Commercial Real Estate Loan Services
“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.
“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.
“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.
“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.
“Commercial Bridge Loans Secured By Real Estate Property Mortgage”
Commercial bridge loans are available via first, second, or third mortgages registered on real estate.
Common situations where commercial bridge loans are required is when:
1) a property purchase needs to be closed quickly
2) mortgage refinancing is required that cannot be completed with a bank or institutional lender in the time available
3) cash flow is required to cover off growth or provide for unexpected costs.
In all cases, a bridge lending situation has a defined beginning and end period, the amount of financing and its usage are clear, and the exit strategy for repayment of all advanced funds is well understood and accepted by the lender.
The reality, however, is that most bridge financing requirements do not allow for a lot of time which tends to rule out banks and other institutional lenders as viable sources to consider.
If you have up to 30 days to work with, a sub prime institutional lender can be the best option, especially for deals larger than $2,000,000.
But if the time required to get the bridge in place is 2 weeks or less, a private mortgage is the only likely option that can provide funds in the time required.
Keys To Getting A Commercial Bridge Loan In Place
the number one key to getting bridge financing funded in the time you have to work with is to work with a commercial mortgage specialist that provides this lending service and has the lender net work and track record of successful placements.
Most short term lenders are not set up for a fast turnaround, and its easy to waste several days or a week before realizing that a particular lender is not going to be able to fund you by your deadline.
A commercial mortgage specialist coordinates process with a bridge lender and the lender’s lawyer so that the process can be completed from beginning to end in the shortest time possible.
Bridge Loan Rates And Terms
Bridge lending is going to be more expensive that a conventional mortgage and the cost will also very depending on the equity in the property and if the security registration is in first, second, or even third position.
Because of the limited number of bridge lending sources that are properly set up for a closing in 2 weeks or less from the time you first contact them, you are also playing a slight premium for the speed, but it typically offset by the hard cost or opportunity cost that would be incurred if funds are not available when required.
Most commercial bridge loans are also for a term of one year with partial to fully open repayment at any time. So even if you only end up needing the funds for a couple of months, you do have the ability to repay the loan when capital is available to do so.
The exit strategy is also closely linked to loan repayment so that the lender can be paid out as agreed.
If you’re in need of a commercial bridge loan for purchase, refinance, debt consolidation, construction, cash flow, or some other reason, then I suggest that you give me a call so we can quickly go over your situation and discuss potential financing options that will meet your needs.