commercial property financing
“A Commercial Property Loan Can Be Secured On A Wide Range Of Real Estate Types By A Commercial Mortgage”
A commercial property loan can be arranged for acquisition, construction, or debt refinancing of a commercially zoned real estate property, or it can be acquired to finance other commercial activities within the business entity that owns the property.
Financing is in the form of a registered mortgage in first, second, third, or further subordinated position.
There really is no such thing as a commercial property loan where the real estate itself is not offered as security to the lender.
There are basically three different categories of commercial property lenders. Within each category are sub categories to provide for the many specific types of commercial real estate that exist in the market place.
Types Of Commercial Lenders
The three categories we are about to go over are set up primarily based on the combination of cash flow, credit, and collateral that is offered by a potential applicant or borrower.
The first category is the “A” credit lending space which is made up of banks and other similar institutional lenders. While there will be different programs and lending focuses around each source of financing in this class, all members will have a similar standard when it comes to the minimum credit, cash flow, and loan to value requirements.
The “A” lending classification also offers the lower available cost of financing with some tradeoffs within the class for different loan to value ratios, reflecting the cost of lending risk for each transaction.
And while all properties owners aspire to secure an “A Lender” deal, the reality is that there is a significant portion of the market that cannot qualify for this class of financing at any given point of time with some geographies and/or industries seeing less than 50% of their commercial debt financing provided by “A Lenders.
If a property owner or business cannot qualify for an “A” commercial mortgage, then they must next look to the subprime commercial market which is basically split into two different groups, those being subprime institutional lenders, and private mortgage lenders.
The subprime institutional lenders are after commercial property loan deals over 1,000,000 that just can’t get qualified by a conventional lender such as a bank.
This type of commercial mortgage provider can take on many different forms such as a merchant bank, investment fund, hedge fund, and so on.
These financing targets still have fairly strong cash flow, credit, and collateral, but still score out slightly below the “A” lenders.
Because “A” lending criteria can be hard to qualify for at times, depending on the strength of the economy and overall global financial market place, a large portion of he market can fall into this subprime category.
Sub prime institutional lenders are typically interested in providing financing for a one to three year period, allowing the borrower the time to strengthen their borrowing profile which will allow them to eventually refinance the debt with an “A” lender in the future.
The third category of commercial property loan provider is the private lender.
Private mortgage lenders collectively will look at any size of deal, but for the most part, 90%+ of this group will consider deals under $3,000,000 only.
Private lenders are mostly made up of individual investors but can also include syndicates, joint ventures among investors, and mortgage investment corporations.
Private money or hard money as some will call it, is more focused on the equity value in the property and the potential resale value of the property in the event of mortgage default.
While cash flow and credit are still considerations, the security value of the property is the most important aspect of assessing an application request for financing.
A commercial property loan from a private financing source can be priced in a wide range depending on the perceived risk of default by any particular lender.
Most private mortgages are for a period of one year and therefore provide very short term bridge financing to the business or property owner.
Commercial Property Loan Market Challenges
The commercial property loan market is a vast landscape of financing sources and programs.
Because of the differences that tend to exist from one property, industry, geography combination to another, it can be difficult to locate and secure a debt financing solution that will meet your particular requirements by the deadline you have to work to.
Even if you’re correctly focusing on the appropriate lender class for a specific deal, it can still be difficult to determine who can actually lend you money when you need it.
One of the best ways to try to get a commercial property loan in place is to work with a financing specialist with experience in this type of lending.
If you’re in need of a commercial property loan for acquisition, construction, refinance, or some other form of capital deployment in your business group, then I recommend that you give me a call so that we can go through your requirements together and discuss the most relevant options available to you in the market.
“Mixed Use Property Loans Can Come From Both Residential And Commercial Lending Programs”
These properties need to be zoned to allow for both residential and commercial utilization.
The split of the property use component will dictate what type of lender or lenders will be interested in seriously considering an application for mixed use mortgage financing.
For instance, for a residential lender to consider a mixed use mortgage, the property utilization must be at least 50% residential. Some home based lenders will only consider residential usage to a minimum of 80%. Each lender and program will be different requiring some market intelligence as to where any one particular deal may fit.
Everything that cannot be covered off on the residential financing side will automatically defer to commercial mortgage solutions.
Mixed Used Financing Challenges
Because of the potential usage combinations of a property with two types of occupancy and use, it can be difficult at times to find a financing solution that is available, or one that meets the borrower’s requirements.
For instance, main line bank and institutional lenders will not typically consider a mixed use property loan application under $250,000.
And when you get into areas of lower population, there can be a considerable drop off in lender interest for any type of mixed use property financing opportunity.
The cost of financing itself can be another challenge.
With straight residential providing the lowest possible cost of mortgage financing available, and straight commercial being the second best, mixed use mortgages tend to have higher risk premiums attached to them and the more unique the property setup the higher the related lender risk due to lower potential remarketing factors.
Limited availability of bank or institutional lending solutions at times can also drive the supply side of the market more towards private lending.
And because mortgage insurance is not available for multi use properties, loan to value ratios tend to average out at less than 60%, with the potential financing leverage ranging from 50% to 75%. So depending on the property, the owner equity requirement can be substantial as compared to other types of property investment.
Comparing Mixed Use Property Lenders
Regardless of the property type or borrower profile, the primary lending objective in most cases is to secure the most debt based capital for the lowest cost. With mixed usage, meeting this objective can be difficult to figure out at times due to some of the financing trade offs you may need to consider.
As an example, there are times when bank, sub prime, and private mortgage options can become similar in terms of the amount of financing provided and the total effective cost of the getting financing in place and servicing debt.
Let me explain.
Banks and institutional lenders can require considerable due diligence and third party verifications to be completed before extending financing. The things they require such as appraisals, environmental assessments, updated financials, and third party studies can be similar in volume and cost for both small and large deals.
At the smaller end of the lending spectrum all the lending application related costs can become substantial.
In comparison, sub prime institutional and private lenders can have significantly lower application related costs as they may be prepared to consider existing appraisals, environmentals, and financials as an example.
So even though secondary mixed use property loan sources may come with a higher interest cost, when all costs are considered, the total cost of financing can be comparable.
With mixed use mortgage financing, this type of more detailed total cost and loan to value comparison can be important to making the best borrowing decision.
Because of all the potential variety in scenarios with mixed use properties from one geography to the next, and one type of property to the next, the process of securing commercial mortgage financing or residential mortgage financing can be difficult to figure out at times and can be helped considerably by utilizing the skills of a property financing specialist.
If you are looking to secure mortgage financing for a mixed use property, I recommend that you give me a call so we can go over your requirements together and discuss the most relevant options available to you in the market and how they stack up against one another.
“Private Commercial Mortgages Can Be Used As Primary Or Secondary Financing Solutions”
One of the great things about private lending is that supply is growing, providing a wider range of interest rate options and property financing applications. More and more investors are diversifying into private mortgages due to the solid rate of return and the fact that their investment is secured by real estate.
For instance, there are private lenders that are looking to secure better than bank interest rates, bond rates, GIC’s, Tbills, and so on, but do not want to take high risk.
At the lower end of the rate spectrum, its possible to secure private commercial mortgages in the 6% to 8% range when that was mostly unheard of not all that long ago.
As risk goes up, so does interest rates as it does with any form of financing, so there is virtually no upper limit for private money as higher risk deals can come with significant rates and financing fees.
Key Benefits Of A Private Commercial Mortgage
The other main benefits of private lending for commercial properties are 1) a more straight forward, less complex application, and more predictable funding process compared to a bank; and 2) the speed with which a deal can be completed.
Let’s look at these benefits more closely by citing a few examples to bring the points home.
Reason #1 – Predictability
In the construction industry, many builders and developers will only use private money due to the more predictable manner in which draws are advanced. Private lenders will still have a work confirmation process that may even involve third parties, but for the most part, the amount and timing of draws is fairly predictable allowing the overall project cash flow to be well managed and the project itself kept on track.
Reason #2 – Speed
Regardless of what you require commercial property financing for, be it purchase, refinance, debt consolidation, bridge funding, etc., there is most likely going to be a period of time you have to work with to get things into place. Most business financing requests require funds to be made available by a certain date so that a transaction can close or complete. Failure to do so can result in a deal being lost, additional costs being incurred, profits foregone, and so on.
So getting the deal completed in the time you have to work with can be critical for a whole number of reasons. If bank or institutional financing cannot be safely and predictably secured in the time you have, then it can make a great deal of sense to first arrange short term financing through a private lender which will get the transaction completed and provide time to get lower priced long term financing in place if that is required.
One could argue that the cost of financing will be higher with private funding so its should be avoided if you can qualify for lower cost debt. But the counter argument is that if you don’t close on time or provide capital when it is required, how many more times over will the cost for being late add up to as compared to the incremental cost of a short term private commercial mortgage.
Reason #3 – Flexibility
As long as you have equity to leverage in commercial real estate, private mortgages can be used for a broad number of purposes that may or may not have anything to do with the improvement of the property being mortgaged, or the business that is occupying it. Compare this to conventional mortgage financing where the use of funds can be considerably restrictive, private lending can provide a source of capital that may not otherwise be made available for a given application.
Reason #4 – Alternative Capital Source
There are times when a borrower cannot qualify for bank financing but still has equity in a commercial property that can be leveraged.
While this is certainly a secondary source of financing its also an important one in that a lack of timely capital can cause business failure and loss of property.
Getting a private loan in place can provide time to either get things back on track so that you can qualify for bank financing, or wind down the business or sell the property in an orderly fashion so no value is lost through some form of forced liquidation.
Sources of Private Commercial Mortgages
Like any type of private mortgage financing, most commercial mortgages funded from private sources will come from individual lenders or investors.
As the amount of financing increases, the private money supply will come from two or more lenders working together, formalized consortiums and joint ventures, and mortgage investment corporations or MIC’s.
Once the deal size exceeds $2,000,000, the supply for private commercial mortgages is limited to investor groups of some form due to the larger portfolios they have to work with.
Private lenders, regardless of their structure, will all have their own lending and funding requirements and targets of interest which can related to geography, property type, and usage.
The key to locating and securing a private mortgage for a real estate property is to work with an experienced mortgage specialist that can not only accurately assess your needs and direct you to highly relevant lender, but work with you to properly apply for the financing and get the deal funded.
If you’re looking for a private commercial mortgage for purchase, refinance, construction, debt consolidation, or some bridge financing requirement, I suggest that you give me a call so we can quickly go over your requirements together and discuss different funding options that maybe available to you.