September 13, 2022
In this podcast, Mike Luster, Executive VP and Commercial Loan Officer at Cape Ann Savings Bank, talks with John Maher about business mortgages. Mike explains how these loans work, and he looks at the differences between applying for residential mortgages and business mortgages.
Transcription Disclosure: Below is a transcript of the conversation between John Maher and Mike Luster. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.
John Maher: Hi, I'm John Maher. I'm here today with Mike Luster, Executive VP and Commercial Loan Officer at Cape Ann Savings Bank. And today we're talking about business mortgages. Welcome, Mike.
Mike Luster: Thanks, John, looking forward to talking about it. Business mortgages, commercial real estate loans are typically one and the same.
What is a Commercial Real Estate Loan or Business Mortgage?
John: Yeah. So what is a commercial or business mortgage, or a commercial real estate loan? How does it differ from a residential type of mortgage?
Mike: That's a good place to start. A residential mortgage would be used for a prospective homeowner to buy their first home or upgrade their home. It's usually for a single family property, or it could be for a one to four family property. A commercial real estate loan or a business mortgage would be made to any borrower looking to buy or refinance a residential property which has five or more units. So a five family, six family property, any mixed-use property, or any commercial property.
Let me elaborate on a mixed-use property. Not everyone knows what that means. A mixed-use property is typically seen in the downtown area and it has commercial retail office space on the first floor, or any floor, mixed with a residential unit or two or three. So it's anything that's mixed. For example, a commercial retail office mixed with residential use, that would be a mixed use property.
And a commercial real estate loan or commercial mortgage or business mortgage would be anything you would see, like a restaurant, any type of property like that, a machine shop, a hotel or an inn or a bed and breakfast, convenience store, anything like that would be considered a commercial mortgage.
Uses for Commercial Mortgages
John: Okay, so basically a commercial mortgage could be used to purchase a property or purchase a property as an investment. It could be used to purchase a mixed-use property, any of those types of situations.
Mike: Yes. Most of the time, a property investor is applying for a commercial real estate loan or a business mortgage to use the property as investment. For example, we recently did one on a six-family property in Salem. The person had several other properties. They wanted to buy this particular property in Salem. It was fully tenanted, fully rented. So he'll collect the rents from those six tenants and build his portfolio that way.
Sometimes it might be not only a property investor, but it might be an owner-occupied, mixed-use property. A pizza shop owner might have an opportunity to buy his pizza shop on the first floor, but there might be some residential units upstairs. So it's going to be an owner-occupied property while he's able to capitalize on being a property investor, as well, as he's getting income from additional sources in the form of rent from the residential tenants.
Can You Refinance a Commercial Mortgage?
John: And can you refinance a commercial mortgage? And what's the best way to do that?
Mike: Yes, we saw that a lot over the last couple years when the interest rates were low. A borrower might have a commercial property and they're looking to access the equity in the building to replace windows, do some work on the property, replace the roof, or they might be looking to access the equity to further increase their portfolio.
They might want to pull equity out of their building to invest it into another property. We typically go up to a 75% loan to value on commercial refinances, and we usually base that on historic income on the property, not projected income on the property. So that's the difference there. We typically do our purchase mortgages at 80%. So a borrower would need a 20% down payment minimum to purchase a property. But a property owner may only need up to 75% loan to value to qualify for the refinance.
Requirements for Commercial Real Estate Loans
John: Okay. And what's required to get a real estate commercial loan?
Mike: That's a great question because it's good to have people prepared when they go to talk to a bank. We look to get the financial information, a personal financial statement and tax returns from each owner of the property that holds a 20% or greater interest in the property. We also look for accurate up-to-date financials. If you haven't done your tax returns since 2019, probably not the best time to come and ask for a refinance.
You should have accurate up-to-date financials. You should have your current rent and expense information from the property you're looking to refinance, have that ready to go. You should have good credit history and a good repayment history. In the case of a purchase mortgage, you should have either cash or equity to inject into it. So like I said, it's important to know upfront who the borrowers will be.
Most local banks will require the owners to personally guarantee the loan, and that would be any owner with a 20% or greater ownership interest. So that's something that would be required, so we would need financial documentation from each of those owners, like I said before. Accurate up-to-date financials is very important. Current rent roll from the property that you're looking to finance. And obviously, if you're purchasing, it's important to have maintained a good repayment history along the way. But it's always important to have equity or cash to put into these properties because banks will not finance a hundred percent.
Business Mortgages in Massachusetts
John: Okay. And are there any aspects of business mortgages in Massachusetts or on the North Shore in general that are unique or different to other places?
Mike: Well, that's an easy one for us because we're located on Cape Ann. Our primary lending area is north of Boston and south of New Hampshire. So for us, nothing really differs from community to community. Everything just depends on what registry of deeds that particular property falls under. We usually have attorneys that close these loans that can run title searches for us and close the loan and record at that particular registry.
In Massachusetts, we require the use of a licensed real estate attorney to handle the closing and the title work.
But for the most part, we stick to the north shore, north of Boston, everything is similar because we're only dealing in Massachusetts, and typically, we know our borrowers and we know the real estate attorneys they're using. So pretty much it's all uniform to us, John.
Contact Cape Ann Savings Bank to Talk About Commercial Mortgage Loans
John: All right. Well, that's really great information, Mike. Thanks again for speaking with me today.
Mike: Oh, thanks for having me, John. Happy to do it anytime.
John: And for more information on commercial lending and business loans, visit the website at capeannsavings.bank. Cape Ann Savings Bank, Member FDIC, Member DIF, equal housing lender.