Collateral, also called security, consists of assets offered by a borrower in order to obtain a loan. In the event of failure to repay the debt, the collateral is confiscated in lieu of the outstanding amount. Any item of economic value, especially which could be liquidated or converted to cash can be pledged as collateral.

When collateral for one loan serves as collateral for other loans as well, it is called cross collaterization. The most common example being the case when a person wants to buy a new residence when he already owns one house. The property being cross-collateralized needs to be appraised and indemnified.

How one property can serve as collateral to different loans? The reason is “Loan to Value,” or LTV. This is the relative amount of the sum loaned against a property with respect to its value. As for example, a house that is at present priced at $600,000 with $300,000 debt has an LTV of 50%. That is, the owner has borrowed an amount which is 50% of the cost of the property. Some or the entire remaining price can be utilized as collateral for a different mortgage or credit. Cross-collateralization can be used to counterbalance risk factors involved in a financial transaction, that is, to allow the lender to circumvent the possibility of incurring a loss in case of default.

It is mandatory that the location of the property being cross-collateralized be in the same state as the new property being acquired. Cross-collaterization is offered on portfolio loans like the Option ARMs and the Flex 3 and Flex 5 loans, in which initially the rate of interest and the amount to be paid remain fixed for 3 years and 5 years respectively.

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By: Sebanti Ghosh

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Applying for commercial real estate financing is a big step. It’s not easy to get commercial property loans, especially if you are a first-time borrower. Before you apply, there are some things you should think about in order to be fully prepared.

Commercial real estate financing is different from residential real estate in a big way, according to the lender. With residential real estate, they are looking at how much the property is worth, and not overly concerned with how much it will make in the future. Residential property generally appreciates over time. With commercial real estate, however, they’ll be looking at future profits.

This means that they will be concerned less with the current worth, and more with the possible worth. As a result of this, they will be very concerned with what sort of profits the venture will generate. This is why it is very important for you to sit down and do the math. How much do you think it will make?

This means also that you should be clear on how you will use the property. What kind of business will this be? Is it going to be all for one business, or are you going to rent out units? These will be major considerations for the lender, so make sure you have a detailed plan all set out.

The actual geography of the property will also be a factor in determining whether you get your loan or not. Look at the location of the property and how that will effect the business. You will have more trouble getting financing for a place located way out in the sticks than a place on a highway off-ramp.

The size and type of the property will also be factors. You will want to look at the history of the place and make sure there aren’t any minor details that might cause trouble, like environmental problems.

Risk is the most important consideration to lenders. They will be looking at the future of the venture and, in particular, at possible things that could go wrong with the business.

A big part of this is the condition of the overall market. You can save yourself trouble later with your commercial real estate financing by studying the market and understanding its current trends. This is what your potential lender will be looking at, so it’s good for you to understand it as well. If the future is uncertain for the type of property you are trying to buy, they may be worried about making back the loan.

Before the deal closes, they will send you a “commitment letter.” This is a notification from the lender letting you know officially that you have been approved. More importantly for the lender, the commitment letter will have the terms and conditions of the loan. In other words, these are the rules.

It will tell you details about the closing conditions, rules for what you can and can’t do with the property, as well as a summary of all the terms you agreed on, making it official. Take a good look at this and make sure that it will not prohibit you from doing the things you intended when you requested the financing.

Finding commercial real estate financing is a long and drawn-out process, but if you can consider a few things before you apply, you can save yourself the headache of dealing with something unexpected later.

By: Andrew Stratton

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