Few commercial mortgage borrowers appreciate when they first apply for a commercial mortgage loan that conduit lenders all require huge impounds that must be funded monthly. An impound is an extra sum that must be included with the normal principal and interest payment every month. Homeowners will recognize impounds from their own home loans when the lender required that they send along some extra dough with every house payment to cover the taxes and insurance. But these impounds are tiny compared to the ones that CMBS lenders require. Not only will the borrower have to send in extra money every month to pay for real estate taxes and insurance, he will also have to send in a huge chunk of money to fund a reserve for repairs. To get the money to make any repairs, the owner will have to fight with the servicing company for the conduit to get them to release the repair money. But that's not all. The borrower will also have to send in a huge sum of money every month to fund the replacement reserve - sort of like a savings account to replace the roof in six years, resurface the parking lot in three years, and to replace the HVAC system in eight years - and so on and so on. And the lender always asks, "Hey, where is all of the dough in this replacement reserve that you should have been saving for the past nine years since you first bought the property?" Since almost every borrower will shrug his shoulders and say, "I don't have it," the servicing company will say, "Well gee, you're really far behind in funding this replacement reserve, so every month we need you to send in a whole bunch more money with your monthly payment." As the Church Lady might say, "Well, isn't this special?" But it gets better! Suppose you have a lease coming up for renewal in four years. Did you know that you will need a bunch of cash on hand to pay for the tenant improvements (TI's) required by the new tenant? A tenant improvement is the cost to build special walls, to install special plumbing and other fixtures, and to paint and re-carpet the unit. And you will also need a lot of cash to pay a big leasing commission to the real estate broker who brings you the new tenant. So guess what? You get to pay even more into your impound account to build a reserve for re-tenanting. The bottom line is this: The conduit borrower often thinks that he is going to enjoy this wonderful improvement in his cash flow because he is obtaining a nice, ten-year fixed rate loan from a conduit at only 6.75%. Oops. When he gets to the close of escrow, he will sadly discover that, because of the impounds, his monthly cash flow is much, much worse. Yikes. Forgive the shameless sales pitch (after all, this is our blog), our own commercial mortgage loans are made with no points, no prepayment penalty, and no required impounds. To apply for a commercial real estate loan with complete freedom, please call Mike Thurman at 916-338-3232. | 
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