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Commercial Mortgages

Negotiating commercial mortgages requires a skill set that differs slightly from residential real estate.

Commercial mortgage brokers can help individuals find a business mortgage that works for them. [©Shutterstock, 2010]
©Shutterstock, 2010
Commercial mortgage brokers can help individuals find a business mortgage that works for them.

Commercial mortgages can be used to help finance a range of business ventures, including shopping centers, industrial and office buildings, hotels and resorts and golf courses. Banks and other financial institutions offer a variety of loan programs and repayment options, so businesses can choose the commercial mortgage that best fits their needs. According to MortgageLoan.com, whether the commercial mortgage interest rate is fixed or variable can greatly affect the total cost of the borrower's loan.

There are several benefits to obtaining commercial mortgages over renting business space. The most obvious advantage is ownership. Through ownership, individuals can build equity with their monthly payments. Additionally, because commercial mortgage interest is tax-deductible, individuals can lower their company's gross taxable income by owning rather than renting their business space.

Types of Commercial Mortgages

Banks and financial institutions offer a variety of commercial mortgage loan types -- some are similar to those offered for residential properties, while others are exclusive to business-use properties. According to MoneyMatters101.com, fixed-rate and variable commercial mortgages are the most commonly offered loan types. Fixed-rate commercial mortgages are those that have one steady interest rate for the life of the loan. Variable rate commercial mortgages are those with interest rates that start off lower than fixed-rate loans but fluctuate based on market conditions. Variable commercial mortgages carry more risk than fixed-rate commercial mortgages, because they do not allow borrowers to accurately budget for monthly mortgage payments. At the end of the low-rate period, the interest rate may be significantly higher.

Interest-only and balloon payments are other types of commercial mortgages. Interest-only commercial mortgages allow borrowers to make payments toward only the loan interest for a specific timeframe, typically the first three to five years of the loan. This allows borrowers to enjoy a low initial payment and focus on increasing their business's cash flow. However, once the interest-only period ends, monthly payments will be significantly higher, because borrowers will not have paid any money toward the actual loan principal.

A balloon payment mortgage is another common type of commercial mortgage. These types of commercial mortgages are shorter-term loans that require minimal monthly interest and principal payments. The balloon payment, or final loan installment, will include the remaining principal and interest. According to BuyerZone, balloon payment commercial mortgages are risky for businesses, because the final installment can equal thousands of dollars, which businesses may not be able to cover if they do not reach their anticipated level of business growth. Other less common commercial mortgages include endowment mortgages, which are interest-only loans that can be funded by life insurance policies, retirement plans and savings accounts.

Choosing a Commercial Mortgage Lender

Banks, commercial mortgage brokers and third-party lenders are the primary sources for commercial mortgages. Banks are the most common option. They generally offer the lowest interest rates and require the most documentation. Third-party lenders charge interest rates that are much higher than banks but require less paperwork to complete the loan process. Commercial mortgage brokers assist individuals with finding competitively-priced commercial mortgages and do not directly provide financing. Due to preexisting relationships with lenders, brokers often have knowledge of loan programs that applicants would not have access to if they were not working with a commercial broker. Brokers are commission-based service providers and receive a percentage of the total amount borrowed as their fee.

Individuals who are shopping for commercial mortgages should seek out specialists who have experience in closing loan transactions on the specific types of buildings they are looking to finance. For example, if individuals are looking for commercial mortgages for an office building, they should look for specialists with experience working with office building sales. It is also suggested that individuals work with lenders who are willing to negotiate fees and other expenses they may incur during the loan process.

Getting Approved for a Commercial Mortgage

Once individuals have established whether they can afford a commercial mortgage, determined the amount of money needed for the loan and evaluated the risks associated with obtaining commercial mortgages, they are ready to apply for a commercial mortgage. Depending on the appraisal process and the loan negotiations, the commercial mortgage process can take anywhere from a few weeks to several months.

Getting approved for a commercial mortgage is more difficult than obtaining a home mortgage loan and requires a significant investment, a solid business history and a considerable amount of documentation. Before applying for a commercial mortgage, individuals must first find the property that they plan to purchase. A property appraisal may also be required to verify that there are not environmental issues with the selected real estate. Applicants will also be asked to provide proof that they are financially stable enough to handle the monthly property mortgage payments. Individuals should consider hiring a lawyer to guide them through the commercial mortgage process and negotiate on their behalf.

After applicants have submitted all of the required documentation, lenders will evaluate the application based on financial statements, business and personal background checks and environmental inspections of the desired property. Once all checks are completed, the lender will either approve or reject the commercial mortgage application. If the lender approves the applicant, then the mortgage documents will be processed. If the lender rejects the applicant, then the applicant will be provided with a list of reasons for the rejection and given an opportunity to address those issues before reapplying.

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