Archive Monthly Archives: February 2010
Commercial Mortgage Applications Require Time, Money, and Patience
“The Commercial Mortgage Application Process Can Be Grueling At Times”
While a residential mortgage process can be completed in 2 to 3 weeks from beginning to end, the same is not true with commercial mortgages.
Residential mortgages typically require a $200 appraisal and the cost of a mortgage registration. For a commercial mortgage the costs can be significantly higher.
Here are some of the main reasons why your search for a commercial property financing will require time, money, and patience.
First of all, a commercial mortgage appraisal can cost several thousand dollars due to more required work, which takes longer to complete. In some areas, there may not be a large number of commercial appraisers available, so there can also be a waiting time of several weeks before they can even get out to inspect the property.
Second, most lenders now require an environmental assessment be performed on any property that they intend to finance. Sometimes existing environmental assessments can be used from past years, but in many cases an up to date environmental report is required. If there are any suspicions of contamination, additional assessment work can be required which will also take more time and cost more money. Like appraisers, it may take some time before an environmental auditor can get out to your property, which can further lengthen the process.
And even if you proactively get an appraisal and environmental audit completed prior to application, there is no guarantee that the individuals or firms you hired will be acceptable to the lender.
Commercial mortgage lenders may also ask for an updated survey of the property where title insurance alone won’t due and a physical survey will need to be completed by yet another qualified third party.
Moving on to repayment assessment, the lender will need to assess the financial statements of the business to see if there is sufficient historical evidence that the applied for mortgage can be repaid without placing a financial strain on the cash flow.
If the existing financial statements are more than 6 months old at the time of application, there is a good chance the lender will ask for updated statements prepared by a qualified accounting firm. More time, more money, and more patience required.
Private lenders don’t tend to have as many requirements for commercial mortgages as institutional lenders, but they still will likely want a commercial appraisal and a recently completed environmental audit, depending on the property and its usage.
The key to getting things done faster for the least amount of cost is to work with a commercial mortgage broker who 1) has access to lenders relevant to your requirements, 2) knows which third party consultants the lenders have approved for service, 3) understands how to project manage a commercial mortgage application process all the way from lender introduction to funding disbursement.
Click Here To Speak With Commercial Mortgage Broker Joe Walsh
Builder Construction Loans
Builder construction loans are available to the occupants of a property or a commercial builder who owns the property for the purposes of construction and resale.
Regardless of the type of builder, the financing process is pretty much the same for construction on a single lot. The construction loan is granted based on the equity value in the land where the construction mortgage is being registered, any equity investment the builder is making into the project, and the estimated fair market value of the property after the construction phase is complete.
When a builder acquires multiple lots for purpose of construction and then resale, the financing process will vary according to the build out strategy.
If the builder plans to complete construction on one commercial or residential unit at a time, then the financing amount requested will be based on the building costs of one or two units. When the units are completed and sold, the construction loan is paid down and the approved funds can be made available at that point to the next project.
If the builder plans to perform construction on all the lots at the same time, a larger scale construction financing facility will be required to complete the work on the overall project and may require either approval of a term out loan at the end of the building process or a certain number of unit pre-sales to have been made prior to approval.
Alternatively, the builder can arrange a unique construction loan on each lot that will be retired at the end of construction either by an inventory loan or proceeds from sale.
In general, builder construction loans will depend on the amount of investment being made on any one property title that the construction mortgage will be registered on. The larger the investment per unique title, the more lender requirements in terms of 1) size of down payment; 2) builder qualifications; 3) presold units and deposits held.
Commercial builders that develop a relationship with a construction lender over a series of projects may be able to secure better rates and terms over time that one off projects as the volume of repeat business and the predictability of the result will have a value to certain sources of construction financing.
If you’re a building contractor or owner/builder seeking a construction loan, I suggest that you give me a call so that I can quickly review your requirements and provide construction financing options for your consideration.
Click Here To Speak With Construction Mortgage Broker Joe Walsh
Military Relocation Financing
Military relocation financing mortgages and DND mortgage and mortgage transfer benefits.
If your a member of the Canadian military that needs to relocate, then you are likely going to have to change your place of residence and that can involve paying out your existing mortgage and acquiring a new one.
If you have mortgage related needs, then you’re also going to want to take advantage of the relocation services and allowances provided by the Department of National Defense (DND) for relocation and mortgage related costs.
As a qualified mortgage broker, I have successfully helped military personnel not only locate and secure a suitable mortgage, but also assisted them in getting the full benefit of the military relocation program.
The key mortgage related benefits offered in the relocation package include providing bridge financing to accommodate you through the process of buying one home while trying to sell the other as well as an allowance to cover any mortgage related costs that can occur from prepayment of the mortgage attached to the home you’re selling or a home relocation loan.
We work directly with lenders that are both familiar with the DND relocation programs and the administration that is required to apply any benefits you’re entitled to receive towards an eligible mortgage.
As mortgage brokers, our job is to make the process of finding a new home and getting the proper relocation financing arranged as quick and painless as possible.
And because we work all across Canada, we are able to provide services for any type of relocation that occurs within the country.
If you are in the midst of a military post relocation and need some assistance with your DND mortgage financing requirements, I would recommend that you give me a call so that I can quickly assess your situation and provide you with the most relevant options to consider.
Construction Financing Success Has a Lot To Do With Lender Selection
In the world of construction financing, all lenders are not going to be relevant or best suited to your project.
Many times there can be considerable urgency in finding and securing a construction loan for a project about to commence and any source of financing will do, or will it?
In other cases, a property owner may become overly focused on the lowest cost sources of construction financing when they may not be the best fit for the borrower and the project.
A construction project is all about accurately predicting and controlling costs, coordination of work, and managing cash flow. The combination of these three elements can have a lot to do with your lender selection.
For instance, if you want to use an institutional lender to provide construction financing, you have to make sure you have the time to prepare and provide the necessary information in the qualifying process that can be fairly extensive for some projects. Furthermore, because draw approvals are very tightly controlled by institutional lenders, you’re going to need very precise project management in place, or a large contingency fund to cover any draw reductions that are not uncommon with this form of financing.
If you’re short on time to get the project started and want to focus on utilizing funding from a private construction mortgage lender, then make sure you spend a bit of time selecting someone that you’re comfortable working with.
Private lenders are mostly individuals, each with their own approach to approving and managing the loan process. This is a departure from a traditional banking scenario where processes and procedures are well laid out and documented. Therefore, it can be very important to not only understand the terms and conditions of a mortgage commitment, but also the manner in which a specific private lender will go about administering the draw advancement process.
Whether or not you choose an institutional or private lending solution, you’re still going to be working with an individual or individuals who will be responsible for working with you through the construction process. If the people you meet and interact with don’t inspire trust and confidence, you would be highly advised to look for another source.
Mortgage brokers are also part of the mix, serving as the middle man for both the approval process and some or a lot of the draw advance process. Being comfortable with your mortgage broker, if one is involved, is also important to the success of the overall process.
The negatives that can occur should be obvious. If money is not advanced in an orderly and predictable fashion, the project could be delayed, resulting in additional costs that may be hard to cover and potentially kill the profitability and even completion of the project.
If you’d like assistance with locating suitable construction financing as well as lender selection, please give me a call so that we can discuss your project requirements.
Click Here To Speak With Construction Mortgage Broker Joe Walsh
Home Equity Line of Credit – When to Apply
A home equity line of credit can be an excellent source of readily available short term financing that can be used for any purpose.
The basic qualifications are solid credit, loan to value amounts of 75% to 80% of the property value depending on the mortgage program and lender, and a repayment assessment based on the three year fixed term rate for a fully funded mortgage.
The financing rates can be prime to prime plus 2 and the outstanding balance is always open to repayment without penalities.
Higher income home owners with good credit would likely qualify for this type of low cost short term or bridge financing any time they wanted while others may not be able to pass the prepayment test for the combined first and second mortgages that will be registered against the property.
Depending on what you’re motivation is for securing a line of credit, there will be different strategies for applying.
Ideally, a home equity line of credit is a great source of contingency financing and cash reserve to protect your family and cash flow from unexpected events. But like most forms of low cost financing, it will be very difficult to secure if not impossible at a time when you really need it if the your circumstances have strained your credit and/or reported earnings.
If this is your motivation to secure a home line of credit, then the best time to apply is simply when you would qualify.
That may sound a bit strange, but its also the nature in which financial institutions grant approvals for prime or prime plus financing.
As an example, if there are two working home owners, each with a good paying permanent job and good credit, the prospects of applying for a secured line of credit on a property that has available equity would be likely be very high.
But if one of the home owners was laid off and the family as a whole was struggling with managing cash flow for a period of time, it would be unlikely that a secured line of credit would be approved at that point.
The same is true of the self employed. You will have greater success applying for secured and unsecured lines of credit right after a good year, whether you truly need the money or not.
Once you have the secured line of credit in place, you can use if for whatever you like. So if there is a time when additional funds are required, for whatever reason, you will have a financing reserve system all set up.
And as long as the balance on the line of credit sees movement up and down over time, you’re not likely to have any issues with the bank. If you are sitting at the maximum amount of the line for a year or more, they may review your account and even reduce the line. But even if that came to pass, you would still likely be able to easily term out this second mortgage due to the fact that there is still at least 20% equity in the property and the available funds have likely helped protect your credit.
The current recessionary period only reinforces the need to have a some sort of financing back up plan to deal with the unexpected and unplanned and a home equity line of credit can be a great way to accomplish that.
New Rule Changes Announced For Government Insured Mortgages
Insured mortgages underwritten by Canada Mortgage and Housing Corporation (CMHC) will undergo a bit of a face lift starting April 19, 2010.
Minister of Finance, Jim Flaherty, announced three policy or rule changes to the mortgage insurance program.
The first, and perhaps most significant of the changes is that a borrower’s repayment qualification will be based on the 5 year fixed mortgage rate instead of the three year rate most lenders now use. Because longer term rates are higher over time, the lending decisions will now be factoring a higher level of conservatism into the repayment assessment.
What remains unclear on this point is the actual 5 year rate that will apply as some mortgage lenders have posted rates while others do not.
The second change impacts mortgage refinancing where additional funds are being drawn against the remaining equity of a residential property. Up until now, you could get an insured mortgage up to 95% of the property value on a refinancing. The new rules will drop this down to 90%.
The last change announced is the amount of leverage available under the program for non owner occupied properties acquired for the purposes of speculation. This would primarily impact the rental market where investors can also take advantage of the government backed mortgage insurance.
But with the change, investors are now going to have to put 20% down on any purchase, maxing the amount available through a CMHC insurable mortgage to 80% of the purchase price.
Many expected the changes to be even more significant as there have been concerns that the current policies were helping to promote a housing bubble here in Canada.
If you’re looking at a higher ratio mortgage that will require mortgage insurance and would like to know how these changes may impact your particular situation, I suggest that you give me a call I will make sure that you get all your questions answered.
The Debt Consolidation Process Can Both Help and Hurt Your Credit
Even though a debt consolidation process can pay down or payout your unsecured credit card and line of credit debt, it can also hurt your credit.
Let me explain.
While its not all that common of a practice, lenders that grant debt consolidation loans can require the borrower to close all the accounts being paid out, perhaps leaving the individual with no credit cards at all.
If the credit score was already low due to the debt being consolidated, the reduction in all available credit will likely make it even worse. And without any active credit cards of any sort, it will be basically impossible to rebuild your credit score.
This is where utilizing the skills of an experienced mortgage broker can come in handy.
While the lender may come back with the requirements to payout and close off all credit card and line of credit accounts, an experienced mortgage broker has the ability to try (and I do say try) to negotiate keeping a couple of credit cards and one line of credit open. If the broker is successful, then the borrower will have truly received the full benefit from debt consolidation.
The reason why this is even possible is due to relationships mortgage brokers can develop with the credit departments for various mortgage lenders. This provides some what of a platform for the broker to make a case on the borrowers behalf for a reduction in the severity of the payout requirements.
While an individual may try to attempt this on their own, its unlikely they will get very far as credit decisions tend to be very difficult to change.
And when you’re dealing with a mortgage broker that has a focus on debt consolidation, its very likely he or she will be proactively positioning for a positive outcome during their discussions with the mortgage lender prior to a commitment even being issued.
If you’re considering taking advantage of the current mortgage rates to perform some debt consolidation of your own, I would recommend that you give me a call so that we can go over your situation together and develop a plan to get you the best overall results.
Another Approach To Cottage Mortgage Financing
One of the best ways to secure cottage mortgage financing for a year round cottage property is through residential mortgage programs that allow a second mortgage for a single family unit.
These programs will allow you to qualify for an insured mortgage that can provide up to 95% required financing for the purchase of a cottage property.
The mortgage applicants would be required to have sufficient income to meet the debt servicing tests for the both properties combined and the home owner or a family member would be required to occupy the residence ( basically, the cottage property could not be used as a rental property).
For higher income families that are looking to invest in larger, year round cottage properties, these programs can be a great fit in that higher leverage can be achieved for very reasonable interest rates.
This type of mortgage financing can also be used for purchasing a condo property as a second home for the kids to live in while they go to university or work away from home. As long as an immediate family member is residing in the home and its not being used for a rental property, this second home would likely qualify under these programs.
In addition, both homes can also be financed through higher ratio insured mortgages provided that the borrowers can pass the debt servicing requirements and the possess the minimum level of acceptable credit.
If you’re interested in purchasing a cottage property, you may want to first inquire as to whether your existing home mortgage provider has this type of program. If they don’t, and your mortgage is open or near the end of its interest term, it may make sense to first move your mortgage over to a lender offering the two home program prior to shopping or trying to secure a cottage property.
This may take a bit of work to arrange, but if you’re able to secure higher mortgage leverage in the process for a reasonable cost of financing, you could either secure your dream cottage for less money down or start looking at higher priced properties that now can be financed through a second insured mortgage.
If you have a cottage mortgage financing need, I suggest you give me a call so that I can quickly assess your situation and provide relevant options for your consideration.
Private Construction Financing
The private construction financing market continues to develop due to the benefits provided to both sides of the equation, namely the borrower and lender.
Private construction funding has become the construction mortgage product of choice for many buyers, home owners, and builders in the province of Ontario as well as other parts of Canada.
For private lenders, construction financing is an effective way to get their money placed into the market several times in one year, yielding a very solid level of return.
This is an example of a product that fits certain needs of the market while still charging a premium price.
Private mortgage financing of any type is not cheap compared to institutional lender rates for similar applications. But one of the key differences with construction financing as compared to other forms of private mortgage lending is that the borrower in many cases will choose a private mortgage over an institutional mortgage offering.
Private construction loans on average, can be put into place faster, provide higher capital leverage, and offer more straightforward and predictable draw schedules that their institutional counterparts.
All things being equal, everyone that could qualify for traditional bank money at the lowest possible rates will take it every time… or at least they would in theory.
The challenges of bank based construction financing become the opportunity for the private lender. Borrowers have to understand that the lowest interest rates are provided at the lowest levels of risk. To determine if an application fits into a low risk category of lending, more assessment work is required by the lender which typically takes more time. With most financing applications for just about any purpose, time is a factor in getting funds approved and in place. So when time is a constraint, private money can become the solution.
The second challenge provided by lower cost money is the amount of funds the borrower needs to have invested or have available to invest in the construction project. If a private mortgage solution will provide higher leverage than the next best institutional offer, then private money can again end up being the solution.
The third challenge related to low risk construction lending is the care and conservatism associated with construction draw advances. If you’re a first time applicant, this is likely not a concern to you as you have no historical experience to go by. But for a builder who is continually utilizing construction financing, the predictability of a private lender’s draw administration process may cause you to chose private construction financing, even if it requires you to pay a premium.
If you’re seeking private construction financing in Ontario, I suggest that you give me a call so that I can quickly assess your requirements and provide you with relevant options for your project.
Click Here To Speak With Construction Mortgage Broker Joe Walsh
Private Mortgage Lenders And Rates Are Very Regional
In recent years, private mortgage lenders have grown in numbers as baby boomers seek out different, more secure investing opportunities outside of the stock market roller coaster of the last ten years.
Regardless of where you live in Canada, there are likely private mortgage lenders not too far away that could be interested in your property if private funding is required.
However, unlike institutional lenders that tend to be more consistent in terms of interest rates right across the country, private mortgage funding and rates can vary tremendously from region to region. There can even be different regions within a province where rates and available funds can vary considerably.
Like most free markets, private mortgage funding is based on supply and demand where lenders will charge what the market can bear in relation to the competition.
Private mortgage sources are mostly regional lenders because they understand the real estate market in their own back yard and are more comfortable assessing mortgage opportunities in areas they are most familiar with.
So if any particular area has a limited number of private lenders, it stands to reason that the interest rates quoted are likely going to be more on the high side due to a lack of competition.
On the flip side, in areas where the real estate market is strong and there are a larger number of private lenders present in the market, rates on average are going to be on the lower end of the spectrum.
But there are all sorts of variations around these two extremes and somethings what is available can be very different from what you might expect in any given area.
For instance, in the Ontario’s GTA, private mortgage rates can range from 8% to 12% on residential and commercial first mortgages, depending on the level of confidence the private lender has in the local market where the property is located.
Within the stronger real estate markets in Montreal, private mortgages can start as high as 15% regardless of what may be considered a lower risk scenario.
Loan to value ratios will also vary from region to region, again reflecting the strength of the local real estate market as well as level of competition.
If you’re actively seeking private mortgage financing, you’d do well to contact a mortgage broker that works with private lenders in your area so you can not only develop a better understanding of potential leverage and pricing in your market, but also access their sources as private lenders are not always easy to locate without the assistance of a mortgage broker.
The 5 Types of Real Estate Development Project Financing
For real estate development project financing, there are actually 5 potential applications of funds that can come into play depending on the project.
Here is a brief description of each of the 5 financing applications.
- Land Acquisition. The purchase of the land that will be developed and or built on is typically the first type of financing required. A land purchase tends to be a stand alone transaction that will require financing to close before other aspects of development financing can be considered.
- Land Development Costs. The actual costs for preparing the site, installing services and road ways can be secured by available equity in the project which would be typically be secured by a second mortgage.
- Construction Mortgage Financing. At this stage, the prior costs may have been funded in cash, reside in a first and second mortgage, or have been consolidated into a new first mortgage. In any case, the construction mortgage funding will again be secured by equity in the project for the initial draw and then by the incremental increases to property value that occur at the completion of each draw.
- Condo Inventory Financing. For residential and commercial condo development projects, there can be a need for incremental capital before some or all the condo units are sold. Capital can be required for 1) carrying costs to fund the project until condo registration is in place, 2) additional construction costs or trade payables that remain outstanding at or near the end of the construction phase, 3) refinancing of the construction loan to secure a lower cost of financing during the condo sales period.
- Take out Mortgage. Once a project is completed, the construction financing will need to be paid out by a long term mortgage. This mortgage can be put into place after the construction lien period has expired without any claims being made and an occupancy permit being issued. The take out mortgage can be arranged prior to construction, during the construction process, or after construction is completed in some cases.
Each of these financing applications may require the issuance of a mortgage specific to the use of funds. Each development project financing requirement is going to be somewhat unique based on type of project, capital contribution by the owners, location, regulatory requirements, and so on.
If you are a buyer, builder, or property owner seeking development project financing, please give me a call so that I can quickly assess your situation and review the most relevant financing options with you.
The Challenges With Securing Industrial Mortgage Financing
Industrial mortgage financing is required for a commercially zoned building that has an intensive or heavy manufacturing or processing purpose.
The term heavy would relate to activities like welding or some form of chemical processing where the work being performed has some impact on the building or property. On the flip side, light manufacturing could be performed in a commercially financed building where the nature of the activity does not impact the property and structure in any manner.
With Industrial buildings, many of the challenges related to financing can stem from the heavy usage they are exposed to.
If there are higher levels of wear and tear, staining from air borne materials, or staining from liquid based materials, there can be an impact on the resale value and speed of resale, causing mortgage lenders to be less interested in these properties.
Also, if there is a toxic or corrosive type activity, the building is going to looked at more closely with respect to its containment systems and a higher degree of environmental testing is going to be involved.
Some buildings were also built for rather unique purposes, so if they are ever put up for sale, it may be difficult to find alternative uses for the building or the renovation costs to make it functional for another type of use may be too high to justify acquisition.
For some industrial mortgage applications and locations, institutional lenders will either have no interest at all in the financing opportunity, or will only provide lower levels of leverage and higher interest rates.
As a result, private mortgages can end up being the only option for certain buildings which will result in slightly higher rates than institutional lenders so the underlying business or commercial tenants will need to have sufficient margins to cover off the higher cost of financing.
The key points here are that industrial mortgage financing sources are typically harder to locate and secure than other forms of commercial financing and the time required to complete the financing process tends to run longer than virtually any other type of mortgage financing.
These are situations where a commercial mortgage broker can be invaluable to you both in terms of finding relevant sources of financing, but also helping you meet all the lender conditions and getting the deal closed.
If you required assistance with industrial mortgage financing, please give me a call and we’ll go through your options together to see if we can find a workable solution that meets your needs.
Criteria For Condominium Inventory Mortgage Financing
The main reason for trying to secure a condominium inventory mortgage is to generate additional capital for a condo project that is not completed to the point where condo sales can be closed and the related funds from sale injected into the project’s overall cash flow.
This mortgage is secured by paying out the construction loan and putting in place a new mortgage that will function as a line of credit, leaving it open for repayment at any time.
While the refinancing can also generate a substantial saving in interest costs, the savings created on the interest side will likely be offset by the costs associated with setting up the condominium inventory mortgage.
The true value doing inventory financing is securing additional capital to fund the project through its later days. Additional funds are secured based on the appraised level of completion.
To qualify for condo inventory financing, the property owner must be able to demonstrate that the trades and suppliers to the project have been paid up to date, or mostly up to date. If incremental funds were not capable of at least paying off outstanding suppliers, its unlikely that the commercial mortgage would be approved.
Another major consideration by a lender for this type of bridge mortgage financing is the amount of condo unit pre-sales that have taken place. Because this is effectively a short term bridge loan, the lender will want to see that significant progress has been made on sales which will further verify the market value of the project and strengthen the security position of the lender.
Even if a project is 100% completed with respect to construction, there may still be a need to cover off the financing costs being carried by the project until the condo registration is complete and the development has the right to close sales on pre sold units to generate cash flow.
Basically, the closer the project is to completion and the higher the level of pre-sales, the more likely it will be to secure financing and also to secure maximum levels of leverage.
If you have a development project that requires additional capital, I suggest you give me a call so that we can quickly go over your options together and determine the best course of action for your project.
Mortgage For Rental Property
If you’re seeking a mortgage for rental property in Ontario, there are several financing options to consider.
For the residential market, where investment properties can include a single family unit home, townhouse, duplex, basement apartment, condo and come from a conventional sales process or even power of sale process, the primary mortgage options fall into two groups.
On the institutional side, residential investment properties still fall under the Canada Mortgage and Housing Corporation (CMHC) for insured mortgages. Borrowers and properties that qualify for mortgage insurance can secure leverage of up 90% of the property value.
Mortgage insurance is an additional cost of financing, but it allows for a much higher level of potential leverage which may be required to make the deal work in the first place. Cash conservation tends to be very important in growing an investment portfolio, so as long as the property can cash flow repayment, an insured mortgage will minimize the cash outlay for down payment, potentially freeing up funds for other rental property investments.
The second group of mortgage options falls under the private mortgage category. While a private mortgage for rental property will likely provide lower potential leverage than an institutional mortgage, there are other benefits to consider.
With respect to leverage, private mortgages on rental properties tend to range between 65% and 75%. On average, the leverage will be closer to 65%. To get to the higher end of the range, the property would have to be very strong in terms of its valuation and resale potential.
Private mortgages are effectively bridge loans in that they will either be for a one year to two year period of time. There may be opportunity for renewal, but there will also be renewal fees incurred for term extensions.
Private rental property loans are more about speed to closing and less stringent mortgage qualifying. If you’re on a tight time line to close a deal you can’t afford to lose, then a private mortgage option may be your best approach to getting the deal done. Or, if you’re credit profile is not strong enough to qualify for institutional financing, a private deal may still make sense if the property can generate a positive cash flow after financing costs are factored in.
If you’re looking for a mortgage for rental property, I suggest that you give me a call so I can quickly assessment your situation and provide you with the best available options.
Condo Inventory Financing
For owners and builders that have gotten to the end of a condo development project and require additional funds before the condo registration process is complete, a condo inventory financing solution may fit the bill.
Its not unusual for a condo development project to experience a delay at the end of the construction phase in getting the project approved for condo sales.
Prior to that point, the project takes on more of a townhouse status from a lender’s point of view which can impact the amount of leverage the owner or builder can secure against the project.
And even though the actual construction is now complete, there are still going to be financing cost that need to be paid on a monthly basis to the construction financing lender and perhaps a first property mortgage that would have been used to acquire the property. In addition, there may also be some trade payable to take care of that were planned to be covered by the initial condo sales, but remain outstanding with no new cash inflows in sight.
The solution in these types of cases is what we refer to as inventory financing whereby the inventory of units where sales cannot be completed at the present time can be used to secure additional capital.
If the project qualifies for institutional financing, the construction mortgage will be paid out and incremental funds provided to a level of 65% of the completed project value.
If the construction loan was from a private source, at an interest rate likely between 10% and 14%, the refinancing will also drop the mortgage rate to 6.5% to 7.5%, creating a significant saving in financing costs.
Any commercial mortgage refinancing is going to cost money to accomplish, so the interest savings can potentially offset the costs of getting a new mortgage into place.
A mortgage for inventory financing is set up as a line of credit with interest only payments required and an open mortgage term so that the outstanding balance can be paid off at any time, making this a very effective form of bridge financing.
If you are working on a townhouse development project that is in the process of receiving condo registration and needs additional capital to keep the lights on and pay the bills, then condo inventory financing may be a good fit. For these types of scenarios, I recommend that you give me a call so I can quickly review your requirements and provide available options for your consideration.