Many commercial borrowers are asking why lenders are requiring loans with recourse and guarantees attached with all commercial mortgage building loans. The solution lies in the 2008 meltdown from the financial industry lending markets. Just before this meltdown, securitization of economic loans was believed to be a mechanism to mitigate lending risk and supply large pools of capital at lower rates than conventional lending.
To be able to increase returns and offer more commercial paper to satisfy the demand, Wall Street lenders commence to lower their requirements by giving non-recourse commercial loans. They naively thought that pooling these loans together would inherently reduce the investors overall risk but nonetheless provide higher returns than other investments goods 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 exactly the same parameters as the residential lending industry through hundreds or a large number of commercial loans and packing these together to be able to sell to large institutional investors. This enabled large usage of capital for commercial borrowers at lower rates than conventional financing including community banks or private investors.
Unfortunately, institutional investors became overzealous and naive to the inherent chance of packing all these loans together. The interest in higher returns and much more commercial paper caused a to underwrite riskier loans with higher loan to values and less equity than conventional or community banks requirements. This ultimately became an occasion bomb than resulted in demise and implosion of business securitization loans. Literally overnight at the end of 2008 when Lehman Brothers became insolvent, the commercial lending evaporated.
Commercial values like residential values start to fall significantly. This result in a downward spiral effect, causing many commercial borrowers to put up more equity or risk losing their properties to foreclosures.
Because institutional investors started to incur huge multi-billion dollars loss, investors began to demand more security in are higher equity, more collateral and assurances from borrower, hence, most commercial loans started to require recourse with personal guarantees as extra security to protect lender losses.
Today just about all commercial mortgages will need personal guarantee s and therefore are with recourse from the borrower. Equity requirements have also more than doubled from 10% approximately 30% in many cases. Additionally, most commercial lending are actually through local community banks or private investors. Many of these lenders desire to minimize their inherent risk by requiring higher net worth's from borrowers, more liquidity and equity positions reducing loan to values.
It's going to most likely be several more years before Wall Street type commercial lending is. For now, all commercial borrowers should expect that new lenders will require personal guarantees and loans with recourse. Hopefully, we are able to all learn from this experience. Good sense must have told us that nothing is free, riskless or rises in value perpetually.
Non-recourse loans within the retail sector are usually limited to single tenant NNN properties. The non-course financing terms (interest and duration of loan) are not only determined by the loan worthiness of the borrower. Non-recourse loans are typically limited by very experienced borrowers, with excellent credit, high net worth, and substantial equity in the subject property, providing "over collateralization " from the loan. Also, and sometimes more importantly, the the non-recourse loan are determined by the the lease as well as the credit history of the single tenant.
Interest Rate The interest rate is largely determined in correlation with the credit history of the tenant as specified by Standard & Poor's or Moody's. And so the single tenant has to be a publicly operated corporation. The better the financing rating of the tenant, the reduced the pace of curiosity is going to be on the non-recourse loan, inside the parameters of the market interest rate at this particular stage.
Term The non-recourse loan is normally directly correlated using the remaining term from the lease from the single tenant. For instance, in the event the single tenant were built with a lease for Two-and-a-half decades, there were 22 years remaining around the lease, the non-recourse loan would balloon at the end of the 22 year period. However, if your tenant elect to extend the lease for an additional period of time, the lending company will probably extend the phrase with the non-recourse loan also. 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
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