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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   August 2006

Reverses: Not Just Residential Anymore

Commercial product applies to properties to be sold or refinanced during the loan term

Recently, a reverse mortgage on nonresidential and commercial real estate has entered the market. 

Residential markets have been writing reverse mortgages for years. With a conventional reverse mortgage, borrowers who are older than 62 and own a home can turn their home’s value into cash. They can receive funds from a reverse mortgage in a single lump sum of cash, in regular monthly cash advances or both. Typically, nothing has to be paid back until they die, sell their home or move.

Commercial properties qualify for a reverse mortgage, too. These property types include apartment and office complexes, ranches, farms, land (residential or commercial), mobile home parks and RV parks. Qualifying properties must be free of liens or have a small loan balance that can be paid off. The reverse mortgage typically has a term as long as five years. Borrowers receive funds just as they do for residential reverse mortgages. A difference: The property must be sold or refinanced within the loan term.

Reverse mortgages on commercial real estate can benefit property-owners of any age as long as they have a reasonable explanation for the use of funds. The amount of funds to be paid upfront and each month is determined by the need, property type and value.

Here are some examples: 

  • Owners with medical challenges who own a 36-unit apartment complex: The owners want to sell, but the property is only one-third rented and needs repairs.
    With a reverse mortgage program, $125,000 will be disbursed as repairs are completed, in addition to $3,000 coming each month to help owners with medical expenses. When property is repaired and occupied, the seller will list it for sale to pay off the note.

  • A family trust owning commercially zoned land: The land is listed for sale at $900,000, and a family member experiences health problems. She needs a newer manufactured home and a full-time caretaker. 
    With a reverse-mortgage program, she can receive $80,000 to help purchase the new home and pay for other expenses. Each month for five years, $2,500 will be disbursed. The property is assured to sell in that time.

  • A developer owning a large parcel of land zoned for multifamily and commercial use: The debt-free property is listed for sale at $6.5 million, and the owner needs monthly cash flow and funds to purchase other property. 
    A reverse mortgage can help with $1 million cash paid upfront and a $10,000 monthly obligation paid to the owner. 

  • A family trust owns parcels on a commercial property valued at $800,000. The family needs $75,000 upfront and $2,500 per month to consolidate bills and cover living expenses. The property would have greater value and salability after the county extends city utilities — a process that could last two years. 
    During the term of a reverse, the family can receive an offer for one of the parcels. An agreed amount will be paid to the lender of the reverse mortgage and to release the parcel. The reverse terms will be adjusted.

This type of financing requires a lender with sizable cash deposits and the ability to extend cash “going out” versus conventional lending. The lender must take the risk and would most likely use private money. The rates are usually quoted at around 11 percent to 13 percent per annum, plus four points. The allowable loan to value often is approximately 35 percent.

In numerous cases, however, a commercial reverse can help all parties.


 


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