Many life insurance companies invest in real estate and offer commercial real estate loans (CREs), which differ from other CRE mortgages. While most banks tend to favor short-term loans, focusing more on immediate returns, life insurance companies write long-term policies for their clients, so they take a longer-term view of their assets. investments and, therefore, they can offer loans with terms between 10 and 30 years.
With a commercial mortgage from a life insurance company, commercial real estate owners can take advantage of terms that may not be available with other lenders. however, borrowers are unlikely to deal directly with the insurer, so they will need an intermediary that has a relationship with the company. Here’s what you can expect if you consider this option:
Reading: How do life insurance companies make loans
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Life insurance companies underwrite more conservatively than other lenders, typically looking for leverage of around 65% or less. however, some insurers can go up to 75% for borrowers with good credit on commercial real estate and high-quality properties.
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The underwriting will focus on the debt service coverage ratio (DSCR), which measures the cash flow available to pay debt obligations. this is calculated based on the property’s current income, not potential future income. life insurance companies would expect the dscr to be at least 1.25.
loan characteristics
- Maximum loan terms will vary between life insurance companies, but tend to be longer than other commercial real estate loans, with terms of 15, 20 and 30 years available.
- Loans can be repaid in up to 30 years.
- Loans typically have a fixed rate, which can be locked in at the time of application.
- minimum loan amounts vary by company, but generally start at $1 million.
- Loans can be with or without recourse.
- Most loans are fully assumable, meaning that (for a fee) the owner of a cre can sell the property that secures the loan, and a qualified buyer of that property takes over the remaining term of the loan .
prepaid premium
Prepayment premiums vary among companies, but a borrower can typically expect to pay a performance maintenance fee or a fixed premium on a commercial mortgage from a life insurance company. The Yield Maintenance Fee is typically calculated as the present value of the loan’s remaining payments, multiplied by the difference between the interest rate on the loan and the rate on a US Treasury bond of the same duration. a good rule of thumb is that if rates go up, you’ll pay a lower performance maintenance fee.
The fixed premium or “reduced” premium is a simple formula that represents a percentage of the existing loan balance at the time it is prepaid. For example, a typical reduction of 5, 4, 3, 2, 1 imposes a premium of 5% in year one, 4% in year two, 3% in year three, and so on until the premium of advance payment is eliminated near the end of the year. the term.
To learn more about prepaid premiums and why lenders use them on CRE loans, read our article on prepaid premiums.
property types
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Life insurance companies generally make loans for any type of commercial property, as long as the property meets their standards, which are often higher than those of other lenders. some companies focus primarily on trophy assets.
key benefits of a commercial mortgage from a life insurance company
For borrowers and properties that qualify for a commercial mortgage from a life insurance company, the biggest advantages are long-term fixed-rate options. A borrower can secure a loan for 20 to 30 years, keeping payments constant and avoiding changes in interest rates. This is particularly advantageous at a time of low interest rates, or if the borrower plans to own the property for the long term. however, if interest rates fall, the borrower will be subject to a higher interest rate.
Because most life insurance company mortgages are assumable, they give the borrower the flexibility to sell their property over the life of the loan and avoid prepayment costs. The loan may also have more favorable terms than those available elsewhere at the time of sale, making the property more attractive to a potential buyer.
plum can work with you to arrange a loan with certain life insurance companies. Contact us today to discuss loan options or for help evaluating your current financial situation.
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