Most commercial real estate lenders seldom take additional collateral when they make commercial loans. For example, conduits never make blanket commercial loans.
While banks will occasionally make blanket commercial loans, these blanket commercial loans are usually SBA loans. Because the loan-to-value ratio on SBA loans is often so high, the bank will sometimes take the borrower's personal residence as additional collateral.
Only rarely will you ever see a commercial bank blanketing additional collateral on a conventional commercial loan. A conventional commercial loan is a commercial real estate loan that is not guaranteed by either the SBA or USDA.
However, the one class of commercial lender that regularly bankets additional collateral is the hard money commercial lender. I have an old and valued buddy, Paul Elis, who also owns his own hard money commercial loan shop. Paul swears by blanket commercial loans. When push comes to shove, mama is not going to allow papa to lose her castle. The borrowers are not going to simply walk away from the commercial property because they would also lose their house.
A commercial lender can sometimes get comfortable with a tricky commercial loan by taking additional collateral. For example, we were looking at a purchase money commercial loan this month where our borrower was buying an REO from the bank. The problem was that the buyer was not putting a whole lot of cash down. Normally we would have passed on the deal.
But then the borrower's commercial loan broker did a smart thing. He offered us additional collateral, which included some land and a separate rental house. The truth was that I was satisfied with the protective equity in the deal. Our borrower was buying an REO from a bank, and the subject commercial property was probably worth more than the purchase price. If we foreclosed, we would probably get out of the deal without too large of a haircut.
But we didn't want to have to foreclose. We just wanted reasonable assurances that the buyer would make his payments. Normally, if a buyer puts down 30% of the purchase price, the size of the downpayment gives him plenty of incentive to make his monthly payments.
Here he was only putting down about 15% of the purchase price. He lacked skin the game. He lacked blood money - the blood on the stoop that a lender would see when he entered the property after completing his foreclosure sale.
When his commercial loan broker offered additional collateral, however, he solved my problem. The borrower would lose both this valuable piece of land and his rental house if he ever defaulted on our commercial loan.
There is one scenario that always makes me chuckle. Commercial loan brokers will often try to create equity where there is none. For example, suppose the borrower needed a commercial loan of $200,000. He offers up as collateral an apartment building, worth $2 million and with a $1.6 million first mortgage. He also offers up as collateral an office building worth $1 million, but which has a $750,000 first mortgage.
Then the commercial loan broker says, "The apartment building has $400,000 in equity and the office building has $250,000 in equity. That's $650,000 in equity to secure just $200,000. Surely you'll make that deal, right?"
Hellooooo? Neither property has a lick of lendable equity. At 80% loan-to-value, the apartment building is already mortgaged to the hit. At 75% loan-to-value, the office building is also fully-mortgaged. You cannot create lendable equity by combining various properties that are individually mortgaged to the maximum.
