First Position Commercial Mortgage Notes — a Safer Alternative Income
A Florida-based financial advisor holding a degree in accounting and finance from American University, Barry M. Kornfeld is a principal and co-founder of First Financial Tax Group. In this capacity, Barry Kornfeld helps to oversee the firm’s delivery of wealth management and retirement planning services, including the administration of first position commercial mortgage (FPCM) notes.
For a number of reasons, first position commercial mortgage notes present a relatively-lower risk alternative income opportunity. First and foremost, lenders holding FPCM notes possess the first lien on the commercial mortgage in question and take priority over any other claims to the property. Specialized mortgage finance companies offering these products conduct extensive due diligence to ensure that the lien granted to lenders is truly the first lien on the property, as well as to ensure that the borrower will have adequate resources to repay the agreed-upon principal plus interest.
Financial institutions generally maintain expansive reserve funds to insure first position commercial mortgage notes against the unlikely occurrence of default. However, this possibility is rendered even less likely by strict loan-to-value limitations. Although specific loan caps vary among financial entities, borrowers typically may not take on bridge loans exceeding approximately 65 percent of the total property value. This allows lenders to regain their funds through the property’s equity in the event of foreclosure. For added, security for his clients, Kornfeld even goes so far as to use a specialty FPCM provider that even puts it’s own funds in a subordinate, or junior, position, in every single transaction.
In addition, FPCM notes do not trade. For this reason, their six-percent monthly yield does not fluctuate in value and provides a more stable, secure source of income as compared to stocks, bonds, mutual funds, and many other more common assets found in more traditional portfolio allocations.