“Three Categories Of Industrial Property Mortgage Financing Options”
Industrial property mortgage financing options can be broken down into three commercial lending groups.
The first group of industrial mortgage lenders are banks, credit unions, and other institutional lenders.
Banks for the most part will put their money into industrial condos or other types of industrially zoned office and work space type buildings.
Institutional lenders as a whole are much less interested in heavy industrial type properties and very little if any interest in properties that have environmental contamination issues, or are suspected of having environmental contamination issues.
The credit and cash flow for bank financing needs to be very strong as well as would be required of any “A” credit lending scenario.
And while branded lenders may seem like the most obvious solution for an industrial mortgage, in many geographies they are financing less than 1/3 of the industrial properties that utilize financial leverage.
Sub Prime Institutional Lenders
The second group of industrial property mortgage lenders out there can be described as sub prime institutional lenders.
Sub prime refers to the fact that they are going to be higher cost than bank financing and in turn will take on higher risk. Institutional refers to the fact that lenders in this category typically will have portfolios in the hundred’s of millions if not billions of dollars, so there is a formalized structure of underwriting and portfolio management.
A segment of lenders in this category will only be interested in deal that are just slightly below bank grade with cash flow already in place to support repayment and an exit strategy involving bank financing once qualifying deficiencies are strengthened.
Other segments of this market will focus on industrial development, industrial land clean up, and so on.
Most sub prime institutional lenders looking at short term lending horizons between one and five years.
Depending on the area, they can provide a significant percentage of the industrial mortgage funds outstanding in the market at any one time.
Private Industrial Mortgage Lenders
Another form of sub prime lender, is the private mortgage investor/lender.
We would refer to this as the third category for industrial property loans, providing financing in the lower third of the market with respect to both rate and mortgage size.
Private lenders, for the most part, fund deals under $2,000,000 and collectively can consider a wide range of industrial properties.
Many times bank and institutional lenders will not even consider deals under $250,000 which can mean than due to deal size, private money can be the best available option.
Private lenders also provide a lot of bridge financing for faster purchase financing closes, quicker debt consolidations, and subordinate debt financing for things like additional working capital for a business, or a construction project.
Depending, on a specific parcel of industrial property, and the borrower requirements, solutions can be available from all three categories.
And the most relevant industrial mortgage offering is not always going to be the cheapest either, depending on the full financial requirements of the property owner.
One of the best ways to assess the most relevant industrial property mortgage financing options available to you is to work with an experienced business finance specialist who has access to these different lender groups and can help you zero in on the best available options for your particular situation.
“An Owner Occupied Property Loan Can Be Arranged In A Number
Of Different Ways”
When we speak of owner occupied property loans, this is a reference to any business that owns the facilities they operate in and require financing to purchase, refinance an existing mortgage, consolidate debt, or fund a construction project.
All commercial properties can be classified into one of three categories. Those being 1) investment properties where the real estate is rented or leased out to one or more tenants, 2) owner occupied, or 3) development where the property is in the process of being developed into an investment property or owner occupied.
When you are your own tenant, the process for qualifying commercial mortgage financing is very similar, but the potential offerings available in the market can vary considerably.
The most common form of owner occupied property loans is from a bank or institutional lender where a long term mortgage is required under a fixed or variable interest term. The loan to value being financed will average around 65% but can go as high as 75% with some of the front line major bank brands.
Banks will also provide the lowest rates for “A” business so they obviously get the bulk of the business.
But there can be some interesting variations available to “A” borrowers as well.
For instance, one of the ways some commercial lenders compete against rate is to provide a higher loan to value, going higher than 100% of the property value in some cases.
The rational for a higher lending ratio is due to the strength of the overall balance sheet of the borrowing entity whereby the covenant provided by the business covers off the security requirements of the lender and keeps the risk manage-able.
Property Versus Non Property Use Of Funds
When a business owner has substantial equity in a property he or she is occupying, the commercial mortgage may be acquired for other purposes in the business or to extract equity for re investment in something else.
This is where the available commercial loan options can produce even more variability to the applicant.
For instance some commercial lenders will provide incremental mortgage funds for a broad range of uses in the business but not outside of the business. Basically, if the funds are being used to strengthen the lender’s security or the borrower’s cash flow, then an owner occupied loan can be arranged.
But if mortgage funds are to be withdrawn from the business, then the applicant would not qualify with many available lenders.
That being said, there are business lenders who will allow equity withdrawal via commercial mortgage financing. This can come at a slightly higher cost as the perceived risk to the lender is higher.
An owner occupied property loan can also come in the form of a collateral mortgage to prop up the security requirements for other assets to be acquired.
For instance if a business owner wants to acquire inventory or equipment through financing, the stand alone inventory and/or equipment financing facilities available may come with a high cost and low asset value leverage. But providing additional security in the form of real estate can reduce loan costs and increase leverage.
Owner Occupied Loans Are Dependent On
Business Cash Flow
While almost all commercial mortgages are cash flow dependent, an owner occupied applicant must rely solely on the financial statements of their own business to support the debt servicing requirements of the lender.
With an investment property where there are multiple tenants, tied into long term rent or lease agreements, the cash flow is coming from multiple businesses which partially helps reduce the risk of cash flow failure for servicing debt.
Because there is so much dependence on the business’s financial statements, its going to be important that the financials project profitability and are completed by a reputable accounting source under a proper engagement.
Commercial lenders will apply considerably scrutiny to an owner occupied application with respect to repayment and will tend to review the past three years of performance as well as projections looking forward. Scrutiny can also move beyond the total numbers and can concentrate on number of customers, number of suppliers, industry and so on.
The more risky a cash flow is viewed in terms of its ability to be maintained over time, the less likely the business will be able to qualify for the lower rate commercial mortgage products on the market.
If you’re looking for an owner occupied property loan solution for your business, I suggest that you give me a call so we can go through your requirements together and discuss the different options available to you in the market place.
“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.