“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But if mortgage funds are to be withdrawn from the business, then the applicant would not qualify with many available lenders.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.