Mortgage Financing

Mortgage Money Is the Lifeblood of the Commercial Real Estate Industry

A great many people think that commercial buildings are built and owned by extremely rich people who use their own money to buy the building. This situation is no longer the norm. Very rich people do pay for part of the purchase price with their own money, but they borrow most of it from mortgage lenders (including banks, insurance companies, and real estate investment trusts). Indeed, mortgage lenders pay most of the initial cost of developing the vast majority of America’s commercial buildings. In fact, if they were permitted, real estate developers and owners would borrow the entire of developing a project or buying one.

Periodically the real estate markets booms, and in some boom times 100% financing has existed, but that sort of party ends rapidly whenever real estate takes a nosedive. Lenders lose fortunes and vow to never let it happen again. In more typical economic circumstances, almost all lenders refuse to lend the entire cost of development or purchase. They want the borrower to have a continuing stake in the success of the property.

In bad times when money is tight, lenders tend to lend a smaller percentage of the total cost than they do in good times when money is plentiful. When money is plentiful, lenders can be altogether too eager to lend, and sometimes they will lend a developer or commercial real estate purchaser only a little bit less than the cost of the project.

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