private 2nd on commercial property
“A Private Second Mortgage On A Commercial Property Can Be An Ideal Source Of Fast Capital”
The ability to quickly access equity held in real estate can important to finance a multitude of transactions or cash flow needs, or to refinance existing debt.
Any type of private funding is going to be short term in nature.
The rationale to use this type of commercial mortgage financing option is, compared to other available options, a private 2nd provide the amount of capital required, for an acceptable cost, in the time you have to work with.
There can be other considerations such as refinancing the existing first mortgage or securing a business loan against cash flow and other commercial assets.
And while some of these other options may be put into place at a lower cost, the issue around the time it will take to get money into place is typically the tie breaker when assessing more than on financing option.
Decision Making For A Private Second Mortgage Will Be Impacted By Circumstances
So while speed of getting money in place can certainly be a defining criteria when it comes to accessing capital from property equity, there are other considerations that will be important in different circumstances.
For instance, if the business or commercial property owner has recently experienced a drop in earnings and is seeking additional capital from their commercial real estate, even if they have time to get a new bank or institutional first mortgage in place, they may not be able to qualify for one at that particular time.
So leaving a good rate in place on first mortgage and getting a private second mortgage in place for a smaller amount can result in the weighted average cost of capital being reduced as compared to a new first mortgage at sub prime or secondary banking rates.
Another example would be the cost of getting alternative financing in place versus the incremental cost of a private mortgage.
The application requirements of a bank or institutional lender for any type of commercial mortgage are going to basically be the same, regardless of the amount of financing required or if the mortgage is in first or second position.
This will include a new commercial appraisal, new environmental assessments, interim financial statements, and so on.
These costs, spread over a smaller financing request, may drive up the effective cost of financing well above when you might be paying with a private 2nd.
This is due to the fact that many private lenders will utilize existing appraisals, assessments, and financials, provided that they still represent the property and cash flow of the borrower.
By being able to utilize third party reports and documents already paid for, the borrower can avoid having to get everything redone and the time and cost involved in doing so.
Very Little Use Restrictions On Private Funds
Another great advantage of most private lending is that your use of funds can be pretty broad.
So for instance, if you were looking at an equity take out via mortgage financing, this would more likely be accomplished through a private lender than a bank or institutional lender as they typically require borrowed funds to be invested back into the property, or at the very least back into the business that owns the property.
Smaller requested capital amounts, which are common with second mortgages, will also tend to draw less utilization questions than larger requests.
So if you’re looking to generate incremental capital for a variety of different applications, and you have equity in a commercial property that you can leverage, then a private second mortgage on commercial real estate is an option you may want consider.