commercial property loan
“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.
“Long Term Commercial Mortgages Are Provided To “A” Credit Borrowers By A Wide Assortment Of Lenders”
There can be some instances where subprime lenders will extend financing terms three or more years, but this is the exception not the rule.
Long term commercial property financing is very prescriptive in nature with virtually all lenders fitting into similar lending and funding requirements.
These lending and funding criteria are centered around debt to equity ratios, debt service coverage ratios, property age and type, and the credit profile of the business and the business owners.
That being said, there can be a healthy range for each criteria set, creating ample opportunity for lenders to differentiate themselves and their lending programs.
Commercial Funding Criteria For Long Term Mortgage Financing
Starting out with debt leverage ratios, the average debt to equity for a long term commercial mortgage is around 65%. This can also vary from 50% up to 100% within the “A” credit space.
Higher loan to value ratios are typically offset by strong cash flow and balance sheets that provide lenders with other forms of security either directly or indirectly via guarantees.
Each geography, property type, and industry niche will have their own financing criteria so its important to understand how property you own or wish to acquire can be leveraged in any given market place.
Debt service coverage ratio, calculated by dividing the annual debt servicing requirements by the available cash flow, can range from 1.20 to 1.60. Once again, individual lender risk assessments and property financing applications will receive different servicing requirements.
Longer term mortgage commitments are supported by several years of historical cash flows generated by either the property itself, or the business that owns the property. Having up to date and accurate financials are key to any commercial mortgage application success.
And as the amount of financing increases, stronger third party accountant reviews are required to provide the lender with the confidence required to make a funding decision in the applicant’s favor.
The Application Process Takes Time And Costs Money
From the time of application to the time of funding, it typically takes 60 to 90 days to complete a commercial mortgage application.
This of course can vary with deals being completed in shorter periods of time and deals completed in much longer periods of time.
Complexity of a deal and the amount of financing required in typically increase the length of time to cover off both the required due diligence and the funding requirements.
Most long term commercial mortgage applications do not have applications fees per say, although there are some lenders that will charge work fees to cover the cost of the lender’s due diligence.
But even if there is no application fee, all the related due diligence costs outside of the lender’s own time will need to be covered off by the applicant.
This will include the cost of commercial appraisals, environmental assessments, third party accountant financial statements, other consultant reports, and so on.
The third party reporting requirements, and their review, is ultimately what takes up the most time in the process.
If a third party provider cannot get at the work for several weeks or even months, then the process will be delayed. And if the lender requires certain third party agencies to be used, which is very common, then it may not be possible to find another service provider to complete a certain element of work sooner.
In an effort to reduce the time required, borrowers can make sure that financials are completed ahead of time and all property related issues are in order.
And while getting an appraisal completed ahead of time from a certified appraiser may speed things up a bit, it can also lead to more cost if the appraiser selected is not on the lender’s approved list which can mean that work will need to be redone adding more time and cost to the process.
Keys To Long Term Commercial Mortgage Application Success
One of the major keys to getting a long term commercial mortgage in place for the terms you desire and the time you have to work with is to be applying for financing with a commercial lender who can fund your deal when you require the financing.
Because the process can be quite involved and time consuming, focusing on a lender that has a lower probability of being able to fund your deal can result in a significant loss of time and money if you cannot get both approved and funded.
Lenders are also “in and out” of the market depending on their overall portfolio concentration in different property and industry types so working with a lender that has the ability to fund your deal type right now is also going to be important.
Another key is making sure you have your financial statements in order including recent completion of historical financial statements and up to date interim statements. Financial statements that are more than 6 months old will be less relied upon that ones that have been completed more recently.
In addition to the financial statements, all other potential documentation requirements of a lender, outside of third party reports that each lender may demand from pre-approved sources, should be up to date and readily available.
Because of the amount of time the process can take, and the variability in both lender criteria and ability to fund, it can also make a great deal of sense to work with a commercial mortgage specialist who can not only help identify the most relevant lending sources to you, but also assist in putting together a proper application package that will proactively answer the key questions likely to come from a particular lender.
Business financing consultants can be invaluable in managing the application process with all required third party information providers and the lender.
Unless you have the ability to be able to devote a considerable amount of time to the financing process, a financing expert can be invaluable in not only getting financing in place, but also to complete the process in the shortest time possible.
If you’re looking to secure a long term commercial mortgage and would like to better understand your options, I suggest that you give me a call and we can set up a time to over your requirements in detail and review different available financing approaches.