Let's suppose you own a commercial property worth $1 million. Your existing first mortgage loan of $780,000 is ballooning. In order to net $780,000 from the proceeds of a new commercial mortgage loan, the gross new loan would need to be around $800,000 in order to cover the loan fees and closing costs.
The problem lies in the fact that the cash flow from the commercial property will not support a new loan of $800,000. Let's suppose the largest loan available to you, the borrower, is one for only $680,000. You are short $180,000 - and you do not have an extra $180,000 lying around in cash with which to pay down the existing loan. What do you do?
One solution is the partial subordination. A subordination is when an existing mortgage holder allows a new mortgage lender to jump in front of him in terms of seniority. A partial subordination is when you pay down the existing mortgage holder and ask him to subordinate the unpaid portion of his loan to a new lender.
For example, in our example you can only obtain a new commercial mortgage loan of $680,000. Out of this loan amount you will have to pay points and closing costs of around $20,000. You will net only $660,000 from your new commercial loan of $680,000.
Here is one solution: You could go to the holder of the existing $780,000 first mortgage and ask him to accept $660,000 now and another $120,000 at a later date. He will have to agree to subordinate his remaining $120,000 mortgage to the new first mortgage for the deal to work.
You will be shocked how often the existing mortgage holder will agree to subordinate his existing loan in return for a large paydown of his loan balance now - especially if the mortgage holder is a private individual. The lure of hundreds of thousands of dollars in cash now is almost irresistable.
In reality, a partial subordination is extremely risky for the existing mortgage holder. If you, the borrower, default on your new first mortgage, the second mortgage holder will have to keep the payments current on this huge, new first mortgage while the second mortgage holder forecloses. This can often take a year or two, especially if the original borrower (you in our example) declares bankrupty. Very few private investors can afford to carry the payments on a $680,000 mortgage for two years.
Despite the very serious risk (I would argue almost suicidal risk), more than half the time private lenders will agree to subordinate their existing first mortgages in return for a partial paydown.
Many banks will not allow a second mortgage behind their first mortgages. Fortunately you can find hundreds of lenders who will allow junior financing on C-Loans.com.
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