Commercial Loans Blog

Commercial Second Mortgages

Posted by George Blackburne on Wed, Jan 14, 2009

Only SBA Lenders and Hard Money Lenders Make Them

In the early 1990's commercial real estate nationwide suffered through a depression. Commercial real estate values fell by 45%.

Prior to the early 1990's there were lots of commercial lenders who would make second mortgages and second trust deeds on commercial real estate. The commercial real estate depression on 1991 wiped almost all of them out. Since then very few commercial lenders have been willing to take the risk of making a second mortgage.

Certainly very few banks will make commercial second mortgages these days ... unless the loan is guaranteed by the SBA. If your company occupies more than 50% of your commercial property, you should definitely apply to C-Loans for an SBA second mortgage.

The SBA, however, will not guarantee commercial loans made on residential investment real estate, like apartment buildings and mixed used properties (for example, apartments over storefronts).

The only other type of lenders that might consider a commercial second mortgage or a commercial second deed of trust is a hard money lender. Hard money lenders will typically charge between 13% and 15% and five to eight points for a three to five year interest-only second mortgage. Like the old joke says, their apples may be expensive, but at least they have apples.

There is a very important ratio that applies to commercial second mortgages. It's the Old-Money-to- New-Money Ratio. In this ratio, the old money is the existing first mortgage. The new money is the gross amount of the new second mortgage. The ratio of old money to new money must never be greater than 3:1.

The reason why is that the second mortgage has to keep the first mortgage current as it forecloses; otherwise the foreclosure of the first mortgage will wipe out the second mortgage (very few buyers in real life ever bid at commercial foreclosure sales). If the second mortgage is too small in comparison to the first mortgage, then the second mortgage lender will have to keep far too much money sitting around uninvested and ready to carry the first mortgage for 18 months to complete the foreclosure and possible Chapter 11 bankruptcy of the borrower.

For example, if a lender foolishly makes a $100,000 second mortgage behind a $1 million first mortgage, the second mortgage lender may have to advance $180,000 (18 months of $10,000 per month payments on the first mortgage) in order to protect a measley $100,000. The ratio of old money to new money should never exceed 3:1.


You can apply to scores of commercial second mortgage seconds in just four minutes using C-Loans. And C-Loans is free.

Topics: Commercial Mortgages, Second Mortgages