Coterminous

What Does Coterminous Mean?

Coterminous loans refers to a supplemental loan with a maturity date that is the same as a senior debt, or an original loan. Coterminous is most often used to describe mortgage loans, such as those for residential and commercial borrowers.

Understanding Coterminous

While a supplemental loan can have a maturity date that occurs after that of the original loan (often called "non-coterminous"), most second mortgage lenders or mezzanine lenders prefer to have both loans mature on the same date. This way, the borrower can choose to refinance both loans into one larger one, preferably with the same lender.

Having the same date for settlement also makes it easier for borrowers to determine if refinancing the original and coterminous loans provides significant savings. Lenders also benefit from having same settlement dates because it represents less default risk as compared to a non-coterminous mezzanine mortgage.

Another advantage of having the same settlement date for two loans is that the strategy ensures that the loans align with prevailing interest rates. In addition to this, it becomes easier to determine interest rates while refinancing or packaging both loans into a single debt instrument at the end of their respective terms.

How Coterminous Loans Are Structured

In some instances, mezzanine loans are financed through investment vehicles that are structured as limited liability corporations.

Lenders who offer coterminous loans may have a number of limits and restrictions. This can include a stipulation that the same lender must service any existing prior mortgages for the borrower. The lender might not allow a coterminous, supplemental loan to be taken out shortly after an original loan has been approved. The borrower may have to wait at least one year into the term of the original loan before seeking this additional financing. Lenders might require that the original loan must have a minimum amount of time left — five years, for example — on its term before a coterminous loan is approved.

A coterminous mortgage may have a minimum amount that must be borrowed. On coterminous commercial mortgages, there could also be stipulations about the property itself.

For example, there may be occupancy requirements that the borrower must meet and maintain in order to qualify for a supplemental mortgage. The building may need to be 85% physically occupied for at least 90 days before the closing of the mortgage. The collection of replacement reserves on a coterminous supplemental mortgage might be waived; however, the replacement reserves in the original mortgage would continue to be collected. A new appraisal of the property may be required as well as a new title insurance policy.

This type of financing could appeal to borrowers because it offers a way for multiple mortgages to have a single date when the property is expected to be free and clear. It is possible that borrowers consolidate their loans by refinancing when interest rates become more favorable to reduce their overall debt obligation.

Example of Coterminous Loan

Coterminous loans are commonly used in construction financing. For example, if a property developer is building an apartment block, then they can take out a first loan to begin construction. The initial payments related to that first mortgage will cover the principal amount borrowed. Subsequently, they can take out a second, coterminous loan to make payments on the first loan and finance further construction.

This strategy benefits both the builder as well as the financing institution. The builder gets an additional source of funding for their project in the form of a second loan and the financing institutions can appraise progress on the project before issuing a second loan. Typically, leverage amounts for coterminous loans are calculated as a percentage of LTV or loan-to-value ratio. The higher the LTV, the greater the risk.