Mortgagor

Definition of a Mortgagor

In a commercial mortgage transaction, the mortgagor is the borrower. This is the individual or, more commonly, the business entity that grants a mortgage to a lender as security for a loan. While the mortgagor receives the funds necessary to purchase or refinance a commercial property, they simultaneously pledge that property as collateral. If the mortgagor fails to fulfill the terms of the loan agreement, the lender has the legal right to seize the property through foreclosure.

Characteristics of a Commercial Mortgagor

In the commercial sector, the mortgagor is rarely a single person. Because of liability concerns and tax benefits, the mortgagor is typically a specialized legal entity. Common examples include:

• Limited Liability Companies (LLCs): Often formed specifically to hold a single piece of real estate.
• Corporations: Larger business structures that use real estate for operations or investment.
• Partnerships: Groups of investors who share the risks and rewards of the property.
• Real Estate Investment Trusts (REITs): Large-scale entities that manage portfolios of income-producing real estate.

The Legal Role of the Mortgagor

The mortgagor holds the equitable title or legal title to the property (depending on state law), but their rights are subject to the lien created by the mortgage. The relationship is defined by two primary documents: the promissory note, which outlines the promise to repay the debt, and the mortgage deed (or deed of trust), which secures the note against the physical property.

Key Responsibilities

The mortgagor assumes several critical obligations during the term of a commercial mortgage. These include:

• Debt Repayment: Ensuring that all principal and interest payments are made on schedule according to the loan agreement.
• Asset Preservation: Maintaining the commercial property in good condition to protect the value of the lender's collateral.
• Tax and Insurance Compliance: Staying current on all property taxes and maintaining adequate insurance coverage to protect against loss.
• Financial Covenants: Adhering to specific financial ratios, such as the Debt Service Coverage Ratio (DSCR), which measures the property's ability to cover its debt payments through generated income.

Distinction Between Mortgagor and Mortgagee

It is easy to confuse the two parties, but the distinction is vital. The mortgagor is the borrower who "gives" the mortgage (the security interest) to the lender. The mortgagee is the lender (typically a bank or private lending institution) who "receives" the mortgage. In the commercial world, the mortgagor leverages the property to gain capital, while the mortgagee provides the capital in exchange for interest income and a secured position on the asset.