There are times when a business or property owner will need to refinance their existing first mortgage in order to get additional capital, but may not be able to immediate secure a long term “A” rate mortgage in its place.
This tends to happen if there is some type of strain or bruising of the credit standing and financial performance of the company.
In these situations where short term qualifying issues can be resolved in a relatively short period of time, typically less than 2 years, a two step financing approach can be deployed where by the needed incremental capital is secured right away through a new private mortgage and a long term financing solution with an “A” lender is put into place as soon as the credit and/or financial issues are resolved.
So the first step in the two step process is to refinance the existing commercial mortgage with private financing that has a term of one to two years. The interest rate is obviously going to be higher than an “A” mortgage but the added cost in many cases is a small fraction of the benefit to be secured or the cost to be avoided by getting the mortgage refinanced on time and potentially providing incremental capital when required.
From a cash flow point of view, because a private mortgage is typically interest only versus having to pay a combined principal and interest payment from an “A” type lender, the monthly debt servicing will tend to be very similar.
Once the private mortgage is in place, the business and property have now been stabilized, allowing for the time and funding necessary to get back to “A” lender qualifying status.
If this can be accomplished in 3 to 6 months, the private loan can be retired early and refinanced into a bank or conventional mortgage.
On the surface this may seem like a much more expensive process for getting financing in place.
But if the alternative is not getting funds in place when required, it may be one of the cheapest options available to you.
Further, many times private lenders will work with existing appraisal and environmental reports provided that they are still representative of the property. This can save a considerable amount of time and money related to getting the original commercial mortgage refinancing completed.
The video in this post goes through an example of an actual case where two step financing was required and the circumstances that led to it.
If you have a need draw incremental funds out of a commercial property that has a mortgage, or just need to replace a commercial mortgage that cannot be renewed by the existing lender, then I suggest that you give me a call at 416 464 4113 for a free assessment of your short term commercial mortgage refinancing options.
Commercial mortgage investing via private mortgages can be an excellent way to build a new investment portfolio or diversify an existing one.
Investment opportunities can include income producing properties, owner occupied properties, and different forms of land development and construction.
Compared to investing in residential mortgages, commercial property loans are typically for a higher lending amount on average and can require a higher degree of investor or lender knowledge to properly qualify each deal.
Within the commercial property market, there are all sorts of niches that can be targeted by a lender to gain a better understanding of the market and to develop more robust lending and funding criteria.
For the private commercial mortgage market as a whole, 90% of individual private lending doesn’t exceed $2,000,000. For larger deal amounts, mortgage investors can choose to syndicate with one or more other investors to cover off the size of the deal and further mitigate the lending risk.
Because of the time it can take to arrange a bank or institutional mortgage, its not uncommon that commercial deals get funded with private funds when there is any type of time pressure involved. This then provides a long period of time for the borrower to arrange long term funding with a bank at rates and terms that meet their requirements.
This form of two step financing can result in a very solid and low risk return on investment to the lender due to the fact that a take out mortgage would likely have been provided in the first place if enough time was available to the borrower.
Similar to residential mortgages, there is definitely a market for fast commercial mortgage approvals and funding which can lend to higher rates of return as most private lenders do not provide a fast enough process for some of the short term bridge financing requests that are regularly out in the market.
So solid commercial deals in Toronto or the Greater Toronto Area are going to be more competitive among private investors as compared to mortgage investment opportunities that are outside the GTA.
On the flip side, higher rates can be obtained outside of the GTA as well not only for higher potential market risk, but also due to a lot less competition for individual deals, with competition being very regionally specific.
The main keys to getting into commercial mortgage investing are 1) to develop a solid understanding of the types of deals you want to consider as well as your lending criteria; and 2) develop a regular deal flow source so that you always have access to potential deals when you have money to invest.
One of the best ways to get access to deals when you want them is to work with an experienced private mortgage broker that works on commercial property financing requests.
If you want to know more about commercial property investment opportunities in Ontario, I suggest that you give me a call and we can discuss further at time that works for both of us.
Click Here To Speak Directly To Private Mortgage Broker Joe Walsh
A business loan, by definition, is financing facility provided to a business for a specific purchase.
This can be provided in both an unsecured and secured format.
The challenge with most business loans is the lender’s ability to get comfortable enough with their own assessment of a given business’s credit, cash flow, and collateral so that capital can be extended to the business.
Because every business is somewhat unique in terms of the time in business, type of business, size, scale, profitability, expertise, and so on, it can become difficult and time consuming to find a lender that will grant the capital that is required.
One way around this is to utilize equity in real estate to access funds faster and in a more predictable fashion.
This is where private mortgage financing can come into play.
Financing from a private lender can be used for just about any type of short term business capital or bridge funding requirement and the source of leveraged debt can come from either residential or commercial property.
Business owners sometimes get overly hung up with the interest rate they are paying on debt.
But once they factor in the costs of updated financial statements, commercial appraisals on different assets, environmental assessments, and the opportunity cost associated with the lost time taken getting financing in place, a private mortgage solution can be the best solution by far at times.
In business, timing can be everything, and if capital cannot be readily procured when an opportunity presents itself then it can be a lost opportunity or at the very least a sub optimized opportunity.
This is also why cost and timing are very relevant in business financing scenarios.
ROI is typically more important than interest rate and should be the deciding factor when looking at different financing options that may be available to your business enterprise.
Especially for small businesses, accessing capital can be difficult to procure in a timely manner.
And the cost of conventional business loans may not be all that different from private financing once all costs are factored in.
If equity is held in residential assets, business owners can also secure private funds personally and then lend the funds acquired to their business, creating their own business loan in the process.
Individuals will at times go to great lengths to avoid highly leveraging their personal home.
But if a business loan is secured that does not mortgage real estate, the personal guarantee of the owners is still required, indirectly exposing personally held real estate to debt financing anyway.
Outside of payday loans, which can only provide a few thousand dollars at best, private mortgage equity loans are one of the fastest forms of money available in the market.
So regardless of property type, funds can be accessed quickly in either first or second, and sometimes even third mortgage position, provided there is sufficient equity in the property to support a private loan.
This can also be far more economical than running up high interest credit card balances, or using up all your available lines of credit. High credit utilization of available credit will also result in a lower credit score which can end up reducing your ability to access conventional forms of credit.
If you are looking for capital for your business and have equity in real estate property you can leverage, then you may want to consider creating your own form of business financing through a private mortgage.
The reality is that you need time to be able to work through the requirements of a bank or institutional lender when it comes to a strip mall or plaza type property.
When you don’t have sufficient time, it can be difficult to secure the funding you require to close a purchase, refinance existing debt, or undertake some scheduled renovations.
Because most strip mall properties are income or rental properties, its going to be important in the long run to have lower cost financing in place to maximize your return on investment. There is not real arguing with that.
But the key with the last statement is “over the long term”.
In the short term, it may make sense to utilize slightly higher priced private money that you can get into place quickly and provide the time you need to arrange the optimal long term financing deal that is available to you in the market place.
Another challenge with financing strip malls at the time of acquisition is the lender’s view and assessment of available debt servicing.
In some cases, a plaza or mall location can be acquired at a good price because of the level of vacancies and/or the below market level rent being charged.
But regardless of what you can project the future rents to be, the lender is likely going to focus in on historical financials which could cause you not to be able to even qualify for financing with an “A” lender.
On the other hand, private lenders are more likely to have a smaller cash flow buffer requirement than a bank or institutional lender.
So it may make a great deal of sense to complete the purchase, secure your great deal with a private mortgage, and then get the rates and vacancies up to where you would qualify with a bank or institutional lender.
Private lending is short term financing that typically can be put into place much faster than a conventional commercial mortgage.
The added cost provides the benefit of speed and and actually getting financing in place, which puts you in a position to take advantage of longer term financing through institutional lenders at better rates.
If you are looking to acquire a plaza or strip mall or want to refinance or renovate one you already own and require financing to do the work, then I suggest you give me a call so we can go over your requirements together and discuss different short and long term financing options potentially available to you.
While private mortgage lenders that finance commercial properties are likely to be measurably faster than a bank or institutional lender when it comes to completing the application to funding process, there can still be a considerable amount of time pass before everything is completed.
The two single biggest items that are key to any type of commercial mortgage approval are the property appraisal and the environmental assessment.
Both of these take time to complete, which can hold up the process for even private mortgage financing.
The big difference between most private lenders and banks and institutional lenders when it comes to these items is that private lenders tend to be more flexibility in terms of working with the information you have available.
For instance, if you’ve completed an environmental audit in the last two to five years on the subject property and there hasn’t been in material change in the use of the property since the assessment was completed, a private lender may be willing to use the dated appraisal and not require that you get a new one completed. This will vary by lender, but with privates there is more of a common sense element to looking at this information versus the pure black and white rules of an institutional lender.
The same can be said for a real estate appraisal, although using an appraisal more than a couple of years old may not work all that well either.
The big difference with an appraisal is having one done by a recognized, or well known AACI certified appraiser. Even if a private lender has a “favorites list” of commercial appraisers, they may still be willing to utilize an existing appraisal from someone off of their approved list, provided the appraiser is well known and the appraisal is not too old.
Having both of these items in hand when applying for a commercial mortgage through a private lender can cut down the time line considerably from point of application to funding.
The key is to have these documents 1) recently completed, 2) completed by a recognized appraiser for the purpose of property financing, 3) in an electronic format so that all the pictures, graphs, maps, and drawings can be easily viewed, plus it makes the reports appear much more professional than an office photocopy; and 4) make sure that the appraiser are prepared to provide transmittal letters to future lending sources you may be speaking with.
If you are in need of commercial mortgage financing and would like to consider both bank and private money sources, I suggest that you give me a call so we can go over your requirements together and discuss the different options that are available to you.
As a result, there are times when its more important to get commercial property financing in place that can get the deal closed versus getting the best deal.
This is where private mortgage financing can play a significant role in the commercial mortgage financing process.
Here are a few examples to further support this contention.
Lets say that you want to acquire a building and renovate it into a long term investment with multiple tenants. You have a considerable amount of cash to put into the deal and a strong financial profile that would allow you to qualify for bank or institutional financing, but you also need to close the initial purchase and then complete the renovations in the next 4 months.
The probability of getting through a bank or institutional financing process in the time period outlined is low, or risky to say the least.
The longer term take out commercial mortgage can start to be arranged as the same time as the private mortgage so when all the work is completed and the property tenanted, the longer term mortgage can pay out the short term bridge loan as soon as possible, minimizing the time you’re incurring a higher cost of borrowing.
Another example would be where you are months into the process of setting up a development mortgage for a residential subdivision project, but are now running out of cash flow and require a private mortgage as a bridge to provide a capital infusion into the project to cover future costs until the longer term development financing is secured.
There are many other examples I could cite, but the common theme is a requirement for shorter term funding to bridge the project or transaction to a longer term bank or institutional commercial mortgage financing solution.
While private mortgage financing can be a great bridge financing solution, it can be hard to locate and secure in the time you have to work with if you aren’t looking in the right places.
Especially when a quick turnaround is required, there is only a small percentage of private lenders that can pull it off.
So the key to success is working with an experienced private mortgage broker with direct access and experience with private lenders that can provide different types of commercial property financing bridge loans.
If you have a short term commercial property requirement, I suggest that you give me a call so we can go through your situation together and discuss available private mortgage solutions.
Commercial mortgage refinancing where 1) the existing mortgage has either come due, 2) the borrower wants to acquire incremental capital through a new mortgage, or 3) the lender has demanded repayment on a mortgage that is default or in breech of one or more of the mortgage covenants.
In any of these cases, a private commercial could range from the only choice available to the best choice available, even over bank or institutional offerings.
When utilizing private mortgage funds in a commercial mortgage refinancing situation, its important to be applying what a private mortgage can provide versus the specific requirements of the borrower.
In situations where the property or borrower is in some type of credit or cash flow distress where they may not be able to qualify with a bank or institutional lender for a mortgage renewal or a new mortgage to refinance their existing loan, a private mortgage can become the only true option available as the private lender is not going to have as strict a lending criteria on cash flow and credit that you would experience when applying to a conventional lender.
In situations where the business and/or property is generating sufficient income to service the debt, but the business does not want to pour most of the available cash flow into debt service in the short term due to other requirements, a private mortgage refinance can provide an interest only payment that can be considerably lower on a month to month basis compared to a fully amortized mortgage payment over 15 to 20 years.
Private commercial mortgages can also be structured to be open with no penalty or minimal penalty in the event of early prepayment.
So if you have an existing mortgage coming due on a property that you are likely going to be selling in less than a year, it may make sense to refinance the existing commercial mortgage with a private lender so that you potentially avoid both mortgage placement costs and some or all of the future prepayment penalty if you have to repay the mortgage early.
A private mortgage for commercial property financing is a tool that can be utilized in a number of situations in and above those where cash flow and credit are distress.
The key to utilizing private funds properly and profitability is in understanding the features available to you and how you can best apply them to a given commercial mortgage refinancing situation.
At the same time, private mortgage features and benefits are going to differ from one lender offering to another, so its going to be important to be working with an experienced private mortgage broker to make sure that you are properly utilizing this form of commercial property financing for your business.
By its very nature, this is a short term lending instrument that is typically only for a period of one year but can be arranged for two or three years in some cases.
When financing commercial property, a private commercial mortgage can be an effective financing approach for at least three different scenarios that we’ll now go over.
The first scenario is when you are trying to purchase a property and there isn’t enough time to get a conventional mortgage in place even though you would likely be able to qualify for bank financing. Sometimes its not worth the risk of losing the process through the borrowing process dragging on and its better to get financing in place that can close the deal than lose out on it all together. As soon as the property is secured, you can then start working through a conventional mortgage solution to pay out the private mortgage.
The second scenario is when the business requires capital quickly for a non real estate related transaction. This could be to consolidate debt or provide incremental working capital for operations to grow sales or cover losses from a business slow down. Regardless of the reason, a private mortgage can be a great solution as the process for getting a mortgage assessed, approved, and funded is typically significantly shorter than a bank or institutional lender. And if the business is in some type of financial difficulty or economic downside, a private lender may be the only real option.
The third scenario has to do with short term cash flow. There are times when a business wants to acquire a property and its available cash flow does not quite need the debt servicing requirements of a conventional lender. This can be in situations of start up where the business is still new and cash flows are being developed, or an established business where the owner or manager is growing the business and cash flow is tight as a result of the growth process.
In this situation, a private mortgage for one or two years is likely going to be more cash flow friendly than a bank or institutional commercial mortgage due to the fact that most private mortgages require interest only payments every month instead of principal and interest payments. Under private money financing, the principal is not going to get paid down during the time of the loan, but the capital will be acquired to purchase the building which is going to be the most important consideration for many businesses in this situation.
If you are considering private commercial mortgage financing for any of these or other situations, I suggest that you give me a call so I can go over your requirements with you and suggest different private mortgage options that would be relevant to your needs.
Because most private mortgage lending terms are for a period of one year, this automatically means that a longer term solution is going to be required to payout the private mortgage, provided that the owner wishes to retain the property into the future and isn’t coming into enough cash within the time period of the private mortgage to retire it with internal sources of funds.
In many cases, once the private mortgage is put into place to deal with whatever short term financing issues that needed to be solved, the business owner or manager tends to relax thinking that they now have ample time to locate and secure a long term bank or institutional mortgage before the one year term is up.
With commercial property financing scenarios, a year can go by very quickly and you still can be strapped for time trying to find the right institutional deal.
What we recommend with our clients is to allow us to complete step one, which is the placement of the private commercial mortgage, and then engage us to immediately start working on the long term commercial mortgage.
In this way, there is going to be some continuity in the effort for looking for financing, and if we can get something in place sooner than later, then we may be able to pay out the private mortgage without any prepayment penalty, depending on how the mortgage is written, saving you the higher cost of interest that is going to come with most private mortgages.
Attacking the process of getting ultimately getting long term commercial mortgage financing in place as a two step process such as what I have described above not only increases the probability of you getting a solid commercial mortgage in place, but also that the financing process for both step one and step two can be completed within the time period you have to work with which will eliminate any penalties or late fees associated with delays in getting everything in place.
There is also the element of critical mass with a business financing search that should not be underestimated either. If you shut down the process for looking for the long term commercial mortgage solution once the private mortgage is in place, it can be difficult to get the process going again and inevitably the restart happens too close to the end of the private mortgage term which can create a whole new set up problems and costs if the long term mortgage placement drags on.
If you would like to discuss how we can help you with this two step process, I suggest that you give me a call and we’ll go over your situation with you as well as different approaches to getting both steps of the commercial property financing requirement completed.
And while this is going to be true for the most part, there is a slice of the private mortgage lending market that offers what we’ll call premium private mortgage rates.
This category of private mortgage investor is looking for a near to zero risk investment, wanting to do better than what they are going to be able to get from CD, Bonds, T bills, and other low risk interest earning investments.
And because they still have a very low appetite for risk, they are only prepared to invest in private mortgages with low loan to value ratios, on strong commercial properties, with good cash flow.
For these types of deals, these premium private mortgage lending rates can fall in to the 5% to 6% annual interest rate range, which can directly rival anything you may be able to secure at a bank or institutional lender.
Even if the premium private rates are slightly higher than the banks, the cost of getting the mortgage in place may be lower, and if the debt servicing requirements are interest only, this can provide a significant cash flow reduction to an amortized commercial mortgage payment, if that is something that is important to you.
Another key benefit of these types of transactions is that you can negotiate very good repayment options from completely open to three months interest penalty.
So if you have a plan to liquidate a property in the near future, but still need to finance it until a sale is perfected, then this can be a great source of low cost short term mortgage financing.
Another scenario could be where you’re business and/or property does not fully qualify for bank or institutional financing at the present time (need three years past financials and you only have two; need longer term tenant agreements which you still require time to get into place, etc.).
Yes, this type of financing is available, but only for very low risk properties in strong real estate markets.
If you have this type of need and think you have a property that might qualify, then I suggest that you give me a call so we can quickly go over your requirements and review any premium rate private mortgage options that might be available to you.