What Happened To The Non-recourse Commercial Mortgage Building Loan?

By Author: Robin Curtis
Total Articles: 39
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Many commercial borrowers are asking why lenders are requiring loans with recourse and personal guarantees attached to all commercial mortgage building loans. The answer lies in the 2008 meltdown of the financial industry lending markets. Prior to this meltdown, securitization of commercial loans was believed to be a mechanism to mitigate lending risk and provide large pools of capital at lower rates than conventional lending.

In order to increase returns and provide more commercial paper to satisfy the demand, Wall Street lenders begin to lower their requirements by providing non-recourse commercial loans. They naively believed that pooling these loans together would inherently reduce the investors overall risk but still provide higher returns than other investments products that were available.

Most of these commercial mortgages were then packaged together in large bundles and securitized into CMBS, or Commercial Mortgage backed Securities. Wall Street followed the same parameters as the residential lending industry by taking hundreds or thousands of commercial loans and packing these together in order to sell ...
... to large institutional investors. This enabled large access to capital for commercial borrowers at lower rates than conventional financing such as community banks or private investors.

Unfortunately, institutional investors became overzealous and naive to the inherent risk of packing all these loans together. The demand for higher returns and more commercial paper caused the industry to underwrite riskier loans with higher loan to values and less equity than conventional or community banks requirements. This ultimately became a time bomb than lead to the demise and implosion of commercial securitization loans. Literally overnight in late 2008 when Lehman Brothers became insolvent, the commercial lending evaporated.

Commercial values like residential values begin to fall significantly. This lead to a downward spiral effect, causing many commercial borrowers to put up more equity or risk losing their properties to foreclosures.

Because institutional investors began to incur huge multi-billion dollars loss, investors started to demand more security in the form of higher equity, more collateral and assurances from borrower, hence, most commercial loans began to require recourse with personal guarantees as extra security to protect lender losses.

Today almost all commercial mortgages will require personal guarantee s and are with recourse against the borrower. Equity requirements have also increased significantly from 10% up to 30% in many cases. Additionally, most commercial lending are now through local community banks or private investors. All of these lenders want to minimize their inherent risk by requiring higher net worth's from borrowers, more liquidity and equity positions and lower loan to values.

It will most likely be several more years before Wall Street type commercial lending will come back. Until then, all commercial borrowers can expect that new lenders will require personal guarantees and loans with recourse. Hopefully, we can all learn from this experience. Common sense should have told us that nothing is free, riskless or goes up in value perpetually.

Non-recourse loans in the retail sector are usually restricted to single tenant NNN properties. The non-course financing terms (interest rate and duration of loan) are not only determined by the credit worthiness of the borrower. Non-recourse loans are typically limited to very experienced borrowers, with excellent credit, high net worth, and substantial equity in the subject property, providing "over collateralization " of the loan. Also, and sometimes more importantly, the terms of the non-recourse loan are determined by the terms of the lease and the credit worthiness of the single tenant.

Interest Rate
The interest rate is largely determined in correlation with the credit rating of the tenant as specified by Standard & Poor's or Moody's. Therefore the single tenant must be a publicly traded corporation. The better the credit rating of the tenant, the lower the rate of interest will be on the non-recourse loan, within the parameters of the market rate of interest at that particular point in time.

Term
The non-recourse loan is usually directly correlated with the remaining term of the lease of the single tenant. For example, if the single tenant had a lease for 25 years, and there were 22 years remaining on the lease, the non-recourse loan would balloon at the end of the 22 year period. However, should the tenant elect to extend the lease for an additional period of time, the lender is likely to extend the term of the non-recourse loan as well.
Retail Single Tenant Non Recourse Client types:
* Walgreens Loan
* CVS Loan
* Wal-Mart Loan
* Target Loan
* AutoZone Loan
* Costco Loan
* FedEx Loan
* Home Depot Loan
* Kohl's Loan
* Kroger Loan
* Lowe's Loan
* McDonald's Loan
* Oreilly's Loan
* Publix Loan
* Safeway Loan
* Staples Loan

Drew Batiato is the Managing Director and Co-Founder of Venture Funding Group, LLC. He heads the credit department and leads a team of analysts in reviewing, preparing, and submitting financial and real estate project packages. Drew studied Business Law at the University of Central Florida. In 2002, he became a licensed investment banker, holding a Securities Series 7, a Series 63, and a Series 24 license. He has successfully raised over $50 million in private placements. The company focuses on providing financial and consulting services to income-producing commercial properties, as well as small businesses for commercial building loans. Get expert help in commercial building loans at http://www.BuildingRefinace.com