Commercial Second Mortgage
“A Commercial Second Commercial Mortgage May Can Be The Fastest And Cheapest Financing Option Available”
A commercial second mortgage will typically make the most sense as a financing option when you already have a low cost first mortgage in place that may not be easily replaced or paid out without penalties.
Getting a second mortgage on the property for the amount of incremental capital required, especially when the new mortgage is substantially lower than the first already in place, can require a lot less due diligence and third party reports such as appraisals, environmental assessments, and so on.
The challenge in locating and securing most second mortgages is that you have to be working with a lender that is prepared to go behind the first of another lender which is not always the case.
This is why many times we utilize private second mortgage options to provide the capital required as private lenders that invest in second mortgages are always going behind another lender registered against the property.
Even with a higher cost of financing associated with private 2nds, when you take into account the fact that you’re not going to be disturbing a low interest rate first, the weighted average cost of capital can still be lower on the combined mortgages than the all in effective cost of refinancing the 1st mortgage.
Commercial Second Mortgages Are A Good Fit For A Variety Of Different Scenarios
Building on the example above related to not disturbing and existing first mortgage, construction loans are many times issued in a second mortgage position for this very reason. Seconds mortgages for construction almost always come from sub prime or private lender sources as well due to the fact that most institutional lenders will not provide a construction loan in a second position.
Second mortgages that are fully open for repayment are excellent sources of short term bridge financing which can be applied to a number of different capital requirements that are short term in nature.
If a commercial property is owner occupied and the related operating company or division requires incremental capital to operate, or wants to term out short term debt that is not getting paid down from operational cash flow fast enough, a commercial second mortgage can be perfect way of providing the necessary capital.
Once again, if the underlying business that owns the commercial property has bruised credit and is showing some financial stress, refinancing a first mortgage can be a very expensive proposition if the refinancing alternatives push the business into higher cost options due to credit and cash flow concerns. By only financing incremental cash requirements through a second, the potential exists to keep the cost of financing under control as well as the monthly cash flow demands related to debt servicing.
Mortgage Qualifying And Terms Of Financing
When a 2nd mortgage is provided by the existing first mortgage holder, many times the supporting information and application that got the first mortgage in place can be used for the second. Sub prime and private mortgage lenders also quite commonly will rely on existing appraisals, financials, and environmental reports to cover off a lot of the required due diligence provided that these existing reports adequately represent and support the current situation.
So mortgage qualifying can be a lot more streamlined than applying for a new 1st mortgage through an “A” lender.
Keep in mind that the higher the loan to value requested, the more scrutiny by a lender which may also required updated reports to make sure that lending risk is properly being understood before any funds are advanced.
For most commercial property, a second mortgage could be issued in the 60% to 75% loan to value range. The actual amount will depend on the property, cash flow, credit, and financial profile being put forward by the applicant.
The cost of financing for seconds, especially for higher loan to value scenarios, is going to be 1% to 3% higher than what you would pay on an equivalent first mortgage.
Amortization and repayment would depend on type of lender and need. For institutional lenders, amortization can be secured in the 20 to 30 year range with interest terms up to 10 years. For bridge financing scenarios, repayment can be limited to interest only for the loan term.
If you have equity in a commercial property that you’re trying to access and want to better understand your commercial second mortgage options, I recommend that you give me a call so we can quickly go over your situation and financing requirements, and discuss the most relevant options available to you.