“Commercial Mortgage Financing Through A Private Lending Source Can Become A Preferred Option”
The goal for any commercial property owner that requires real estate financing is going to be to secure capital through a bank or institutional lender in order to keep their cost of capital at a minimum and their repayment in keeping with with cash flow requirements.
Arranging proper financing can be critical to both the business capital a company has to work with as well as the level of operating costs they can afford.
But there are situations where a bank or institutional commercial mortgage solution either is not available to the property owner, or cannot be made available in time.
And in some cases, where the property is in a strong market and is held by a financially stable owner, the private mortgage financing rates can almost rival bank commercial mortgage rates, further making private money something to consider in certain circumstances.
“When Does A Private Mortgage Make Sense On A Commercial Property?”
I have come up with a list of the five most common situations where a private mortgage gets put into place on a commercial project. There’s likely others, but these are the most common ones in my opinion.
Property Acquisition. There are times when either the window available to get financing in place is too short to allow for a bank application for financing, or the available window is rapidly shrinking because the application process with a bank or institutional lender is taking too long. In these cases, the short close ability of many private lenders allows the buyer to close the deal and not miss out on the purchase altogether, which can end up being considerably more expensive at times than the slightly higher cost of a private commercial mortgage.
Construction. Similar to residential construction, private mortgages can be a preferred source of financing for a construction project to erect, renovate, or expand a commercial building. This is typically an option for commercial construction projects under $2.0M. As the amount of construction financing increases, a private construction loan could still be an option, but it will likely have to be syndicated through multiple lenders or funded through a specialized mortgage investment corporation.
Business Down Turn. There are times when a business may pass through a bad economic stretch and cannot provide the type of financial performance required by an institutional lender. In these situations, a commercial mortgage from a bank may not be renewed creating the need for the property owner to transition the commercial mortgage to a private lender until such time that the business cycle has been corrected and financial performance restored. A private mortgage may also be used to generate any additional capital the business may require to fund itself through the down turn.
Bad Credit. Similar to a business down turn, there may be times when the overall credit of the business and/or the property owner have declined causing the borrower not to be eligible for a bank or institutional commercial mortgage. The business or tenants of the property may still be providing adequate cash flow to fund the business, but because the credit score or rating requirements of the lender cannot be met, a private mortgage may be the next best option to provide the time necessary to get the credit level of the business and/or the owner back up to the level required by cheaper sources of money.
Property Liquidation Or Wind Down. In situations where a business is not going to be able to survive and an existing mortgage lender is in a position to foreclose or start foreclosure action, a private mortgage can provide the funds necessary to pay out the lender and buy time for the owner to perform an orderly liquidation or wind down of the business assets so that the maximum value can be extracted from sale.
Private mortgage financing can be a valuable form of short term financing that may be more relevant in some situations than you may realize.
If you are in one of the above situations and are seeking a commercial mortgage for one or more properties, I suggest that you give me a call so we can go over your situation and requirements together and discuss different commercial property financing options that could meet your needs.