Advantages And Disadvantages Of Commercial Mortgages
The main advantages of commercial mortgages are as follows:
Retain Ownership. Instead of raising funds by
selling an interest in the property or the business to an
investor, you retain complete ownership of both. The lender
is only entitled to an interest return on its mortgage,
not a percentage of ownership that an investor would expect.
Also he/she can only exercise the right if you default.
You retain all the benefits of ownership in an asset that
has the potential to appreciate in value.
Better Cash Flow. A mortgage gives you access
to capital with minimal up-front payments and the flexibility
to design a repayment schedule that suits your needs.
Maximize Financial Leverage. Financing your property
purchase with a mortgage will allow you to use your cash
flow for other pressing needs.
Simplified cash flow management. Mortgage schedules
are preset, making cash management more predictable.
Tax advantage. Interest payments on your mortgage
are tax deductible and are made with pre-tax money.
Purchases financed with profits, in contrast, are, made
with after-tax money. The main disadvantages of commercial
mortgages are as follows:
Collateral. The nature of a mortgage requires
you to pledge the purchased property to the lender. If you
default on the mortgage, the lender is able to foreclose
upon the property and sell it to repay the money owed to
the lender. Make sure that when the mortgage is repaid,
the lender is obligated to release its mortgage and is required
to make any government filings acknowledging this release.
Defaults. The lender may define a variety of events
that will constitute a default on the mortgage, including
failure to make any payment on time, bankruptcy, insolvency
and breaches of any obligations in the mortgage documents.
Try to negotiate advance written notice of any alleged default,
with a reasonable amount of time to cure the default.
