“When did you purchase your property and what did you pay for it?” This is a crucial question that brokers handling commercial mortgages should always ask when their borrower is looking to refinance. Many lenders will need to know the length of ownership and the purchase price before they can begin the underwriting process, so it’s important to find out the answers early on in the process.
Here’s what every broker needs to understand about commercial mortgage seasoning requirements:
When a commercial mortgage lender loans money, they are always taking a risk on your borrower and on the underlying collateral. This is the basis for lenders having seasoning requirements; to make sure that the risk they incur is manageable. For example, let’s say you have a borrower who recently purchased a property for $200,000, made $75,000 worth of verifiable improvements (for which proof like receipts is required) and now believes the property is worth $400,000. If the lender advanced 70% LTV the resulting loan would be $275,000; all the investment the borrower has into the property. This is the reason that many lenders’ have seasoning requirements that base the loan amount on purchase price plus improvements; they want the borrower to retain investment risk.
From a lender’s point of view, what someone will pay for a property, in a reasonable period of time, is ultimately the value of a commercial property. This is why lenders require an appraisal on the collateral property in addition to verifying the purchase price and verifiable improvements completed. The lender wants to understand market value and marketing time, as well as knowing that your borrower has a financial commitment to the property. Even if the appraisal of the property supports your borrower’s value claims, the lender is likely to stick with an LTV based on the purchase price plus verifiable improvements, so they keep your borrower at risk. This decision is based on both the fact that your buyer bought in the open market and demonstrated what value really is and that appraisals of small commercial properties are not a science. Unlike homes that have many similar properties in close proximity to each other, commercial buildings are often unique, making value more difficult to determine.
Brokers working with borrowers seeking to refinance commercial properties should keep the above in mind when collecting information for their lender. Seasoning requirements are necessary in order to help lenders determine the true “market” value of a property and to understand all of the risk that they are taking when financing a commercial property.
Being aware of these requirements will help both you and your borrower to understand your lender’s underwriting process and will allow you to close more commercial mortgages more efficiently.