Many owners in the commercial real estate industry are unaware that a second lien position loan exists, and especially in this rough market. But yes, for the right scenario borrowers can still secure these second lien position loans. These programs are geared towards smaller projects though with real estate values less than $3,000,000. Loan amounts on the commercial line or commercial second mortgages are capped at $500,000.
Both programs can be used by either investors or business owners, though the loan requests are easier to fund for business owners (because there are no property specific Debt Coverage Ratio’s to contend with).
As far as which loan program is a better option, we in general recommend the fixed rate program. First of all the rate is fixed between 5, 10 or even 15 years. This security of knowing the interest rate will not move is valuable in this uncertain market. With inflation looming, it seems certain that the fed will soon start bumping up rates again, which will put many borrowers in floating loan programs in painful positions.
Also, the rate on the commercial second mortgage is often right on par or only slightly higher than with the line – with the security of being fixed. For example, as of this writing 7/08, the rate on the line of a $500,000 loan amount is at around Prime plus 1.5% or 6.5%. While the 5 year fixed, 30 year amortization loan rate is at 6.9%.
In addition, underwriting is often a little easier with the commercial second mortgage than with the commercial line of credit.
The primary benefit of the commercial equity line of credit is having capital, available and ready. Like a home equity line, the borrower does not pay interest on the line unless money is pulled out and used. Often borrowers that want the line use it to recapitalize a business, rehab or renovate another property or use the money out of the line as the down stroke on the purchase of another property.