Commercial Blanket Loan Questions
Landlord · Southfield, MI · Member since 2009 · 5 posts · 0 votes
I was reading a thread here on BP about private money investors, and ways that those investors can get their money back sooner than later. The topic of doing a refi as a commercial blanket loan after purchasing several SFH rentals was brought up. I was wondering if there was anyone who can shed some additional light on this? How does it works for the private money investor and for the Real estate investor, perhaps some pros and cons if possible?
If there is a threat already talking about this, please send the link and i'll continue my questioning there.
Here's a link to the thread that sparked this question.
http://www.biggerpockets.com/forums/49/topics/74060-how-does-private-lender-make--on-sfh-rentals
Blanket loans are often found in development situations where the developer is developing a larger parcel, has sub divided into lots and sells lots off individually. The loan will contain a "Partial Release Clause" which allows for the sale of one lot individually and the pay down of loan principal as it relates to that one lot. In that situation a blanket loan is functional and useful allowing the autonomy of lots being sold and only having one loan. This would be opposed to having a a single loan on every lot, which would be a pain in the rear.
In another situation, two or more properties are pledged as collateral for a loan where a loan might not be viable or as a function of reducing the lender's risk or as a function obtaining more favorable terms for the borrower such as a higher loan amounts, cash out options and perhaps lower interest rate to name a few.
The key to the loan is two or more properties are pledged or cross collateralized as security to the loan. As an investor or manager you would want to considered when it is valuable to your plans and needs to consider this type of loan. As an example, if you had exceeded the allowable investment property mortgages conventionally, a blanket loan might be a good idea. Perhaps you want to purchase and rehab a seriously dilapidated asset. Where that asset on its own can not carry a loan. By offering additional properties as collateral and letting the lender put a blanket loan over the group you get the loan you need and the lender insulates its risk sufficiently.
The genesis of this post was the concept of taking out (or paying off/back) a private investor. I believe it was even stated the investor was not interested in a long term investment such as a rental property. In that sense, there is nothing special about a blanket loan opposed to any other loan. Conventional single property loans have low rates and favorable terms currently in the market place. Unless you are unable to obtain that conventional loan there is not really a great need to pursue a blanket loan.
When Ann Bellamy mentioned it in the previous thread it was relative to a portfolio of properties being present and taking out the investor. If you had a portfolio of properties (more than one) and you wanted one loan, that is a blanket loan. However, there is nothing special about the loan which makes for a more viable investor take out. You could accomplish the same thing putting a loan on each property in the portfolio. This is assuming you have not crossed the 10 mortgage rule and each property in the portfolio is sufficient security against its own note.
If you find yourself in a situation where you need to contemplate pledging more than one property to obtain a loan ensure you know what your terms are. As Bill pointed out they are not really long term financial solutions. Further the loan to value ratio per property may not provide sufficient capital to actually pay off the interests of the investor.
I have never seen or heard of the usual HML doing a blanket loan on say more than three properties as the loan amounts are usually higher than can be justified with the concentration of loans in one area.
The blanket loans I have done were all through participating banks in the area. There is no difference really in underwriting the loan except in looking at the location and concentration of the collateral, at least for SFDs. If you do go this route you will want to get a stated payoff for the release of each property secured, as a percentage of the principal outstanding. Otherwise you could sell a property and end up having it all applied to the loan or in the event of fire or other claims, the entire amounts received from the insurance folks could end up paying the loan down. You need the ability to free up any property with a pro-rated reduction.
As with a single property loan, you'll also be assigning rents on all properties secured, this aspect is often overlooked by the borrower but such assignments should be limited if not received from a foreclosure, in an order of collection to cover the payments required, otherwise all rents can be tapped and applied at the discreation of the lender. This is generally in other types of commercial properties but might be consider for SFDs as well.
You'll have one note and one security agreement, DOT with several properties listed on the one DOT and filed with memorandums on each property to the secuirty agreement, or seperate filings to each property depending on the Recording authority.
Insurance can remain seperate on one property or you can use a blanket policy, won't usually matter.
These are not usually long term financing arrangements or fully amortized depending on the loan amount. With any balloon obligation, don'tcount on that lender renewing the loan! I suggest you start working on the refi a year before it's due, minimum of 6 months.
These can also be set up as future advance notes like a line of credit, good for short term financing needs.
Good luck
Thanks Bill Gulley this seems like there are a lot of little details involved that make a big difference in the end. Do you have any suggestions on where I can get more information aside from my local banks, just so that I can better prepare for a conversation with them?
Also, is there anyone else with more information to share?
Not really, I doubt anyone here does blanket loans as a lender, some may have input to their horror stories of getting trapped in such a loan. You might just google "Blanket Mortgage" or "Blanket Loan" and study what pops up, I'm sure there is plenty of info out there. Good luck....
Blanket loans are often found in development situations where the developer is developing a larger parcel, has sub divided into lots and sells lots off individually. The loan will contain a "Partial Release Clause" which allows for the sale of one lot individually and the pay down of loan principal as it relates to that one lot. In that situation a blanket loan is functional and useful allowing the autonomy of lots being sold and only having one loan. This would be opposed to having a a single loan on every lot, which would be a pain in the rear.
In another situation, two or more properties are pledged as collateral for a loan where a loan might not be viable or as a function of reducing the lender's risk or as a function obtaining more favorable terms for the borrower such as a higher loan amounts, cash out options and perhaps lower interest rate to name a few.
The key to the loan is two or more properties are pledged or cross collateralized as security to the loan. As an investor or manager you would want to considered when it is valuable to your plans and needs to consider this type of loan. As an example, if you had exceeded the allowable investment property mortgages conventionally, a blanket loan might be a good idea. Perhaps you want to purchase and rehab a seriously dilapidated asset. Where that asset on its own can not carry a loan. By offering additional properties as collateral and letting the lender put a blanket loan over the group you get the loan you need and the lender insulates its risk sufficiently.
The genesis of this post was the concept of taking out (or paying off/back) a private investor. I believe it was even stated the investor was not interested in a long term investment such as a rental property. In that sense, there is nothing special about a blanket loan opposed to any other loan. Conventional single property loans have low rates and favorable terms currently in the market place. Unless you are unable to obtain that conventional loan there is not really a great need to pursue a blanket loan.
When Ann Bellamy mentioned it in the previous thread it was relative to a portfolio of properties being present and taking out the investor. If you had a portfolio of properties (more than one) and you wanted one loan, that is a blanket loan. However, there is nothing special about the loan which makes for a more viable investor take out. You could accomplish the same thing putting a loan on each property in the portfolio. This is assuming you have not crossed the 10 mortgage rule and each property in the portfolio is sufficient security against its own note.
If you find yourself in a situation where you need to contemplate pledging more than one property to obtain a loan ensure you know what your terms are. As Bill pointed out they are not really long term financial solutions. Further the loan to value ratio per property may not provide sufficient capital to actually pay off the interests of the investor.
Again thanks Bill Gulley for your additional info, and Dion DePaoli for your comments as well. The information has been very helpful regarding my options going forward. It seems that the blanket loan is not something worth pursuing immediately, but could be worth looking into down the road as my portfolio grows. Thanks again, and I look forward to learning more from you both.