Commercial Lending 101 – Some Things to Know
Most people that enter into the realm of commercial real estate immediately feel the intimidation setting in, because the risk level is ratcheted up significantly when you’re talking about dealing with commercial properties. Commercial real estate investing is definitely nothing to enter into lightly, so it is necessary to have a good fundamental understanding of some of the basics before you jump in with both feet, so to speak.
One of the first areas of knowledge to have under your belt is the different types of lenders you’ll be dealing with; they fall normally into two broad categories—the mortgage bankers and the mortgage brokers. Mortgage bankers usually have a very well-established business relationship with commercial lenders, while mortgage brokers are more loosely tied to any one specific commercial lender—they shop your loan application around to look for the most beneficial deal. Mortgage brokers are usually slightly more costly in terms of the loan fees, but flexibility and possible access to a greater pool of resources makes going with mortgage brokers attractive to many applicants.
The “usual suspects” as far as your commercial loan documents are concerned are the promissory note (your written promise to repay the loan) plus the deed of trust or mortgage (depending on which state you live in) to secure the actual property. The promissory note will have the standard fare of details that you would expect from any real estate contract, such as the lender & borrower’s names, principal sum as well as interest rate, repayment terms, the actual written promise to pay, prepayment penalty stipulations (if any), etc. When the mortgage or deed of trust are recorded, they are the financial instruments that are legally binding on the property and they secure the property. They are actually known as “voluntary liens” in real estate parlance, because it is a lien on the property that you willingly entered into, versus an involuntary lien such as a mechanic’s lien (usually a lien that contractors file against a property for unpaid work) and the like.
There’s a lot of legal “pomp-and-circumstance” in the wording of these documents that I refuse to bore you with in this article, but suffice it to say, the terms are listed in thorough detail, with all of the accompanying space for signatures and so forth. I do recommend that you familiarize yourself with how the standardized aspects of these documents look, and I encourage you to regularly perform a detailed study of these documents, because in commercial lending, when it all boils down to it, it’s all about the legalities, baby.
