Archive Monthly Archives: October 2012
Challenges With Commercial Property Refinance
“Just Because You Have A Commercial Mortgage In Place Doesn’t Guarantee That The Lender Will Renew Or Renew With Similar Terms”
From time to time I have written on how it can be a challenge at times to get a commercial mortgage in place for some form of incremental financing versus straight mortgage renewal.
This would primarily include real estate acquisition, but can also relate to any type of subordinate financing that would be registered against the property.
One of the basic challenges to potential borrowers is the shifting sands of borrowing landscape.
Lender portfolios are constantly changing with each and every deal that comes in and gets funded.
This requires a constant balancing act on the part of the mortgage provider to keep advanced funds and overall risk rating in balance.
The end result is that at times lenders can either be out of the market for certain types of deals, or they have more stringent criteria related to a particular type of real estate and geography combination in order to bring down their risk rating.
But these commercial mortgage supply issues are also not reserved for acquisition or new mortgage lending.
When you’re in a refinancing situation, this type of supply issue can occur as well.
If the lender is “out of the market” for a particular type of deal, there may be no renewal offered at all and the time period available to you to get the mortgage repaid can leave you scrambling.
In situations where the lending criteria has changed, you may be offered a renewal, but the rates and terms might not be acceptable or difficult to manage in your cash flow.
Let’s look at an example of this latter situation.
Say that you have a commercial property mortgage that is coming due with a maximum amortization period of 15 years.
As long as the mortgage is renewed with current market interest rates, your cash flow can still manage the repayment provided that the amortization period is not reduced.
But what if the lender has changed its lending/funding criteria on that particular type of property and shortens the amortization period to 10 years.
All of a sudden your cash flow is going to get squeezed by a higher payment which you may be challenged to cover at particular times of the year.
Planning Ahead Is Important To Minimize Surprises
The best way to make sure you don’t get a surprise at renewal time is to touch base with your lender at least two months ahead of time to make sure that 1) a renewal will be offered, and 2) the rates and terms are going to be in keeping with what you already have.
If the lender feedback is inconsistent with that you were expecting, then its time to start working on Plan B.
And Plan B can involve a few different courses of action.
On the one hand, you can work towards trying to locate another lender that can provide the rates and terms you are looking for.
But that may not materialize in the time you have to work with as there may be money supply issues related to the property type with other lenders as well.
The other course of action is to see if you make your cash flow work with the renewal being offered.
It could be your best option, so its important to determine if and how you can make it work.
Even if you determine that the renewal is unacceptable for a period of years, perhaps you can get a completely open repayment option so you have the flexibility to refinance if and when a suitable alternative can be located.
In many cases this is a good possibility due to the fact that if a lender shortens their amortization significantly on a renewal, they are basically squeezing you out anyway so they could be totally onside with a fully open repayment on the renewal.
Bottom line is not to make assumptions about a future renewal and to make sure you proactively find out what you’re likely options with the current lender will be well before the renewal date.
Because commercial financing can take a considerable amount of time to complete, if you do have a surprise you want as much lead time as possible to deal with it.
Dominion Lending
“The Joe Walsh Team Has Joined Forces With Dominion Lending Centres”
Dominion Lending Centres Toronto
At the beginning of October, our mortgage business launched a new Dominion Lending Franchise here in Toronto.
Operationally, we have the same location at 1935 Leslie Street here in Toronto, and all contact information remains the same, so for any of our existing and future clients, its all business as usual with our mortgage business.
What is different is out affiliation with Dominion Lending so I thought I would first let you know about it and then give you a bit of background on our decision.
As you may or may not know, Dominion Lending is the fastest growing mortgage company in Canada and many of the initiatives they are and will pursue going forward are very congruent with our own.
Let’s face it, the mortgage industry is continually changing and to stay not only on top of all the rule changes occurring on a monthly basis, but to also be on top of the state of the art technology for delivering information, products, and services to our customer, made Dominion a clear choice for our business.
From a mortgage product point of view, Dominion now gives us access to even more lenders as well as an expanded network of mortgage specialists and originators that can provide greater assistance in certain situations.
This provides our customers with even more choice when it comes to making a mortgage decision which will greatly contribute to achieving optimal mortgage financing results, whether we’re talking about residential, commercial, or industrial real estate properties.
The information systems, reports, and multi media presentations provide a great library of information that is designed to help borrowers to better understand the different programs and products available so that an informed decision can be reached that much faster.
And lets face it, as we all rapidly move forward into the information age with websites, social media, Youtube, Facebook, and the like, we also recognize that we have to be able to provide content to out customers in a manner than you most refer. This is another area where Dominion provides value to use as they continually make substantial investments in their information and information delivery systems.
As franchise owners, we will also have access to credit card programs and other financial products that get developed and set up by Dominion. More products and services provide greater value to our customers which is one main reasons why we made the decision to become part of the Dominion Lending Team.
There is more going on than I an elaborate on today. But I will be following up in the future to comment on more specific developments as they occur.
In the mean time, I invite you to give us a call or send me an email with any questions or comments you may have.
We welcome the opportunity to discuss this new business arrangement with our customers and also value any comments or feedback you are willing to provide.
That’s about it for today other than to say we are very excited about this new relationship and all the value it can help bring to our customers.
Mortgage Prepayment Calculators
“Using Prepayment Calculators As A First Step in Determining Prepayment Costs”
One of the more confusing aspects of any mortgage decision is the accurate calculation of a potential prepayment penalty now or in the future.
If you’re looking to refinance for a lower rate and/or to gain some additional funds, an exact prepayment calculation can be obtained from your mortgage provider at any time.
But if you’re in need of a new mortgage, it can be difficult to determine what the future prepayment penalty calculation will be for any given situation.
By law, mortgage lenders must clearly outline the detailed calculation related to prepayment penalties associated to any of their mortgage products.
That being said, lending sources have never made this an easy to understand process even though all the information required is technically “all there” for you to digest.
And having to crunch out the math on perhaps a number of future prepayment scenarios you may have in mind can not only be time consuming, but also easy to do incorrectly.
So with more and more complaints about the complexity of the math and the understanding of each lender’s criteria, many of the main mortgage sources in Canada now provide mortgage prepayment calculators for anyone to use free of charge.
Mortgage Calculators Provide Interesting Results
The article itself goes on to explain that after inputting similar scenarios into all the different calculators, that no two penalties ended up being the same.
This would clearly speak to the need for this type of online tool and judging by the ease of use and non use of some of the calculators, the tools need to also continually be improving.
Now, whether you’re doing some online research to refinance, you can at least get an initial feel as to what the prepayment penalty could be in a mortgage you are leaving as well as how the prepayment penalty would work for a new mortgage for different scenarios in the future.
Statistics clearly show us that consumers and business owners are going online more and more for mortgage related information and for this particular type of inquiry, these tools are a step in the right direction.
That being said, they also point out that there are vast differences in prepayment penalty calculations, and while the calculators mentioned in the article provide you with some data to work with, they are clearly unofficial with respect to any exact prepayment penalty you may incur now or in the future from any of the named lenders.
so while these resources are good for some online research, they don’t replace the need to be working with an experienced mortgage broker who can work through all the calculations and comparisons with you.
If you’d like to discuss prepayment penalties for a mortgage you now have, or for a future mortgage, I suggest that you give me a call and we’ll make sure you get all your questions answered right away.
click Here to Speak With Toronto Mortgage Broker Joe Walsh
Private Equity Mortgage Lenders
Private Equity Mortgage Lenders Focus On Available Property Equity, But Can Also Focus On Other Elements Before Funding A Deal”
Private money is being used more and more for short term financing options, both on residential and commercial property, where there is enough time, or the cost to complete is to high, to get a bank or institutional lender in place.
Strategically, many property owners and investors utilize private funds for bridging different transactions which can include buying the time necessary to find more ideal long term funding.
So while more people are considering AND using private equity lending as a primary option, there are still a lot of misconceptions in the market place about how private lenders make their borrowing decisions.
For instance, because private lending is always focused primarily on the equity in a property, then the immediate assumption is that not much else is going to be looked at or assessed by the private lender before making a lending/funding decision followed by near term funding.
Private Lender Due Diligence Can Be More
Than You Anticipate
The reality is that most private lenders will look at whatever they think is going to be relevant for them to get comfortable with a deal.
This most certainly will vary from lender to lender and even from deal to deal.
But the notion that just because you are asking for a private mortgage, that a due diligence process similar to what a bank would put you through is not going to be forth coming may or may not be true.
What is consistently true is that the lower cost forms of private money are going to perform more due diligence in order to make sure that there is very little chance of problems.
This can include review of financial statements, rent rolls, tenant contracts, and so on.
It can also include updating property and environmental appraisals similar to what a bank or institutional lender would require.
But many times potential borrowers will seek out private money with the expectation that there will not be this extra work or checking or review involved and just because a higher rate of interest is being charged, that assessing and lending against the equity in the property should be enough.
Certainly that can be enough, but as previously mentioned, that type of restrictive information approach can also lead to higher rates of interest and higher borrowing fees.
For these vary reasons, its not uncommon for a solid deal to end up being priced higher in the market because lower cost competitors were eliminated from the equation, based on the amount of information provided to them to assess.
There Are a Few Takeaways Here
First, the pricing on a private equity mortgage can vary considerably from one lender to another. Lower cost offerings are more likely to be provided for consideration when more information is made available to assess risk.
Second, if you have a strong financial profile to work with and are only trying to access private money for short period of time until lower cost long term financing can be arranged, then it can be highly beneficial to work with a private lender and provide the information they request, even if its information you don’t think they should need to look at as a non banking lending.
Closing On Commercial Properties
“Securing The Right Type Of Commercial Mortgage In A Timely Fashion Is The Key To Closing On A Commercial Property”
I’ve written quite a few articles relating to the process of commercial property financing, the costs you can expect, and the different forms of mortgage lending that should be considered in different situations.
Today I’m going to delve further into this topic by focusing even more on cost and timing related to longer term by and hold situations.
There can be many different scenarios unto which a commercial property transaction can complete.
The vast majority will require debt financing due to either a lack of cash or a desire to utilize leverage of capital.
But in every situation where debt financing is required, one must discern the relationships between costs and timing for getting the deal closed versus getting the best possible deal available in the market place.
Another way of saying this is that the optimal financing arrangement for the long term may not be the first type of financing that is arranged.
To close a commercial deal, you may need to seriously consider fast forms of closing with less conditions and work elements related to not only closing, but the decision making process for even getting the financing in place.
Lower cost forms of financing require new optimal conditions to exist before any funds will be approved and advanced.
The key to getting a deal closed is being able to quickly assess whether or not there is a very high probability of achieving an optimal lending situation in the time you have to work with.
If the initial assessment does not yield a high probability for landing low cost money for whatever reason, then its time to look at the next best option that CAN produce the high probability of success that you’re looking for.
Remember that first and foremost, the prime objective is to secure the property and hold it for a long period of time, either as an income producing property or an owner occupied asset.
So if the initial financing to close the deal is not the ideal financing, but something that can get the deal closed and buy time to get the ideal longer term financing arranged, then all options that are long term cost effective should be considered.
Getting Even More Specific On Cost And Timing
Depending on the size of a transaction, a bank or institutional lender will want to see a recently completed commercial property appraisal commissioned directly to themselves, an environmental appraisal, and financial statements no more than 6 months in age. When multiple properties and entities are involved, these requirements will likely need to be provided separately on each property and entity.
The cost and time it takes to complete this body of work can be considerable. Understanding these elements, their cost and timing are essential to the initial assessment process of where to get your commercial mortgage for closing purposes.
Conversely, a private lender that specializes in short term financing may be able to utilize property and environmental appraisals that are several years old as well as existing financial statements, both accountant prepared and interim statements.
While the cost of private financing is going to be higher from an interest rate and lender/broker fee perspective in virtually all cases, these costs can be significantly offset by not potentially having to get new supporting documents prepared. This is also not just a pure cost comparison issue either, as the value of your time to ride herd on the process can be significant in terms of other more profitable things you could be doing with those units of time.
On the the aspect of time, you can also have what I will call a reverse problem with private financing options.
With bank financing, the concern is needing more time to complete their administrative requirements.
On the private side, once you have been provided with an offer, most private lenders will only give you a short period of time to take the deal and move to funding.
This is due to the fact that they want to get their money out into the market and sitting around for weeks or months, waiting to be used as a last minute contingency, is not typically going to be an option for you.
So if you want to go down the private mortgage path for acquisition financing for a property, then you have to be prepared to act quickly on an offer or the funding will not remain available.
Another timing consideration is that if you wait until the last moment to move off a bank financing process to a private lending process, you may not be able to locate and secure private money as well, especially if you’re looking for more than $1,000,000 in funds as the privates that would potentially do the deal may not be in funds at that moment in time.
The key to commercial property closing then is 1) make a good initial assessment of what type of money is best suited to your situation; 2) make sure that the incremental costs will still make the acquisition profitable over time; and 3) be ready to move forward quickly on whatever path you choose to take so that you’re maximizing the probability of success.