yield over the entire term. The formula's to determine this are yield maintenance or defeasance. Fixed rate loans are usually priced at a spread over the similar term US Treasury rate.

Variable Rate

This is a long term loan for a property at stabilized occupancy. The loan has a rate that changes over the life of the loan. Rates are typicially matched over short term indexes like LIBOR and are changed when the index rate is re-set. Apartment owners typically use these loans as the constant turn-over of apartment units implies rental revenue increases during times of rising interest rates. Properties with relatively stable revenue streams are not great candidates for variable rate loans unless the leverage is low. For example, office properties generally have tenants that sign long-term leases where rents won't increase in step with rising interest rates. Variable rate loans typically do not have a pre-payment penalty.

Acquisition and Development

This is a 2-3 year loan. Proceeds can be used for land acquisition/refinance, entitlement costs, infrastructure and other related costs.

Bridge

This is a short term loan that implies something positive is going to happen to the property or its ownership. The usual event is the property will increase dramatically in value due to some leasing activity (vacant space leased, rents increasing, etc.). Generally bridge loans are underwritten to the future value allowing loan amounts up to 95% of cost (today's value). The take-out source for a bridge loan is a standard fixed rate or variable rate loan.

Construction

This is a special form of a bridge loan. It is used by a developer to build improvements on land. This loan type requires monthly oversight to insure funds are available to complete the project. Generally, a portion of the loan funds are disbursed monthly based on a property inspection where the disbursed funds cover only the cost of the work completed to that date. An A and D loan (acquisition and development) is for purchasing the property and improving the infrastructure (utilities, streets, etc.). Essentially the owners cash equity and the debt are placed in a loan fund which covers 100% of the project's costs. These funds are then disbursed like a construction loan. The owners equity is usually disbursed first and generally those funds go towards the acquisition price of the land.

Construction/Permanent

This is a combination of a construction loan and a permanent loan. The lender funds the constructino loan then converts it to a permanent loan at the end of construction.

Forward Commitment

This is a fixed rate loan that is to be funded in the future. The rate is set today with a loan commitment and funded at some time in the future (usually 12 to 18 months). There is usually a rate premium of 2 to 3 basis points per month forward (there is no premium for the first 3 months) and a deposit is required (typically 3 to 4 basis points). Substantial pre-leasing is important except for apartments. Forwards are generally associated with new construction but could also be used on existing properties. The other terms of the forward are the same as a fixed rate loan.

Mezzanine

This financing includes debt and equity. The take-out of a mezzanine financing is the sale of the property, not another loan. The lender/investor will take some share in ownership in the property or the income generated by the property. Other terms for mezzanine debt are joint venture, structured finance, participating debt, and land sale/leaseback. Like a bridge loan this financing is put in place when something positive is going to happen to the property and loan funds of up to 95% of cost may be available. Unlike a bridge loan, this financing involves ownership by the lender (property, cash flows, etc.) and can be both short term or long-term. Generally, the return on the mezzanine portion of the loan requires a return in excess of 15%.

Sale Lease-Back

This is a type of owner occupied financing where the owner sells the property and leases the property for an extended period on a NNN basis. The tenant maintains full operational control of the property. These are often structured as operation leases which means the entire lease payment is expensed and makes this a non-balance sheet item. Companies use sale lease-backs to obtain 100% financing on their corporate properties.