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.