In this article, we’ll discuss how commercial real estate developers and investors can benefit from blanket mortgages to finance their projects. As you’ll see, when dealing with multiple properties, blanket mortgages are more efficient and less costly than traditional mortgages. Thankfully, Assets America® can professionally and efficiently arrange a customized blanket mortgage to finance your multiple properties.
What Is a Blanket Mortgage?
A blanket mortgage, or blanket loan, is a single financial instrument that encompasses multiple real estate properties. Therefore, it allows investors to hold, buy and sell multiple properties easily without resorting to the inefficiency of multiple mortgages.
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Blanket Mortgage Basics
A blanket mortgage is useful whether you currently own multiple properties or are formulating a multi-property deal. Indeed, a blanket mortgage reduces the administrative and financial issues you incur when dealing with multiple mortgages. To illustrate, consider the situation in which you own and rent out 10 different multifamily homes, each with its own mortgage. Truthfully, you’d waste a lot of time handling 10 different payments to multiple lenders. Each payment would be based upon a unique set of interest rates, terms and conditions. Moreover, every time you add another property, the monthly juggling act continues to escalate.
In contrast, imagine that you cover all 10 properties with a single, large, blanket mortgage. Conveniently, you make one monthly bank payment reflecting a single set of rates and terms. What’s more, you can sell or replace properties without triggering a due-on-sale clause. This gives you the flexibility to use the proceeds from one sale to purchase another property.
Blanket Mortgage Rates and Terms
Because you are dealing with so many variables, you should expect each blanket mortgage to be unique. Nonetheless, we can identify certain blanket loan characteristics that are fairly typical. We list these characteristics in the following table:
|Loan Amount||$100K to $50M|
|Term||2 to 30 Years|
|Interest Rate||4% to 11%|
|Amortization Period||15, 20, 25 or 30 Years|
|Balloon Payment||3 to 15 Years|
|Points & Fees||Up to 3 Points, but highly variable|
|Required Cash Reserves||Frequently, 6-months payments, but variable|
|Loan to Value Ratio||50% to 75%|
|Interest-Only||Available for short-term loans|
Special Features of Blanket Loans
Blanket loans (aka blanket financing) have certain valuable features that make them flexible and convenient. However, you need to be aware of the recourse rules and possible constraints on the properties you can include under the blanket mortgage.
One of the best features of a blanket mortgage is its release clause. Specifically, the release clause allows you to sell a property covered by a blanket mortgage without triggering a due-on-sale clause. This is a truly wonderful benefit! To clarify, on a typical mortgage, a due-on-sale clause would force you to pay off the entire mortgage. This is true if you sell any property covered by that mortgage. Happily, the blanket loan release clause removes such due-on-sale considerations. However, you must bear in mind that your blanket mortgage presupposes a certain loan-to-value ratio and collateral backing. By selling a property, your loan LTV increases and your collateral drops, perhaps beyond the lender’s limits. But by replacing the sold property with another one, you can restore the LTV and the collateral. Alternatively, without a replacement property, you might have to reduce the size of the blanket loan.
Most blanket mortgages are recourse loans. That means the lender can go after your personal assets if you default on the mortgage. Contrast this with a traditional commercial mortgage, which could possibly be a non-recourse loan. In any event, when you apply for a blanket mortgage, expect the lender to require a personal guarantee. Of course, whether recourse or non-recourse, you pledge as collateral the properties that the blanket mortgage covers. You might be able to wangle a non-recourse blanket loan. Of course, you would need an excellent credit score, a great CRE resume, and a solid track record. Otherwise, you might try pitching a non-recourse blanket mortgage with a lower LTV ratio. Essentially, this reduces the lender’s risk due to the copious collateral.
Limitations on Like-Kind Properties
Occasionally, a lender might seek to restrict the variety of properties you include under a blanket mortgage. For example, it might not want you to mix commercial and residential units.
Some lenders expect that the properties included in your blanket mortgage are located in the same state or geographic area.
Qualifying for a Blanket Loan
When qualifying for a blanket loan, the cash flow and property values usually dominate the underwriting process. Simultaneously, most lenders will also require the borrower to pass muster as well. The following are some factors that determine whether you will qualify for a blanket mortgage.
Qualifying the Properties
The prospective lender will assess the properties using evaluation standards that help determine their value and financial performance:
- Number and Type of Properties: The lender might prefer a particular number of properties under the same blanket mortgage. For example, the lender might favor a few properties. They do this in the belief that this will make it easier for the borrower to repay the loan. Inversely, some lenders prefer many properties, since these create bounteous collateral. As mentioned earlier, some lenders prefer to restrict the variety or location of properties under any one blanket mortgage. On the other hand, many lenders will accept any collection of properties if the entire deal makes sense to them.
- Blanket Mortgage Term: Risk-averse lenders might prefer mortgage terms no longer than 10 years. This limits their exposure to risk compared to longer-term blanket loans.
- Ownership and Seasoning: Lenders put a lot of credence in the amount of time you’ve owned the subject properties within the blanket mortgage. These commercial lenders like to see evidence that you’ve been able to make your loan payments on these properties. Further, they want to see that you’ve operated them properly. Existing, or “seasoned”, loans on the properties demonstrate your track record for paying on time.
- Income: Lenders will examine the net operating income (NOI) of the rental properties involved in the blanket loan. Simply put, NOI is gross revenues minus operating expenses. Some expenses stem from vacancies, so a low vacancy rate helps your cause. Lenders use NOI to compute the debt service coverage ratio. DSCR= NOI/Total Debt Service. A number above 1 shows a positive cash flow. Accordingly, most commercial lenders require a DSCR of 1.20 or higher. A figure below 1.15 will almost certainly disqualify you.
Qualifying the Borrower
You can seek a blanket mortgage from a hard money or private money lender. If so, you won’t receive the same level of personal scrutiny as you’d receive from an institutional lender (a bank). Nonetheless, strong borrowers reassure lenders who want to deal with creditworthy customers. These are customers who have an excellent track record and suitable industry experience. Here are some factors that go into the mix:
- Borrower Credit Scores: Lenders will examine the credit scores and histories of all the loan principals (the guarantors). They will be looking for evidence of good repayment history. They will also look for sufficient income to cover the payments and enough wealth to generally cover the loan. These factors become more important as the loan size increases.
- Business Creditworthiness: The entity that seeks the loan (typically a limited liability company or limited partnership) might have a track record of its own. The same factors that make individuals creditworthy also pertain to businesses. That is, lenders look at debt and income levels, previous repayment history and any evidence of bankruptcies or foreclosures.
- Industry Background: Lenders appreciate borrowers with a good track record in their industry. Generally, two years of experience is the bare minimum for each participant and 5 to 10+ years is much preferred. In particular, the lender will evaluate the borrower’s type of experience, whether a builder, developer, investor or rehabber. Expect to produce documentation attesting to your previous success in the industry.
Who Benefits from Blanket Loans?
Developers, builders and long-term investors are the types of borrowers who benefit the most from blanket loans. Simply put, these borrowers benefit from the efficiencies that blanket loans provide. And as we’ll see, developers and builders benefit from a blanket loan’s release clause when constructing or assembling multi-property projects.
It can be cumbersome to manage multiple properties, each with its own mortgage. Borrowers must pay attention to the lenders’ requirements while juggling multiple payments each month. A blanket mortgage simplifies the administration of multiple properties each month and particularly during income tax season. Investors benefit by combining multiple properties into a single blanket loan. This is because lenders might refuse a borrower with an excessive number of outstanding loans. Furthermore, the release clause allows an investor to sell a property without triggering a due-on-sale clause. Additionally, the investor can add properties to the blanket loan without renegotiating it.
Developers and Builders
When constructing a multi-property project involving numerous lots, most developers and builders prefer to start construction on simultaneous lots. However, to obtain a construction loan, the land must be free and clear of debt. That is, lenders don’t want to risk financing construction if the developer defaults on a land loan. A smart developer handles this problem by putting multiple lots under a well-structured blanket mortgage. The developer can then request the release of a lien on a single lot, thus making the lot debt-free. By invoking the release clause, the builder can commence construction on the released lot immediately.
Assets America® Offers Blanket Loans
Assets America® is proud to offer blanket mortgages, with minimum loan amounts of $5 million, with virtually no upper limit. Our network of private money lenders and banks can compete for your business. And we can render the best deal for your unique needs. We take deep pride in having satisfied so many customers in the last 30+ years. And, we look forward to satisfying your commercial financing needs next. Contact us today for a free, no-obligation quote on blanket loans and many other types of commercial financing. Assets America® is the name you can trust for all your commercial funding needs. But please remember, our minimum loan size if $5 million.