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.