Structure

Definition of Structure in Commercial Mortgages

In the context of commercial real estate finance, structure refers to the specific framework of financial and legal terms that define a loan agreement. It is the architectural design of the debt, outlining how the capital is deployed, how it will be repaid, the level of risk assumed by the lender, and the rights of the borrower. Unlike residential mortgages, which are largely standardized, commercial mortgage structures are often highly customized to fit the specific needs of a property, the cash flow of the business, and the risk appetite of the lending institution.

Detailed Description of Mortgage Structure Components

A comprehensive commercial mortgage structure is composed of several critical elements that dictate the long-term viability and cost of the financing. These include:

• The Capital Stack: This defines the hierarchy of debt and equity on a property. Structure determines where the mortgage sits—usually as senior debt, meaning it has the first claim on the asset and its cash flows. More complex structures may include mezzanine financing or preferred equity, which sit behind the primary mortgage in priority.
• Repayment Terms: The structure specifies the amortization schedule versus the actual loan term. Many commercial loans are structured with a 25 or 30-year amortization period but have a "balloon" payment due at the 5, 7, or 10-year mark. Alternatively, some loans may be structured as interest-only for an initial period to maximize cash flow during property renovations or leasing phases.
• Recourse and Liability: A pivotal part of the structure is whether the loan is recourse or non-recourse. A recourse structure allows the lender to pursue the borrower’s personal assets if the collateral is insufficient to cover the debt. A non-recourse structure generally limits the lender's recovery to the property itself, subject to specific "bad boy" carve-outs.
• Debt Covenants: These are financial requirements the borrower must maintain throughout the loan life. Common structural covenants include the Debt Service Coverage Ratio (DSCR), which ensures the property generates enough income to cover loan payments, and Loan-to-Value (LTV) limits that protect the lender's equity cushion.
• Prepayment Provisions: Because commercial lenders often expect a specific yield over a set period, the structure typically includes penalties for early repayment. These can take the form of yield maintenance, defeasance, or fixed percentage step-down schedules (e.g., 5-4-3-2-1%).
• Release Provisions: For loans secured by multiple properties or large-scale developments, the structure may include "partial release clauses," allowing the borrower to sell off portions of the collateral as the loan is paid down.

Ultimately, the structure serves as a risk-mitigation tool for the lender while providing the borrower with the necessary leverage to acquire, develop, or refinance a commercial asset. A well-negotiated structure balances the borrower's need for operational flexibility with the lender's requirement for financial security.