Above Average

Definition of "Above Average" Commercial Mortgages

In the context of commercial real estate finance, an "Above Average" mortgage refers to a loan profile that demonstrates significantly lower risk and stronger financial fundamentals than the standard market benchmark. These loans typically feature a combination of superior collateral quality, robust borrower creditworthiness, and conservative leverage ratios that exceed the typical requirements of traditional lenders.

Detailed Description and Key Characteristics

An above average commercial mortgage is defined by several critical metrics that provide lenders with a high degree of confidence in the repayment of the debt. These characteristics include:

• Strong Debt Service Coverage Ratio (DSCR): While a standard commercial loan may require a DSCR of 1.20x to 1.25x, an above average mortgage often boasts a ratio of 1.50x or higher. This indicates that the property generates ample net operating income to cover all debt obligations with a significant remaining cushion.
• Low Loan-to-Value (LTV) Ratios: Above average loans typically feature lower leverage, often falling between 50% and 60% LTV, compared to the market standard of 75% to 80%. This increased equity stake by the borrower provides the lender with substantial protection against market fluctuations.
• High-Quality Asset Class: The underlying property is usually a Class A building located in a primary (Tier 1) market. These properties are characterized by modern construction, premium amenities, and high occupancy rates with credit-worthy tenants.
• Superior Sponsor Profile: The borrower or "sponsor" typically possesses an impeccable credit history, significant liquid net worth, and a proven track record of managing similar commercial assets successfully.
• Stabilized Cash Flow: These mortgages are almost exclusively for "stabilized" assets, meaning the property has a history of consistent rental income and long-term lease agreements, often with Triple Net (NNN) structures that shift operating expenses to the tenants.

Market Impact and Benefits

Securing an above average classification allows borrowers to negotiate highly competitive loan terms that are unavailable to the general market. Because the perceived risk of default is minimal, lenders are often willing to offer:

• Lower Interest Rates: Spreads over the SOFR or Treasury benchmarks are typically much tighter.
• Extended Interest-Only Periods: Borrowers may receive several years—or even the full term—of interest-only payments, maximizing cash flow.
• Flexible Prepayment Structures: Lenders may offer reduced yield maintenance or more favorable "step-down" prepayment penalties.
• Non-Recourse Carve-outs: Most above average mortgages are non-recourse, meaning the lender's only recovery source in the event of default is the property itself, rather than the borrower’s personal assets.