It’s not uncommon for a business these days to turn to private mortgage financing of a commercial property to inject the necessary cash into the business to keep the doors open as the economy tries to turn itself around.
And for many business owners who have never had to utilize private money in the past, they may reluctantly take it on and try to pay the higher private commercial mortgage rates for as short a time as possible.
This is definitely a good strategy, provided that you have an accurate assessment of the amount of time your commercial mortgage from a private lender needs to be in place.
For instance, most private mortgages are only for a period of one year.
So, is it realistic that within one year the business will have returned to more historical levels of financial performance that will allow it to refinance the private mortgage through some combination of internal resources and bank or institutional commercial mortgage financing?
A year can go by pretty quickly, and it will also take time to get third party financial statements prepared to support a strong financing position.
Therefore, even though you may not be crazy about paying private mortgage interest rates for a longer period of time, it may be a good idea to consider a two or even three year term, or at least a renewal that allows you more time if you need it (provided that such options are going to be available).
Failing to do this and running out of time on a one year private commercial mortgage can end up being pretty expensive as the solution may end up being starting from scratch with another private lender, paying broker and lender fees again as well as legals to essential keep the same money in place for a longer period of time.
Estimating time in this regard as two considerations. First, how long does the business need to rely on private money before its in a better borrowing position and second, how long is it going to take to get lower cost commercial mortgage financing in place once things do turn around.
In many cases, both of these considerations can take more time than you estimate, which means that some amount of time buffer needs to be built before committing to essentially a bridge loan to fund the working capital of your business.
Its better to be a bit conservative and pay a bit longer than risk incurring considerable incremental costs through having to refinance a second time after your one year term expires.
A commercial mortgage can take some real time and patience to get into place from a bank or institutional lender, mainly because of all the due diligence and funding conditions that can come with a commercial mortgage.
This is in keeping with the reality that cheaper money is lower risk money and slow to get into place as a result.
Sometimes the requirements of the commercial mortgage lender are also too rigid for the intended purpose of the borrower, making commitments that end up being presented to the borrower basically useless.
If you understand what the typical commercial mortgage requirements are, you can try and mold your deal to fit the money.
Most business people think that commercial property lenders are fairly pliable with their programs and will bend a bit here and there to make a deal work.
The reality is that most commercial lending criteria and requirements are quite rigid and inflexible and if you can’t fit the box, you don’t get funded.
While this may appear to be unreasonable, it does make sense in that lenders have to manage risk through applying a very specific model. If they stray too far outside of what they know will work or be manageable, they set themselves up for failure, and there’s plenty examples of failed banks and lending institutions that strayed too far away from prudent risk management strategies.
So when you have a workable deal that doesn’t quite fit into a bank or institutional lender’s box, the next best alternative can be a private mortgage lender.
The private money lender has the same types of risks to deal with, but likely doesn’t have the collective exposure of a major bank, and tend to micro manage their risk position a lot better, so customizing a commercial mortgage commitment to fit your requirements on a deal that makes financial sense can be very possible to achieve.
Private money is likely going to be more expensive, but it may come down to moving forward at a higher cost of capital or not moving forward at all.
If there is room in your margin or returns to cover the cost of a private commercial mortgage in the short term with the potential of getting refinanced with cheaper money within one to three years, then private money may be the better approach versus wasting months and perhaps years trying to get a bank or institutional lender to bend enough to fund your deal with cheaper money.
If you are in need of a commercial property mortgage and want to better understand your private mortgage alternatives, I suggest that you give me a call so we can go over your requirements together and discuss private commercial mortgage options that meet your requirements.
When someone talks about getting the best commercial mortgage available to them in the market, they are invariably talking about the interest rate they will be charged on any commercial mortgage they receive.
And while the cost of money is always going to be important with any type of financing instrument, interest rate is not always the most important factor for the best commercial mortgage in any given situation.
This is largely because it can be difficult at times to secure the commercial mortgage you want in the time you have to work with.
Its not unusual for a commercial mortgage funding process to take from 60 to 90 days or longer from the time you first apply until the deal actually gets funded.
And if at the end of that time period, you still don’t end up with the rates and terms you’re looking for, there may not be enough time to start the whole process all over again somewhere else.
To try to alleviate running out of time, applicants may try to work with several lenders at the same time.
But unlike residential mortgage financing, deal shopping is frowned upon with commercial mortgage lending due to the amount of work that can go into getting a deal completed.
If it comes to the attention of a commercial lender that you have several other applications out on the market, they may remove themselves from the mix and work with what they would perceive as more committed applicants.
So locating and securing the best commercial mortgage is all about what you can get into place with the time you have to work with.
In many cases, there isn’t an abundance of time to start with and the prospects of going 6o to 90 days without completing the financing process does not bode well for most deals or transactions dependent on commercial financing to complete them.
This is exactly why private mortgage lending can be an excellent option and best commercial mortgage option for financing your commercial property.
A private mortgage lender can typically complete the application through funding process in 30 days or less with less third party verifications (and their related costs) required at times.
Once you have funding in place, and you’re no longer under the gun for time, you can start the process for seeking out a long term commercial mortgage financing solution, if that’s what is required, that can provide the best available rates and terms in the market.
With no time pressure, you’re also not going to be trapped into taking something that is less than desirable due to running short on time. A better bargaining position has to have time on your side and with short term funding already in place, you are in a much better position to go through the market strategically to land the best commercial mortgage deal.
If you’d like to discuss the best commercial mortgage options available to you at this time, based on your requirements and time parameters, I suggest that you give me a call so we can discuss your situation in detail and review potential commercial mortgage options available to you.
For instance, with the residential sub prime mortgage market, the institutional lenders that provide equity based loans to people with bad credit and/or weak cash flow may set the interest rate on the mortgage offering at or even above what a private mortgage lender would charge for the same deal.
This is in stark contrast to the interest rate spread between an “A” residential mortgage rate and a private mortgage interest rate which can be 5% or higher.
With commercial mortgage financing, the same type of rate spread variation exists, but to an even larger degree.
For instance, for an “A” type commercial deal, a private mortgage lender may be offering an interest rate at or slightly below what is being offered by a bank or institutional lender. Commercial mortgages can provide the opportunity to place larger blocks of money and for well secured properties pledged by low risk borrowers, there is a slice of the private lending market that is very competitive with the banks.
The same is true in more regional areas where banks and institutional lenders tend to offer higher rates, even under national brands, than they will for very similar properties in larger, more active real estate markets. In these situations, the rate spread between institutional and private mortgage lending rates can be very small compared to what one might expect.
In very competitive commercial market, there will be a healthy spread between a bank’s rates and those offered by a private commercial mortgage lender, but that’s not always the case as mentioned above.
And while private mortgage lending of any type is not a long term financing solution, it can be an excellent short term solution that is very rate competitive compared to what you may think.
From a mortgage interest rate perspective, any situation where the rate spread is small or none existent provides a short term opportunity for the borrower to consider.
If there aren’t any bank or institutional offers at the present time that can significantly beat the best private rates being offered, then you may want to consider going with the private mortgage.
Institutional commercial mortgage lenders are basically ruled by the quality and balance of their portfolio. So at a given point in time, what they may be able to offer may not be considered to be a bargain in the market. So instead of locking into a longer term mortgage at less than an optimal rate, you could choose to private, pay interest only payments which will help you cash flow, and use the time provided from the private term of likely one or two years to seek out a better long term commercial deal.
If you play this right, this strategy can potentially lead to a significant cash saving over time.
The key point here is that we should not assume that there are always large rate spreads on commercial mortgages between private and bank or institutional financing sources. Depending on your short term requirements and view of where long term institutional rates are headed, a private mortgage offering may be a better fit for your commercial mortgage requirements.
Because there are so many types of commercial properties, there are also lots of different types of commercial mortgage lenders as well.
The more unique any one property is, the more difficult its going to be to locate and secure a commercial mortgage, unless there is a obvious and active resale market in place.
Because of the larger dollar amounts associated with commercial buildings due to larger square footage, many lenders will have very specific requirements and areas of interest in commercial property financing.
Taking it one step further, all mortgage lenders have a portfolio of mortgages where different property types and different industries must be balanced off against one another so that the lender’s overall level of risk stays within their funding mandate.
What that all means, is that bank and institutional lenders, both on a national and regional basis, can come in and out of the commercial mortgage market on a regular basis, based on what they need to do next to bring their portfolio into balance or keep it in balance.
The result is that commercial properties can have a hard time finding the right type of commercial mortgage at a given point of time which can force them to go into the secondary market of private mortgage lending for a period of time.
While most private money lenders focus on residential mortgage financing, there are quite a few that are comfortable with mortgages for commercial property and have taken advantage of the opportunity the market has provided to them in the form of mortgage financing opportunities that are either not currently “bankable” or that can’t locate a suitable lender at a particular point in time.
Because the quality of some commercial deals are so high, situations where a commercial property owner gets forced into the private market due to timing can still see them secure commercial mortgage rates that are very similar to what the bank would charge anyway.
The big difference though is that the private lender will typically only provide a one or two year interest term, essentially providing a commercial bridge loan until such time that a longer term institutional commercial mortgage financing solution can be arranged.
And even though private lending is very common on commercial properties under $500,000, its not unusual to see private money finance commercial property up to $10,000,000 for everything from bare land acquisition, to construction, and mortgage consolidation.
If you’re looking for mortgage commercial on the web, then I suggest you give me a call to first determine if an institutional or private commercial mortgage option is most appropriate, and second to line up some potential options for your consideration.
These days, many banks and institutional lenders will not even consider a commercial mortgage or industrial mortgage under $250,000 as the return on the mortgage doesn’t cover off all their costs associated with qualifying the application and monitoring the account over time.
For these lower dollar commercial and industrial properties, private mortgage lenders become not only a good choice in many cases, but the only choice for financing at times.
And while its also true that private mortgage terms are typically for no more than one or two years, there are private lenders that will look at three to five year terms on commercial and industrial properties, but only a few in most areas.
Even for larger property values, banks and institutional lenders can be difficult source of capital to procure if 1) the buildings on the property are old, and 2) there is any potential risk of environmental contamination from activity that’s taken place on the site, or from the activity of the neighboring properties over time.
Another application for commercial private mortgage financing is when you have a commercial or industrial complex that does not have all the units rented or leased out at a given point in time. Below certain levels of occupancy this is going to be a deal killer for a bank or institutional lender, but likely not for a private lender.
In this situation, you could look to acquire a private mortgage for one or two years, go and get all the units rented or leased, and then spend as much time as is necessary to locate and secure the long term commercial mortgage or industrial mortgage from a bank or institutional lender.
And while the rate of the private money may be slightly higher than what the bank is offering, the cost of getting the mortgage in place could be less. As an example, a bank or institutional lender will always require an up to date environmental assessment on the property. If the structures on the property are fairly new, or there was an environmental audit completed sometime in the last couple of years, a private lender may not require anything further to make a borrowing decision.
And even if the overall cost of the private mortgage is slightly higher, if the time provided by the private mortgage term allows you to the opportunity to find and secure a great long term mortgage deal, then the cost over time could very well be less versus taking a suboptimal institutional deal today.
One last thing to mention with private lending is the impact on cash flow.
Many commercial mortgages and industrial mortgages can be issued with very short amortization periods. The resulting principal and interest payments can put a lot of stress on the cash flow.
In comparison, most private mortgages have interest only payments, which can cut your monthly debt servicing costs in half, which for a new company or one in transition, can be significant.
Even when individuals have great credit and a strong down payment, the application, approval, and funding process through a bank can take 60 to 90 days and many sellers are not going to be prepared to wait that long.
And while residential mortgage financing is accepting of rate shopping, commercial mortgage lenders are not as open to the idea. Because of the large amount of work that can go into a commercial property financing assessment, if the lender finds out that the deal is being broadly shopped, they may decline you early on and save on their administrative efforts.
So if you’re only working with one commercial lender and your months into the process without a result, time is going to be working against you to complete the deal.
One potential solution to dealing with acquisition financing for a commercial property is through the use of a private mortgage.
A private mortgage lender can typically make a lending decision and get the deal funded within a 30 day period, allowing the deal to get closed and for you to take ownership of the property.
Once the property is secured, you can immediate turn to finding the long term financing solution for the property as the private mortgage is only likely going to be for a one year term. But one year is going to likely be sufficient time to not only locate and secure an institutional commercial mortgage, but to also negotiate the best possible deal for your business as now you don’t have a time pressure that puts you in a negative negotiating position.
The private mortgage may cost you a bit more for its short term use, but when you consider what even a 1/2% can add up to on a long term commercial mortgage over time, or even worse, the opportunity cost or operating costs associated with not closing on the property in the first place, a private mortgage can be a true bargain and deal saver.
If you’re looking to acquire a commercial property, or you’re in the middle of trying to arrange a commercial mortgage for a property that you have already made an offer on, I suggest that you give me a call so I can make a quick assessment of your situation and requirements and provide you with relevant private mortgage financing options for your consideration.
These days with all the private money entering the market place, its not uncommon to see a commercial deal prices one or two percentage points above comparable bank or institutional rates where the typical spread between private mortgage interest rates and bank interest rates is considerably higher.
And if you go one step further and calculate an all cost in effective rate, a private mortgage lending solution can even be cheaper in some cases, although that can be very hard to determine from the outset. This is due to the fact that bank and institutional lenders that provide commercial mortgages will all have more third party cost demands required to approve the mortgage and maintain it over time compared to most private lenders.
A higher standard of care associated with lower rate commercial mortgages can lead to considerably more costs which when added into the cost of financing may not end up being cheaper at all.
Even if the effective rate on private money is higher, it may not be very much higher, and if there is added benefits received from a private mortgage such as speed to closing, then the added cost can be more than worth it.
Like with any type of mortgage financing, rate is a function of risk, and the lower the risk associated with the financing request for the property, the lower the potential rate that can be secured.
The real wild card to getting a solid rate for a private commercial mortgage is working with the right private lender.
Even though we can all equate rate to risk, each private lender will have their own costing table for the money they are prepared to put out in the market and many times, there is no reduction for risk which allows them to secure a better deal with a healthy profit margin.
The key then is to find the private lender that is the best match for your commercial mortgage financing requirements.
The best way to achieve this is to work through an experienced private mortgage broker who has lenders that will fund commercial deals in the same slice of the market that you are vested in. And even though a private mortgage on commercial property is going to be faster to get in place through a private money lender compared to a bank, its still going to take time.
So you want to make sure you’re focused in on the right type of private lender so you don’t end up having to take a less than optimal deal from the wrong one because you’re running out of time.
If you’d like to know more about commercial mortgage rates for a commercial property requirement you have, I suggest that you give me a call so we can go through your requirements and determine what type of bank and private mortgage rates are likely going to be available to you.