Building Type

Definition of Building Type in Commercial Mortgages

In the context of commercial mortgages, Building Type refers to the specific classification of a property based on its primary use, architectural design, and revenue-generating potential. Lenders use this classification as a foundational metric to evaluate the level of risk associated with a loan, the stability of projected cash flows, and the overall liquidity of the asset. The building type determines which underwriting standards will be applied and which loan programs the property may qualify for.

Detailed Description and Classifications

Building types are generally categorized by their functional utility and the nature of their tenants. Each type carries a different risk profile, which directly impacts the interest rates and terms offered by a commercial lender. The most common building types include:

• Multifamily: Residential properties with five or more individual units. These are often viewed as the lowest-risk building type because housing is a basic necessity, leading to more stable occupancy rates and consistent cash flow.
• Office: This includes everything from high-rise professional towers to small suburban medical suites. Lenders typically categorize these into Class A, B, or C based on age, amenities, and location, with Class A representing the highest quality.
• Retail: Properties used for the sale of goods and services, such as shopping centers, strip malls, or single-tenant "big box" stores. Financing for retail is heavily dependent on the creditworthiness of the "anchor" tenants and the property's location.
• Industrial: This category encompasses warehouses, distribution centers, and manufacturing plants. Industrial buildings are currently highly favored by lenders due to the rise of e-commerce and the demand for logistics hubs.
• Hospitality: Hotels, motels, and resorts. These are considered specialized assets because their income is based on nightly stays rather than long-term leases, making them more sensitive to economic fluctuations.
• Special Purpose: Buildings designed for a unique, specific use that is difficult to convert to another purpose. Examples include self-storage facilities, gas stations, schools, and religious institutions.

Why Building Type Matters to Lenders

The Building Type is a primary factor in determining the Loan-to-Value (LTV) ratio. For example, a lender may be willing to offer an 80% LTV for a multifamily building but may limit a hospitality or special-purpose loan to 60% or 65% because those assets are harder to sell or repurpose in the event of a default.

Furthermore, the building type influences the amortization schedule. While a standard office or retail building might receive a 25-year or 30-year amortization, a specialized industrial plant with a shorter functional lifespan might be restricted to a 15-year or 20-year schedule. Understanding the nuances of each building type allows borrowers to better prepare their financial packages and align their expectations with current market lending appetites.