First Position Commercial Mortgages FAQ

First Position Commercial Mortgages FAQ

1. What is a First Position Commercial Mortgage?
A First Position Commercial Mortgage is a private third-party loan that is secured by commercial real estate. Private lenders select a commercial mortgage to serve as collateral for their private loan. They are recorded on title and acquire a first lien position on the mortgage, and each lender receives monthly interest payments at a fixed annual yield, with a return of principal at the end of the one year term.

2. Why are they called First Position Commercial Mortgages?
The phrase “First Position Commercial Mortgage” describes the collateral pledged as security for the loan you are making. As a private lender, you select a particular commercial mortgage from inventory to serve as collateral for your loan. A First Position Commercial Mortgage loan is not a mortgage investment pool and it is not a direct investment in real estate. They may also be referred to as First Trust Deed Loans or Senior Interest Position Mortgages.

3. What is a first position in a commercial mortgage?
A commercial mortgage executes only first mortgage transactions with commercial borrowers ensuring we hold the first lien on the property. If you have a first position, that means you have priority over any other liens or claims on a property if the property owner defaults.

4. With interest rates so low, why do borrowers agree to these terms?
Unfortunately, banks are not lending the way they used to. In today’s lending environment, real estate developers and commercial borrowers are seeking out alternative financing that they can receive in 2 to 3 weeks using short-term bridge loans based on the value of their commercial property. The borrowers qualify for our mortgages because they are secured by the high value commercial assets.

5. What types of property are used as collateral in these transactions?
Generally, mortgages are secured with commercial real estate, such as multi-unit apartments, office buildings, retail centers or mixed-use developments; though we will sometimes accept as collateral non-owner occupied, single-family homes that are held as investment properties and owned by a corporation or limited liability company.

6. What are some of the terms of the mortgage given to the borrower?
The commercial mortgage lending policies dictate a maximum loan term of two years and up to only 70 percent of the value of the real estate. That means the properties that secure the mortgages are worth considerably more than the loans themselves at closing.

7. What type of due diligence are performed on these properties?
A title search is ordered to make sure we have an insured first lien position and thoroughly evaluates each property by conducting a comprehensive appraisal to confirm market value.

8. Are the properties insured?
Yes, insurance coverage is obtained on the encumbered property. This mitigates the risk of loss to the property’s value due to damage, destruction, natural disasters (earthquake, flood, tornado, hurricane, mudslide), and the like.

9. What is a lender’s collateral?
With loan-to-value ratios of 60% or less, the property’s equity is your collateral.

10. What is the paperwork required to get started?
When you lend on a First Position Commercial Mortgage, you enter into a Promissory Note and Loan Agreement that set the terms for which you are paid.

11. How am I better protected from downside risk?
Your loan is secured by a hard asset collateral—the property itself. Additionally, the loan originator participates by lending confidently alongside lenders and holds a second lien position on all commercial mortgages.

12. How is it established that the property has no additional liens?
Any existing lienholders are paid off when it enters into a transaction with a borrower so there are no additional liens on the property. Additionally, a title policy is obtained for each property.

13. How do I verify that I hold a first lien position in the mortgage?
Upon request, you will be provided with a copy of the title policy which indicates there are no other liens or claims above you.

14. Will my name appear on the land records of the property?
Yes. First Lien Position Documents will be in your name and the documentation filed with land records in the relevant jurisdiction.

15. Does the borrower make payments to me?
No. There is a contract obligation to make your monthly interest payments and return the principal at the end of the term, regardless of the status of the underlying loan.

16. What happens if the borrower does not make payments or defaults?
First Position Commercial Mortgage loans are private transactions that are separate and distinct from the pledged collateral. As such, contract obligations to you are neither contingent upon nor subject to the performance or repayment status of the underlying commercial mortgage. If a commercial borrower does not make its payments or defaults, Originator remains obligated and shall continue to pay your monthly interest payments and return your principal at the end of the term according to the terms of your Promissory Note and Loan Agreement.

17. How am I taxed on a First Position Commercial Mortgage?
You should consult a tax advisor or accountant for tax-related questions specific to your situation; however, the IRS typically taxes payments on first lien position interest holdings as ordinary income. A Form 1099 is provided for all lenders.

How do I get started?
If you’d like to get started on purchasing a First Position Commercial Mortgages GIVE US A CALL TODAY 863-937-3924