Commercial Second Lien Mortgages


What is a commercial second mortgage?

These are second mortgages taken on income-producing properties, such as businesses, offices and factories. While some of these loans can be for large amounts, they are limited by a lenders maximum combined loan-to-value ratio (CLTV%). The balance of the first mortgage combined with the new second mortgage cannot exceed the CLTV%. It is common for borrowers of commercial first mortgages to obtain competitive rates for anywhere between five and ten-year terms. As a result, borrowers often find it advantageous to avoid disturbing the favorable terms of the first mortgage, and instead, seek a second mortgage cash-out to convert equity into cash. The borrower can then retire the second mortgage when he/she refinances the first.

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What are common types of commercial second mortgages?

  • Cash-out second mortgage – This mortgage converts the equity in the property (the difference between its value and any mortgage balance) into cash. It is repaid over time, like the first mortgage, but is subject to its own set of financing terms.
  • Mezzanine loan – This is part of the capital stack for a large project. The borrower has favorable funding terms in the first mortgage, but requires additional capital to complete the project. In this case, the mezzanine lender provides cash in exchange for equity (ownership interest) in the project.
  • Construction completion – The builder requires additional funding to finish the project, beyond the existing first mortgage. The amount of the loan could be based on a percentage of ARV or the completed value of the project.

Why do borrowers take second mortgage loans on commercial properties?

There are many reasons for commercial borrowers to take a second mortgage for their project, including to:

  • Get cash to purchase additional business property
  • Provide money to pay for business expansion
  • Rehab the property to reposition the business in the market
  • Pay for new equipment
  • Repair uninsured storm damage
  • Buy the raw materials to fulfill an order

Which lenders offer a commercial second mortgage loans?

Many bank and non-bank lenders will fund this type of commercial loan. Banks and credit unions will fund a second mortgage for a successful cash-flowing enterprise at conservative CLTVs but require full documentation of the borrower and property, as well as an appraisal. Non-bank lenders are often used by borrowers that are turned-off by the time-consuming bank or credit union underwriting or are unable to provide all of the necessary documentation.

Do hard money lenders offer commercial second mortgages?

Yes they do. Borrowers often explore hard money loans when they need funding quickly (usually within a couple of weeks) or don’t have access to the documentation required by other bank and non-bank lenders.

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