“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.
“Financing Multi Unit Family Buildings Is Primarily About Cash Flow”
Multi unit properties are also divided into two categories for lending purpose.
Properties with 4 or less units are typically financed through residential mortgage financing programs while multi unit family structures of 5 units or more are financed through commercial mortgage programs.
The focus here is the larger commercial buildings in this category.
Like most commercial financing applications related to property, the land value for these apartment buildings are determined by commercial appraisal and the loan to value offered by the lender will be specific to the structured of the program that the lender is providing.
Multi unit family building financing programs will tend to fall in the 50% to 85% loan to value range range. Many programs will require qualification for mortgage insurance to cover off the lender risk of default. The cost of financing will be impacted by whether or not mortgage insurance is required and the amount of the financing required.
So Now back to cash flow.
Longer term commercial mortgage agreements require proof of established rental incomes in order to secure lower cost interest rates.
There are a number of different revenue and cash flow items that are reviewed at the time of application to validate cash flow.
These include 1) rental rolls; 2) vacancy rates; 3) rental contracts or agreements; and 4) financial statements.
The longer a period of time this information can be provided, the more credibility it has to supporting the cash flow available for debt servicing.
Calculating Debt Servicing Capacity For Multi Unit Financing
Each commercial property financing program for multi unit family buildings will have prescribed debt service coverage ratios that describe the relationship that needs to exist at a minimum between required annual debt repayment and the annual net cash flow generated by the property.
Once again, depending on the property, this ratio can range from 1.2 to 1.4.
The process for coming up with net cash flow is to take the income from the financial statements and add back non cash items, primarily depreciation. There can also be other add backs or reductions to the cash flow calculation depending on the lending program.
If you have a low vacancy rate and solid market rents, then its more likely you will be able to qualify for the higher end of the loan to value range. If this isn’t the case, then the amount of equity that needs to be invested will increase.
This is common in situations of acquisition where the buyer can secure a good purchase price for an under preforming asset and realizes that rents can be raised with some work and vacancies reduced.
The challenge with this from a financing perspective is that while the lender will want to see your projected cash flow over the period of the proposed loan term, the debt servicing calculation is going to be based on existing and historical cash flows with some programs opting to consider a three year historical average.
This can make it difficult to qualify for financing with lower cost lenders until such time as the cash flow has been increased.
If the cash flow requirements of the “A” lenders cannot be met, then more equity based lenders will need to be considered to provide a higher loan to value, but that will also come with a higher cost of borrowing.
The point here is that the cash flow that has been generated by the property in the recent past and the present is the most important aspects for financing a multi unit family building.
Especially in situations of acquisition, its recommended to get enough basic financial information from the seller to roughly assess the amount of financing the property can service.
This can save a lot of time purchase and financing process as by doing some preliminary math you can better determine how much capital you will need to invest of your own money and if the financing request you are making is likely to be approved and funded.
Failing to do this can result in waste of a considerable amount of time and money trying to secure financing that will not hold up under cash flow due diligence.
If you’re looking for financing multi unit family buildings of 5 units or more, then I suggest you give me a call so we can go over your requirements together and work through the different commercial mortgage scenarios that are available to you.
“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.
“What Is Subprime Commercial Mortgage Lending”
Some people will call subprime a secondary financing market or second chance funding that is available to those borrowers with a combination of cash flow, equity, and credit provides the basis for a lender to advance a mortgage at a higher rate of interest due to higher risk.
In the commercial mortgage financing market, depending on the geographic location, only about 1/2 of the market is funded through banks and institutional lenders with the balance capitalized by subprime lenders and borrower equity.
While there are many that hold the opinion that subprime is more of a lender of last resort, this is not necessarily the case and in fact this can be a lending vehicle of choice, especially if you have shorter time lines than what a bank financing process will require.
Subprime commercial mortgages can be placed for purchase, refinance, debt consolidation, construction, and bridge financing applications.
And there are lots of subprime or secondary financing sources, each working to carve out a niche in which to operate.
Even though there are many different sub prime lending sources and lending models, on the whole all of these sources of business property financing can be categorized in to 1) subprime institutional lenders; and 2) private mortgage lenders.
Subprime Institutional Lenders
Subprime institutional or quasi institutional lenders can include trust companies, merchant banks, pension funds, investment funds, and so on where funds are targeted towards a certain type of real estate, rate of return, and risk. The lenders are formalized organizations that directly or indirectly work with investor capital to place real estate mortgages on commercial property.
There are large capital holders in the global market place that seek to diversify their holdings through into real estate and do so through these quasi institutional lenders that can be wholly owned or outsourced.
While there can be considerable variability in what is offered from one of these lenders to the next, the commonality would center around what we would refer to as “near bank deals” where the borrower has not quite been able to get qualified at a bank, but is close enough to evolve into “A” credit financing in the near future.
Rates are higher than bank deals due to the higher inherent risk.
The terms tend to range from one to three years and can include prepaid interest, interest only, and amortized repayment.
One of the key aspects of subprime institutional lending that differentiates it from most of the private lending is the size of the deal that can be considered. Minimum deal sizes are typically $1,000,000 or higher with upper limits in the 10’s of millions.
Due diligence also tends to be more straightforward and streamlined as compared to a bank or institutional deal with funding timelines from application to advance of 30 to 45 days.
Private Commercial Mortgage
Private mortgage lenders are also part of the subprime commercial mortgage space.
While subprime institutional lenders will focus on cashflow, credit, and equity, private lenders are mostly concerned with the equity of the property, making them still higher risk lenders in most case.
That being said, there are lower risk private lenders that would overlap with the subprime or quasi institutional group.
Some of the bigger differences with private lending is deal size and lender profile.
Private lenders are primarily individual investors placing their own money, or working in small syndicates. There are also mortgage investment corporations or MIC’s that place investor money into mortgage investments.
90% of private money has a deal size of under $2,000,000 and a term of no more than one year.
Larger deals are more confined to MIC and larger syndicates.
One of the major benefits of private lending is the speed of deal completion which for smaller deals can be accomplished in a matter of days, and for larger deals, a matter of weeks.
So on average, private lending focuses on smaller loan size, faster placement, higher risk, higher rate lending than sub prime institutional.
If you can’t qualify for a commercial mortgage with a bank or institutional lender, or don’t have time to invest in their process, then the subprime commercial mortgage market is likely your next best option.