Examination Of Commercial Mortgages In The Banking Sector

By Oyetola Muyiwa Atoyebi, SAN

It is important to state that the goal of every organization, individual and business enterprise is to make a profit for its owners or for itself. A commercial or business mortgage can be defined as a loan secured by a commercial property. It is usually derived to refinance or refurbish a business property[1]. While some organizations acquire a business mortgage to own the property where the business activities are carried out, other investors acquire such a loan to purchase a property to rent out or lease to another entity. Before funding a commercial mortgage, the lenders (banks) do their due diligence through an extensive financial review of the property and its owner. In addition, many underwriting and appraisals are raised before the deal is closed.

The ebb and flow of this concept of a commercial mortgage in the banking sector is as follows;

“ABC & Associate acquired a commercial loan for N10 Million from XYZ Bank to fund acquiring a new office building at Ikoyi, Lagos, to accommodate the increasing workforce. The loan was for five years with an interest of 5%. ABC & Associates paid the interest of 5% every year for five years for 4,294.57 every month. After five years, they made a balloon payment of N734,629.91 and settled the remaining amount from the loan”.

A commercial mortgage is technically two contemporaneous documents:

A promissory note that evidences the borrowing; and
Either a mortgage or deed of trust, either of which provides the lender access to the security collateral in the event of default by the borrower[2].

It is important to also point out, what commercial mortgage-back security is;

Commercial mortgage-back securities (CMBS) are bonds issued against commercial property. They provide liquidity for both commercial lenders vis-à-vis bank and real estate investors. In case of a default, the loan in a CMBS acts as collateral to the investors[3].

EXAMINATION OF A COMMERCIAL MORTGAGE IN THE BANKING SECTOR

A commercial mortgage is a loan usually secured by a commercial property like an industrial warehouse, office building, shopping centre, or apartment complex. The receipts from the loan are usually used to acquire, replenish, or refinance a commercial property. The financing of such loans is not carried out through personal money but from business operations or rental income[4].

Commercial mortgages are another type of term lending but they are used exclusively to finance (or refinance) commercial real estate. The analysis and underwriting techniques vary depending on whether the property is owner-occupied or if it is an income-producing investment property; however, both tend to have more flexible terms (longer amortization, very competitive pricing, etc.) than other types of commercial loans.

Commercial mortgage rates are highly influenced by the risk the lender bears, the market condition, and the borrowing request. In addition, it often has a floating interest rate which means the interest is variable due to the above factors.

HOW TO GET A COMMERCIAL MORTGAGE

Securing a commercial mortgage is more challenging than securing a residential mortgage because of the sheer paperwork and scrutiny it is put through before sanctioning. A business can apply for such a mortgage directly to the bank through an adept commercial mortgage broker[5]. The following are the steps to take:

The online commercial mortgage form is filled.
Relevant and important information regarding the business is submitted.
Valuation of the property is drawn out for the property the organization wants to buy.
Wait while the lender and their team carry out their due diligence before approving.
Once approved, a formal commercial mortgage loan offer is sent across[6].

FirstBank offers different mortgage packages like:

Commercial mortgage.
Joint mortgage.

The FirstBank commercial mortgage empowers small and medium-scale enterprises to finance the acquisition of landed property for commercial purposes. While the FirstBank joint mortgage loan, enables you and your spouse or business partner to easily buy a property that either party can ordinarily not have been able to purchase as individuals[7].

ADVANTAGES OF COMMERCIAL MORTGAGE IN THE BANKING SECTOR

Owning a commercial property has its benefits which include:

Lower interest rates

Commercial property mortgages typically have lower interest rates than other unsecured borrowings. Choosing to have fixed monthly repayments means you can accurately use them in your business planning and forecasting, enabling you to structure the finance of your business with a bit more certainty[8].

Capital gains

Substantial capital gain can be made when you buy a commercial property. This can be a good way of realizing capital growth over a long period as (long-term) property prices always rise[9].

Renting potential

If you have any additional space in or on the property you own you can monetize it by renting out the surplus space to generate additional income[10].

Financial Planning

Commercial property mortgage payment plans usually extend for several years which allows a business to focus on other important business matters such as sales, monitoring overheads and training staff.

No ‘empty money’ rent payments

Your mortgage payments will probably not cost you any more, per month, than what your equivalent rent would be. But as you own the building, your equity in the property will continue to grow with each mortgage payment, providing you with a more solid financial foundation.

Capital Gains

Long-term property prices rise and buying your premises is a form of investment so long as the area you are buying in is right. Business property prices can often rise quickly in a short space of time, making your investment a shrewd one.

Ending a Mortgage

If you find yourself unable to pay your mortgage, or you need to move to bigger premises, or if you decide to close your business, you are still left with plenty of options if your mortgage is commercial. While getting out of a long-term leasing arrangement can often be difficult, a mortgage can still be covered if you decide to sell the premises or if you decide to rent it out and maintain the asset.

DISADVANTAGES OF COMMERCIAL MORTGAGES

The following are the disadvantages of commercial mortgages in the banking sector:

The property is harder to sell

Commercial property is, generally speaking, more difficult to sell than residential property, and this can mean that if you need to vacate the premises or try and sell it quickly this can become complicated[11].

Property maintenance

As the owner of a commercial property, all the security, upkeep and maintenance costs are yours to pay for, rather than as a tenant where the landlord would cover the majority of these costs[12].

Falling property prices

There are always fluctuations in property prices and sometimes these short-term downturns can affect the value of your property which can result in reduced capital, affecting your finances and future borrowing capability.

Your interest rate

If you happen to have a variable-rate mortgage then any rise in interest rates will result in your monthly repayments becoming more expensive.

Monthly payments can increase and your capital may decrease

As most commercial mortgages have a variable rate, be aware that your monthly repayments can increase as well as decrease. Property values can also go down as well as up so be prepared for this as it will decrease your capital[13].

CONCLUSION

A commercial mortgage is a loan offered to business entities, usually for replenishing, redeveloping, rebuilding their existing premises, or acquiring a new property. The business profitability, creditworthiness, actions to tackle debts, and other financial commitments play a significant role in sanctioning the loan. Future projections or plans are mentioned along with the application to give the lender an idea of the enterprise’s plans. Lastly, a typical repayment schedule comprises the repayment of the interest with a combination of amortization periods that the borrowing entity is subject to follow.

SNIPPET:

KEYWORDS: Banks, Interest, Mortgage, Lender, Loan, Default, Collateral, Amortization, Floating, Deposit, Property, Broker.

AUTHOR: Oyetola Muyiwa Atoyebi, SAN

Mr Oyetola Muyiwa Atoyebi, SAN is the Managing Partner of O. M. Atoyebi, S.A.N & Partners (OMAPLEX Law Firm).

Mr. Atoyebi has expertise in and vast knowledge of Banking Law Practice and this has seen him advise and represent his vast clientele in a myriad of high-level transactions. He holds the honour of being the youngest lawyer in Nigeria’s history to be conferred with the rank of Senior Advocate of Nigeria.

He can be reached at atoyebi@omaplex.com.ng

CONTRIBUTOR: ABDULWASIU MOHAMMED

Abdulwasiu is a member of the Dispute Resolution Team at OMAPLEX Law Firm. He also holds commendable legal expertise in Banking Law Practice

He can be reached at abdulwasiu.mohammed@omaplex.com.ng

[1] “Wall street mojo Team” https://www.wallstreetmojo.com

[2] ‘’National Association of Insurance Commissioners’’ https://content.naic.org.

[3] “Wall street mojo Team” https://www.wallstreetmojo.com

[4] “Wall street mojo Team” https://www.wallstreetmojo.com

[5] “Wall street mojo Team” https://www.wallstreetmojo.com

[6] “Wall street mojo Team” https://www.wallstreetmojo.com

[7] “Firstbanknigeria.com” https://www.firstbanknigeria.com/mortgages-in-nigeria

[8] “Matt Haycox” https://www.fundingguru.com