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COLLATERAL is generally defined as an asset used to provide security for a lender’s loan. Collateral may be seized and sold by a lender to help repay a loan in the event of default by a borrower. In commercial mortgage lending, collateral usually consists of the commercial real estate and improvements, which includes land, building and fixtures, which the business is buying and/or refinancing. Depending on the project and type of collateral being offered, a lender will generally be willing to provide a maximum loan in the range of 50% to 90% of the value of the collateral for a real estate loan (50% to 90% loan to value).

The value of collateral for a loan is a key component in determining how much money a business can borrow. In the case of a new property acquisition, collateral value is usually determined by using the lower of cost or appraised value. However, if you already own a property being financed, a lender may utilize the appraised value of the property to determine the maximum amount of a loan. A lender’s willingness to do this will usually depend on your length of ownership and generally is permissible with at least one to five years ownership. Different lenders will have their own appraisal requirements. Before engaging an appraiser, you should always check with your intended lender to ensure that its appraisal requirements are being met.

In addition to its value, real estate collateral is generally classified into two primary categories:

1. Multipurpose: This type of collateral can be used by a wide variety of businesses without substantial changes (e.g., office buildings, warehouses, etc.).

2. Special Purpose: This is defined as property that can only be used by only one or a few businesses without substantial changes being made (e.g., gas stations, car washes, hotels, etc.).

Categorization of collateral into one of the above areas usually determines a lender’s maximum loan to value. The more specialized the property, the lower a lender’s maximum loan to value.

In addition to the above, there are other factors which may or may not already be factored into an appraisal value or collateral categorization that a lender may use to determine maximum permissible loan to value:

•  Location
•  Age
•  Condition
•  Type of Construction
•  Alternate Uses
•  Visual Inspection
•  Potential for or Presence of Environmental Contamination
•  Easements

At a minimum, any given lender will typically utilize its own unique combination of most or all of the areas discussed here to determine the maximum permissible loan to value for your project.