Need a Second Loan Against Commercial Property?

Things You Need to Know

Commercial property owners that seek junior financing (that is prohibited by the lender holding the first lien) are always told that financing is NOT available, and that the property cannot be used as collateral. And while technically true, there are legitimate alternatives.

Whether you call us or not, here are some pieces of information that you need to know as you shop for a loan:

The first lienholder can prohibit the second loan. Typical bank lending on commercial properties prohibit junior liens or subordinate loans attached to the asset in which the lending institution holds the FIRST MORTGAGE OR FIRST TRUST DEED. As a matter of practice, the first lien banks always put language in their loan docs that specifically prohibit additional liens on the property. The First Lien loan documents typically show that if secondary financing is discovered, the bank’s loan can be accelerated and the loan will be declared in default. Banks do this to keep the foreclosure process super simple if this event becomes inevitable. That is, they know that a secondary lender is likely to delay the collection or foreclosure process by being involved, doing so to protect and preserve their rights and own interests. Having another lender at the table slows and complicates the process for the first lien holder. Another important reason that banks prohibit secondary financing is that THERE IS NO LIEN PRIORITY WHEN DEBTORS DECLARE BANKRUPTCY irrespective if there is a lot of equity in the asset. In the event that the debtor declares bankruptcy, the senior lender wants to have the entire collateralized security and not risk that a judge will award priority to another lien holder who also has rights to the property. In bankruptcy, the only real priority of payoff is that secured lien holders get paid before unsecured creditors. The unsecured creditors often only get pennies on the dollar of what they are owed or get wiped out completely. Bankruptcy tends to make all secured lien holders “more equal” despite lien position.

There are safe and legitimate ways to navigate around this.

Lenders often get nervous when the second loan request is larger than the balance on the first loan. For us that fact has no merit. Rates on second mortgages often are much higher than first loans. If there is sufficient equity in your real estate, there is no reason to pay more than high double digits on your loan. Lenders want extra equity as a cushion since they have to worry about the first loan too. The best providers offer larger loans since they also are looking at loan servicing abilities.

How Does This Work?

Having a poignant and direct conversation about what you seek is where we start. Give us 7 minutes to answer your questions and provide a quote. Here’s what we need on our first telephone conversation:

• What loan size do you want?
• When do you want to close?
• What are the terms of your FIRST loan?
• What’s the approximate value of your property?

Once we have an idea of your needs and particular circumstances, we will structure a deal that’s perfect for you. Most loan requests from beginning to funding should take approximately 2 weeks.

What Are the Alternative Loan Structures?

Junior loans that can be made against commercial real estate often take a mezzanine position that hold shares of the company that owns the property as its security, but not the property itself, or this second loan is cross-collateralized by a completely different property. The subordinated loans that are becoming popular are not mortgage loans that get attached to the property. These mezzanine loans hold the shares of the entity that owns the property as collateral. If the debtor defaults on a mezzanine loan, he or she risks losing the entity that owns the property and, therefore, risks losing the property itself. In case of default of the mezzanine loan, the second lien lender takes over the ownership of the borrower entity, not the property itself. This structure is usually comprised of Special Purpose Entity’s (SPE) to satisfy the creditors as to bankruptcy-remoteness and follow the first lien covenants against secondary debt and ensure the collateral value. Similarly, the owning entity may simply create an agreement through qualified legal counsel that provides non-collateralized financing. For example, a commercial property owner that happens to be a limited partnership, may create an amendment to the operating agreement that establishes a unique, sub class of investors that lend money to the holding entity and in return receive a preferred interest position as to repayment. And though these class of investors that provide the secondary financing cannot take over the holding entity, the arrangement can allow for the forced sale of the asset in case terms are not met. Borrowing money against commercial real estate where the senior lender prohibits such activities is only advisable if the structure and character of the financing legitimately and legally navigates around the senior lender’s security instrument language. This is best done by securing an enthusiastic and qualified lending or capital team including legal counsel, accountancy and private investment dollars and advisory services.