Commercial Mortgage Categories
“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.
“Mixed Use Property Loans Can Come From Both Residential And Commercial Lending Programs”
These properties need to be zoned to allow for both residential and commercial utilization.
The split of the property use component will dictate what type of lender or lenders will be interested in seriously considering an application for mixed use mortgage financing.
For instance, for a residential lender to consider a mixed use mortgage, the property utilization must be at least 50% residential. Some home based lenders will only consider residential usage to a minimum of 80%. Each lender and program will be different requiring some market intelligence as to where any one particular deal may fit.
Everything that cannot be covered off on the residential financing side will automatically defer to commercial mortgage solutions.
Mixed Used Financing Challenges
Because of the potential usage combinations of a property with two types of occupancy and use, it can be difficult at times to find a financing solution that is available, or one that meets the borrower’s requirements.
For instance, main line bank and institutional lenders will not typically consider a mixed use property loan application under $250,000.
And when you get into areas of lower population, there can be a considerable drop off in lender interest for any type of mixed use property financing opportunity.
The cost of financing itself can be another challenge.
With straight residential providing the lowest possible cost of mortgage financing available, and straight commercial being the second best, mixed use mortgages tend to have higher risk premiums attached to them and the more unique the property setup the higher the related lender risk due to lower potential remarketing factors.
Limited availability of bank or institutional lending solutions at times can also drive the supply side of the market more towards private lending.
And because mortgage insurance is not available for multi use properties, loan to value ratios tend to average out at less than 60%, with the potential financing leverage ranging from 50% to 75%. So depending on the property, the owner equity requirement can be substantial as compared to other types of property investment.
Comparing Mixed Use Property Lenders
Regardless of the property type or borrower profile, the primary lending objective in most cases is to secure the most debt based capital for the lowest cost. With mixed usage, meeting this objective can be difficult to figure out at times due to some of the financing trade offs you may need to consider.
As an example, there are times when bank, sub prime, and private mortgage options can become similar in terms of the amount of financing provided and the total effective cost of the getting financing in place and servicing debt.
Let me explain.
Banks and institutional lenders can require considerable due diligence and third party verifications to be completed before extending financing. The things they require such as appraisals, environmental assessments, updated financials, and third party studies can be similar in volume and cost for both small and large deals.
At the smaller end of the lending spectrum all the lending application related costs can become substantial.
In comparison, sub prime institutional and private lenders can have significantly lower application related costs as they may be prepared to consider existing appraisals, environmentals, and financials as an example.
So even though secondary mixed use property loan sources may come with a higher interest cost, when all costs are considered, the total cost of financing can be comparable.
With mixed use mortgage financing, this type of more detailed total cost and loan to value comparison can be important to making the best borrowing decision.
Because of all the potential variety in scenarios with mixed use properties from one geography to the next, and one type of property to the next, the process of securing commercial mortgage financing or residential mortgage financing can be difficult to figure out at times and can be helped considerably by utilizing the skills of a property financing specialist.
If you are looking to secure mortgage financing for a mixed use property, I recommend that you give me a call so we can go over your requirements together and discuss the most relevant options available to you in the market and how they stack up against one another.