In addition to all scenarios I outlined where commercial mortgage financing gets funded by private mortgage lenders, industrial mortgages have a few more applications to make mention of.
Most notably are situations where there either is existing environmental contamination or a threat of environmental contamination related to the use of the property.
Keep in mind that private lenders, like any other type of property lender, are concerned about environmental liability and how it can impact their security value if some sort of clean up was mandated that was beyond the means of the property owner to finance.
And in most cases, private lenders, just like conventional mortgage lenders, want to see environmental reports on properties that they are looking to finance.
Where the difference comes in between institutional lenders and private mortgage lenders with respect to environmental criteria is that banks and institutional lenders are extremely conservative with their assessment criteria for environmental liability whereas a private lender will provide their own subjective assessment to a property and in certain cases provide a mortgage commitment where an institutional lender will not.
That being said, there are also very conservative private lenders that would likely be no different from a bank with respect to the way they assess environmental risk.
Because of the historical use of a property, the historical use of neighboring properties, and the property’s current use, private mortgage lending may be the only option.
This can create real challenges in that most private mortgage lenders only provide one year interest terms with some private lenders going as high a 5 year terms, but this in the definite minority.
If there is an opportunity to clean up a property to the point where a bank or institutional lender will look at providing an industrial mortgage, then a private mortgage is likely going to be the best short term option.
But even when its not likely that an institutional mortgage can be acquired in the future, then it comes down to using private funds for as long as its going to take to become debt free on the property.
The higher cost of private money will need to be factored into the equation and in many cases will impact the resale price of the industrial properties to allow for the fact that any buyer not paying cash is going to have to pay a higher level of interest.
Sometimes sellers of industrial properties will offset the amount of financing required and the interest rate through a vendor mortgage to allow the buyer to cash flow the private mortgage in the short term and retire it as soon as possible in the near term.
Outside of environmental challenges, industrial properties can have a hard time being financed for loan to value amounts above 65% of the property value.
Large industrial buildings, even ones that are fully tenanted, can still take years to move on the open market, so lenders are apprehensive financing higher amounts.
Even for private lenders, loan amounts above $2.0M will be limited to mortgage syndication and larger mortgage investment corporations that provide private funds.
Another key point to remember is that due to the fact that each industrial property can be somewhat unique, any resulting industrial mortgage approval and subsequent funding will be customized in nature, making private funding a more viable option if there is any time of short term time pressure (less than 60 days) to get the deal done.
If you have an industrial property that requires financing and you would like to better understand your private mortgage options, I recommend that you give me a call so I can review your requirements with you in detail, and provide relevant private mortgage financing strategies for your consideration.