Commercial Second Mortgage (second Lien Position)

By: jeff rauth

have historically been a very rare financing tool reserved for extremely strong borrowers, divided into two general segments.

1. Owner occupant property owners with outstanding business finances. 2. Large sophisticated commercial real estate developments with minimum loan amounts beginning at $5 million. Typical project size would be $15 million plus.

Both of these types of loans have been out of reach for the vast majority of commercial real estate investors and users. Owners have had no reliable or efficient way of accessing their equity without refinancing their current first position loan or taking on the 'dreaded' equity partner.

A few national lenders have recently started offering fixed rate commercial second loans; much to the industries surprise. This loan structure can dramatically change the illiquidity that so many property owners complain about.

The terms of the loan program include fixed periods ranging from 5 -10 years with amortization schedules between 25 -30 years.

Loan amounts are small ranging from $50,000 -$500,000 with max Combined Loan to Value of 70 - 75%, among other details. Rates are strong for borrower with excellent credit, yet increase steeply for borrowers with good to decent credit scores. As of this writing, the lowest rate would be 7.31% for a borrower with 720 + credit and a loan amount between $400,000 - $500,000.

It is interesting to witness what our clients use the Commercial Second Mortgage for. Among the more creative scenarios include:

Use Commercial 2nd Loan Proceeds as Down Payment on New Acquisition.

For example, borrower could pull equity out of an existing property and use that capital as the down payment/closing cost on a new commercial property purchase. Essentially maximizing the overall leverage of the property owner's portfolio and limiting out of pocket cash.

The underwriting of the second loan would be off the existing property and would not negatively affect the cash flow and or Debt Coverage Ratio of the property being purchased.

Use Commercial 2nd Mortgage as Rehab Capital.

Unfortunately commercial rehab loans are as daunting and cumbersome as ground up financing, requiring extensive underwriting and reporting. By tapping the equity in another property via a commercial fixed rate second mortgage the borrower can avoid the 'process' of a traditional commercial rehab/construction loan. The borrower in this example would simply receive a lump sum of capital and can spend this money as he sees fit. There are no draws or city permit review/approval.

At the end of the project the borrower could refinance the loan of the property being renovated and use those proceeds to pay off the commercial second mortgage with better loan program tied to the rehabbed building.

Use Commercial Second Loan as Working Capital for Day to Day Business Activities.

Many borrowers do not like the idea of a floating rate line of credit. Many business owners prefer having the security of a fixed rate loan that enables them to better predict/manage their costs of capital. Business owners have virtually no restrictions on the use of loan proceeds. Common uses include, purchasing equipment, launching advertising campaigns, investing in new technology, etc.

Whatever the use or intent of the borrower, this new commercial second mortgage provides a solid option and an additional financing tool for commercial property owners.

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