What is a Life Insurance LoanA commercial real estate loan is a loan secured by commercial real estate and offered by a life insurance company. It is secured by a first lien position on the financed property. Real estate properties favored by most life insurance companies are: apartments, offices, and retail and industrial properties. Other properties such as hotels or mixed use may be used, as each case is looked at individually.In commercial real estate, it is usually an investor, who most often is a business entity, that buys the property, leases out space, and collects rent from the businesses that operate inside the property. The commercial investment is intended to be an income producing property.
Who needs a Life Insurance Loan
Not everyone needs or can qualify for life insurance loans. Borrowers who qualify for these kind of loans are those with:
Getting this loan allows you to draw from a large pool of lenders and banks. Commercial Loan Direct has over 200 lenders and banks as partners including local, regional, and national lenders. Selected insurance companies, hedge funds, and agency lenders are included, giving a borrower multiple options. Due to its size and the amount of business which Commercial Loan Direct has, lenders offer it wholesale lending. This has the effect of lowering the loan price. Even with a bank a client may transact in, they can get a lower price, making it more favorable to use their services.
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How to get a Life Insurance Loan
Here is a general guide to what is needed to get these loans. Remember, requirements vary from lender to lender.
Life Insurance Loan Terms
Loans are serviced by either the funding institution, originator, or a third party. The master servicer carries out the day-to-day loan activities such as collection of loan payments, managing escrow accounts, inspecting of collateral, and analysis of financial statements. Non-performing mortgages are sent to the special servicer who does the restructuring of loans, appointment of receivers, foreclosure, managing the foreclosure, and eventually selling the property. Master servicers can sub-contract some of their services to a primary or sub-servicer.
Length of term and amortization
This is largely dependent on the type of property and the lender institution. It can vary from 5-30 years, while amortizations are from 15-30 years. It can be structured to have a loan balance at the end of term. This means that it will have to be refinanced or paid off. The other option is self amortizing. This is where the balance is fully paid when the loan matures, having no balance to pay off.
Recourse
Life insurance loans can be in 3 categories of recourse:Non-recourse: This is whereby borrowers aren't personally liable for loan repayment. The property held as collateral and its cash flows are the only source of repayment in the event of a default or foreclosure. However, if the borrower participates actively in an activity that could harm the property, lender, or investors, some sort of recourse could be obtained. Activities include loan fraud, transfer of property, or subordinate financing, all done without consent from the lender.Limited recourse: Here, sponsors that guarantee the loan are responsible up to a certain percent. They are responsible for a shortfall between loan balance and sales price caused by a default or foreclosure. Where property is auctioned off, legal and ancillary fees also apply. Caveats for non-recourse loans are included.Full recourse: In this category, the sponsors who guarantee the loan take full responsibility for all deficits between loan balance and sales price. All other fees where applicable also apply.
Loan Assumption
Most life insurance loans can be assumed. This is done at a fee and involves the borrower selling the real estate that secures the loan. Once the sale is completed, the purchaser is the owner of the property and takes over the loan. The original borrower is now released from any responsibility of the property and loan, which is then assumed by the purchaser. The purchaser is now bound by the original terms of the assumed loan. Loan assumption is favorable in a high interest rate or tight credit market. Since the rate doesn't change, huge savings can be made.
Prepayment Penalty Structures
These vary depending on the insurance company that is funding the transaction. Prepayment terms are indicated in the loan document and can be negotiated along with other loan terms in commercial real estate loans. Options available should be understood early and evaluated before paying off a loan early.
Yield Maintenance
Bond investors here are allowed to maintain the same yield, assuming the borrower made all necessary payments up to maturity. The penalty is usually calculated using a formula in the Note of the Loan Documents. There are 2 amounts paid; Unpaid principal balance and a prepayment penalty. The penalty is determined by calculating the difference between loan interest rate and replacement rate. Payments are discounted back for the monies time value. A provision of a penalty 'floor' of about 1% and no penalty for the last 3-6 months of the loan is made.
Breakfunding
This method ensures that the lender doesn't make an economic loss caused by prepayment done before maturity. Here, the lender doesn't make money from the remainder amount. Original cost of funds is compared against cost of funds at loan repayment time. The difference is then multiplied by the current loan balance and the remaining time of the loan. The total obtained is discounted back for time value of money. This is done mathematically, as follows:Loan balance at time of payoff * original cost of funds - new cost of funds * # years left in loan * 360/365
Declining (Step-Down) Prepayment Penalty
Here, the penalty lessens by 1% per step. The last 3 plus months are penalty free. It can be structured in different ways and is mostly offered on short term loans (between 5 and 10 years). In a five year declining prepayment penalty, it would be structured like this: 5% of loan amount if prepaid in 1st year, 4% in 2nd year, 3% in 3rd year, 2% in 4th year and 1% in 5th year.
Life Insurance Loan Requirements
To identify the precise requirements and start off the process, fill out the application online or contact Commercial Loan Direct. As an overview for investment property: 2 to 3 years and year to date operating statements, current building pictures, rent roll and PFS (personal financial statement) are required to assess credit worthiness for all principals or owners. For owner occupied property, have your PFS, current pictures, last 3 years corporate and personal tax returns. Financial ratios, such as the loan-to-value ratio and the debt-service coverage ratio, may be taken into account.