July 19th, 2016
Commercial Mortgage

What Makes a Commercial Mortgage Good or Bad?

paul2We speak to agents all the time who want to get involved in commercial mortgages but feel overwhelmed by the complexity of the deals and are unsure how to source good deals to place with the right investors. Unlike residential mortgages, commercial mortgages have different criteria. Where residential mortgages are heavily dependent on the equity and borrower characteristics, different attributes determine whether or not a commercial mortgage is a good deal.

So what makes a commercial mortgage good or bad?

A good commercial should bear the following characteristics:

  • Strong marketable properties – Meaning the financing is on a type of commercial property that sells quickly.
  • Income producing – This is not as simple as meaning the property has a tenant. Who is the tenant? Have they been there long? Are they a large company? The larger and more established the business, the better. Commercial properties are often valued based on the income they produce so arranging financing on an income producing property is best for the investor.
  • Multi-use buildings – Multi-use buildings are an example of a type of property that likely has good marketable properties because they are more flexible and provide more opportunity should the building have to be sold.
  • Strong Covenant – The stronger the borrower, the better, for obvious reasons.

Of course, if there can be good commercial mortgages, there can also be ones that should be avoided.

Some signs that a commercial mortgage may not be good are:

  • The property is in a rural area or has characteristics that make it difficult to sell – these are the first major signs that a commercial deal may not be a good one. Purpose-built properties are a great example: A church with a steeple or a school, for example, may be more difficult to sell than a small commercial plaza with a warehouse.
  • A property that has no income is an issue for obvious reasons, meaning that the borrower must be able to show that they have sufficient/significant income from another source.
  • A weak borrower is another factor that may make a commercial deal a challenge.

Unfortunately, it is often weaker borrowers that have problems arranging financing and likely will end up in your office. If you are representing a borrower who has a weak profile it will be essential to ensure that there is a good, strong property with good equity, income and characteristics.

Paul Mangion has years of experience dealing with commercial mortgages and can offer the assistance required to distinguish between good commercial mortgages and those which require more caution.

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