During the course of a typical month I will receive numerous requests for debt consolidation loans where the solution could be a first or second mortgage, either institutional, or most likely private mortgage.
This is a common type of mortgage financing request and is not at all unusual considering the high average level of consumer credit that is reported in the news on a regular basis.
The key to being able to provide a workable solution to the borrower is the presence of equity in their home or real estate property.
With sufficient equity, a potential solution can be arranged despite cash flow and/or credit problems.
Over the last couple of months, what has been most interesting with some of these cases is that the borrower inquiring about financing options is also considering not making their payments and negotiating a write down or write off of their current debts.
While negotiating a debt write down is certainly not a new practice, I have seen this being considered more and more in recent months by borrowers considering their debt management options.
And to be clear, I am not talking about individuals that do not have any refinancing or debt consolidation choices. I am referring here to individuals that have the means to consolidate their debt through incremental borrowings but choose not too, or seriously consider to choose not to in favor of trying to get their debts written off or written down.
Further, these are not consumer proposal scenarios either, but private debt negotiations.
There are definite pros and cons to a strategy of negotiating down your debt load.
The obvious pro here is that a write down or write off of debt reduces your overall amount of debt, your payments, and the interest you are going to have to pay on a go forward basis.
The potential here is to reduce your overall debt load by 30% or greater which can add up to very significant dollars for some individuals.
On the con side, there are a also a number of things to consider.
First of all, to go down this road, you are basically going to stop paying your creditors and get forced into a standard collection process over a number of months.
Collection agents are going to work hard to get this money repaid and it may take a considerable amount of time and distress until the process gets to a point of being negotiated out.
Second, there is no guarantee as to what the end result may be. In the mean time, your credit is slowly being destroyed and once everything gets resolved, it could take 5 to 10 years or longer to repair your credit.
So the question then becomes can you get a large enough short term benefit from a write down or write off to offset the future cost of bad credit over the next 5 to 10 years?
Many people also don’t realize that credit bureaus are now used for more than qualifying you for borrowing money.
Its not uncommon now for employers to complete both police and credit back ground checks during the hiring process. The reason for looking at your credit is to potentially get a glimpse of your character and how you handle your affairs away from work. Whether this is a fair practice or not, the point here is that bad credit can impact you in a number of different ways that can be hard to quantify.
Basically, its important to understand the true potential cost and benefit of trying to negotiate down debts you have incurred when you have other options available to you.
If you don’t have any other options, then that’s a different story altogether.
But for those that do, these are some of things they should be considering.
If we can find a way to consolidate existing debts through mortgage refinance or additional mortgage lending and get the cash flow in order in the process, then in the end there is a very good chance this is going to be a better approach for all the reasons mentioned and more than taking the highly uncertain path of trying to negotiate debt write off or write down.
Regardless of what strategy you choose, we are always available to go through the debt consolidation and mortgage refinancing process with you and discuss the available options…and the pros and cons.
When looking into construction financing for a commercial project, its going to be important to get a semi accurate assessment of how much financing you can hope to secure before getting to far into the project.
Many times the property owner can start out with assumptions or guidelines related to being able to secure a construction loan that are inaccurate which can create problems completing the work on time and in budget.
So here’s a few things to keep in mind about how a lender undertake a commercial construction financing process.
First, you are better off reviewing, in detail, your plans and preliminary budgets with relevant construction lending sources prior to spending too much money.
There can be a tendency to make assumptions as to what costs a lender will cover, and what value they will assign to the work completed prior to you speaking with them. If your assumptions turn out to be off by a wide margin, it may become difficult to arrange financing with what you have to work with at that point as it may be difficult to alter the scope of the project for various reasons.
Second, the fundamental basis for approving a construction loan is going to be based on the lender’s opinion of the property value before, during, and immediately after construction. So its going to be important to support property values through third party appraisals at all relevant intervals of the project.
The starting point is always going to be “what is the land worth today in its as is state?” So if you paid $300,000 for a piece of real estate 60 days ago, its unlikely that a lender will now consider it to be worth any more than that.
Property owners and builders can get overly hung up on getting the budget for the project financed instead of the market value of the end product.
For example, if you have a $5,000,000 construction budget for a project to be erected on a $500,000 piece of property, the starting point would be that a construction lender would consider financing 65% to 70% of the project value.
But what is the project value?
On a cost basis, one can argue that the project value is $5,500,000.
But if we get a qualified appraiser to come up with a post construction value of the property, based on the plans and budgets, the amount can be more or less than $5,500,000.
And there is a real risk of it being less if the scope of the construction work provides building improvements and functionality that are going to be unique to the future tenant(s). A market value appraisal may provide significant discounting of the value associated with a “non standard construction”, providing a lower baseline that a construction lender will finance from.
Another way of putting this is that a construction financing source will provide up to 65% to 70% of market value of the completed project, to a maximum of the budgeted amount.
Third, any shortfall between what a construction mortgage provider is prepared to advance and your total capital required, is going to have to be invested by the builder in the form of cash or through leveraging of other real estate assets, which is not uncommon and can be an effective solution to make the numbers work.
Once again, its important to have all of this understood before you spend very much money so that the project can be structured within the scope of what can realistically be provided by a construction loan source.
If you have a commercial construction financing requirement for a project you are planning or are in the middle of, I suggest that you give me a call so I can go through your requirements with you and discuss different financing solutions that may be available to you.
The last completed appraisal valued the property at $325,000 so it currently is priced to sell.
The house has 2 bedrooms and 1 bathroom.
There is no basement and the one car garage is detached.
The property has its own septic system and the home is heated by way of a forced air oil furnace.
Water source is from a well on the lot.
The property consists of a corner lot being an approximately 49,223.362 square foot parcel of land level with the adjoining roadway that has approximately 527.854 feet of frontage on Arthur Street West (26 Highway) which is a two lane arterial roadway and 156.692 feet of frontage on Lansdown Street North.
The Town of the Blue Mountain Official Plan has the site designated as Commercial.
An analysis of site characteristics, nearby improvements and reported development of the vacant lot kitty corner to the subject with a national grocery chain indicates that the
subject site could adequately support physical commercial development.
Development within the subject neighborhood is financially feasible considering the retail, commercial and residential use buildings located along Arthur Street, King Street
and 26 Highway.
The house is protected by the conservation authority.
You can renovate the existing residence but you can’t rebuild.
The rest if the site offers great access to local highways and is well suited for a future commercial application if desired.
And while that may sound like an either or type of scenario, there are several variations to consider.
First of a, a residential home mortgage can be fully open or partially open.
A fully open mortgage provides you to repay all or part of the mortgage at any time during the interest term without any prepayment penalty being applied.
A partially open mortgage provides the borrower with the right to pay off the loan at any time in full with a penalty of either three month’s interest, or interest differential, which ever is the greater.
Many times people assume that a fixed interest term mortgage is a closed mortgage, which may or may not be the case.
By definition, a true closed mortgage does not allow any prepayment of the mortgage during the interest term, except in cases where an arms length sale takes place.
A closed mortgage can provide other prepayment options such as increasing the periodic payment or making lump sum payments, but not full repayment during the term.
The confusion around closed mortgage options has a lot to do with how lenders describe their mortgage products with some stating that their mortgage is closed when it actually has a prepayment option, while others are truly closed mortgages in description and function.
A truly “closed” mortgage with no prepayment options is also not very common in the market place, but it still is offered by different lenders.
Some may offer it as a full stripped down options benefit to provide the lowest rate while at the other end of the spectrum, a sub prime lender may provide it as their standard offering on three and five year interest terms.
The point here is that its very important to understand the prepayment options on different mortgage offerings so that you end up with a product that meets all your requirements and does not provide an unexpected surprise in the months and years to come when you want to partially or fully prepay the principal outstanding.
The best approach for understanding the differences among an open, partially open, and closed mortgage products in the market, is to work with an experienced mortgage broker who can answer all your questions and provide proper explanation of the terms and conditions provided by a given lender or lenders.
The key to getting the construction financing for a town house project is through a concentrated focus to avoid, reduce, or eliminate the major challenges to getting this type of financing in place.
The major challenges for most town house projects include but are not limited to 1) the loan to value amount required; 2) the sale of the units; and the 3) timing of draw advances from the lender.
Starting with the loan to value challenge, in order to assess an application for townhouse construction financing, a lender will require a recently completed appraisal from an AACI appraiser that they are comfortable with, to show what the “as complete” value of the property will be.
If the appraisal comes back with a value that is lower than what you expect it to be, you may end up having to invest more up front capital into the property to make the loan to value work for the lender. Lenders may also make their own adjustments to your as complete projected value to build in more conservatism and protect themselves against risk in the process, which can further increase the equity that must come into the project before they are going to be prepared to advance any funds.
Now there may be ways around this type of challenge and taking a proactive approach to the potential problem is likely going to yield the most options for consideration.
Another major townhouse financing challenge is the sale of the actual units.
Most “A” lenders are going to be looking at around 70% presales before construction begins.
Some “B” lenders may allows as few as 50% of the projected units to be presold.
In each situation, the lender’s assessment of presales is going to take into consider the location of the development, the perceived “saleability” of the units, and the lender’s own internal policies.
The last of the major challenges we most often see relates to the timing of the draw advances.
Before the project starts, the lender will create a draw advance schedule typically with input from the borrower.
If everything goes according to plan, there may be very few issues with draw advances. But the reality for most projects is that there will likely be some issues related to weather or work coordination that does not allow the work to be completed exactly as planned.
When a draw is requested, a commercial real estate lender will typically ask a third party professional such as an appraiser or engineer to conduct an assessment of the work completed and the work remaining. If the assessment of the work remaining is greater than what the borrower estimates, there could be a delay of the draw and/or a draw reduction which can create a hole in your cash flow right in the middle of the project.
Once again, when these types of issues arise, there can be ways to effectively deal with them without impacting the progress of the work or the ability to manage the cash flow.
The best way to deal with any of these challenges to work with an experienced commercial mortgage broker who has placed these types of construction mortgages and has a track record for helping their clients with overcoming these or other issues when they arise.
Strip Mall and Retail Plaza financing can come from a number of different lending sources, but regardless of the source, there are going to be some challenges that you’re going to need to address or overcome to get the financing you’re looking for.
While there can be a lot of unique commercial financing challenges to any one deal, here are the four most common challenges we come across with strip mall and plaza financing applications.
The four most common financing challenges relate to cash flow, tenant profiles and lease terms, vacancies, and building age, condition. and location.
Let’s start with cashflow.
Many times a strip mall location is going to be acquired because of the future profit potential from lowering vacancies, increasing rents, and so on.
But from the lender’s point of view, the cash flow from operations that will be considered for debt servicing is going to be historical in terms of what is reported in the last several years financial statements. So its going to be important to match up the available cash flow to the right financing scenario and lender to get financing in place to complete an application.
When cash flow improves in the future, then other lower cost, higher leverage financing options may be able to be considered, but at the time of purchase, you have to be best positioning the cash flow that is already in place with the most relevant commercial property lending sources.
Similar to cash flow, the existing tenant mix and leasing terms are going to be important to the application assessment of a commercial property financing source.
For instance, if you do not have any well established anchor tenants, or all existing leases or rental terms are all short term in nature, then it can be difficult to either get financing in place from a preferred lender, or get an interest term longer than a couple of years as most lenders want the lease terms to be at least as long as the interest term extended.
In terms of vacancies, you will likely be projecting a certain amount of cash flow from vacant units in the coming year for debt servicing, but business real estate lenders, who will always take conservative approaches, may discount future rents from the vacancies to zero, taking a worst case scenario into account. This again will impact your ability to meet the debt servicing requirements of certain lending groups and institutions.
The final of what I am calling the largest financing challenges is the age of the building, its location, and condition.
Commercial lenders will look at the building both from a security and unit marketability perspective.
From a security point of view, is there an active market for this type of property in the location in which it resides? How long on average does it take for one of these properties to be listed and sold on the market.
With respect to unit marketability, lenders are going to take note of the age of the building relative to other similar properties in the area. Newer developments are likely going to be able to command higher market rents and will have a greater advantage in attracting tenants due to newness/modernization factors. So market area capacity, vacancy, and rents can play a large role in determining who the most suitable lender will be and what they may be prepared to offer to you.
The best way to proactively address these challenges and/or overcome them is to work with an experienced mortgage broker who can quickly assess your situation and requirements and get you working with the most relevant lending sources for your deal as soon as possible.
The key to getting a multi unit property financed is to clearly understand and then proactively addressing what are typically the major concerns with this type of commercial mortgage financing request.
More specifically, the main financing challenges related to multi unit commercial mortgages are cash flow, down payment or equity in the building, and the condition of the building.
So lets start first with cash flow.
When a commercial lender looks at a multi unit residential application, one of the first things they will focus on is the net cash flow available for debt servicing.
This is going to vary among lenders in terms of how much net cash flow is enough, and each lender will have their own additions and subtractions to the operating cash flow statement you provide, but in the end “A” lenders will require a higher net cash flow than “B” or “C” lenders so its going to be important to understand where the available cash flow that you have to work with will fit among lenders that do this type of financing.
And because the lender will typically only rely on historical cash flow, the fact that you may increase rents or reduce vacancy rates in the future will not likely be factored in so you have to work with the existing cash flow when trying to qualify for a commercial mortgage.
The second major financing challenge is the equity in the building for a building you already own, or the down payment you are prepared to make to acquire a multi unit residential property.
The minimum equity requirement for a commercial mortgage on a multi rez is going to be 15% of the value of the property, and at a 15% equity level the building will need to be insured.
In situations where insurance is required, it can be challenging to get the insurer, such as CMHC to insure based on your assessment of fair market value or even the actual purchase price. It’s not uncommon that they make adjustments to the gross value of the property which can reduce the amount of the mortgage that they are prepared to insure, requiring you to need to come up with more cash to put into the property as equity.
The third major challenge when trying to arrange financing for a multi unit residential property is the condition and age of the building.
Older buildings, or ones that require a certain amount of repair, can be closely scrutinized by the lender and/or the insurer which can result in a deficiency list that you will have to rectify before they will advance all the funds approved for financing.
Once again, this tends to be more of a challenge in situations where a high loan to value financing facility is going to be required due to the fact that the lender and/or the insurer want to make sure that the equity they are relying on for security will be maintained during the term of the loan.
If you are looking for multi unit residential property financing for a purchase or refinancing scenario, it can make a great deal of sense to work with an experienced mortgage broker who can help proactively help you overcome the three challenges mentioned above and get financing in place in the time you have to work with.