All posts by Joe Walsh
Warehouse Purchase Financing
“Warehouse Purchase Financing Challenges With Commercial Mortgage Lenders”
Today we are going to be talking about some of the main challenges that you can have when trying to get a mortgage in place to complete the purchase of a warehouse property.
One of the main challenges is focused on the age, condition, and layout of the building.
For instance, with older buildings, the layout and infrastructure may not be conducive to how the market would be defined for similar space, which can cause “A” lenders at least to have no interest in lending against these types of assets.
Another challenge with financing existing buildings is placing lending value on improvements that have been made. If the the purchaser is planning to rent or lease out the space, the improvements made for or by the last tenant may have no value to a future tenant or the average tenant in the market place. So the result can be a commercial appraisal that comes in lower than the purchase price which will require a larger equity investment on behalf of the purchaser.
Overall, when you get into warehouse properties that are over 20 years in age, it can be difficult to get these financed through “A” commercial lenders.
The second most common challenge I see when warehouse financing is related to the tenancy of the building.
Lenders can be very interested in the financial profile of each tenant as well as the manner in which they are utilizing the rented or leases space.
Tenant concerns are partially related to cash flow and partially related to security.
From a cash flow point of view, stronger tenants that have lease terms in place for at least as long as the lending term contemplated will have a greater chance to help attract an “A” lender than a warehouse that does not.
From a security point of view, all “A” lenders today require environmental audits to make sure all financed properties are being kept up to the standard of the day and even if the seller or purchaser can provide a clean environmental report at the time of purchase, the tenant usage of the property could still cause a lender not to issue a commitment to finance which could result in financing needing to come from sub prime commercial and private mortgage lenders.
The third major challenge I see is the commercial appraisal that is going to be used by the lender to establish the size of a potential mortgage.
As mentioned earlier, a warehouse facility may have functionality and utility in it that the average tenant does not have any use in. So if you are acquiring a property where there is going to be tenant turnover, or could be tenant turnover in the future, keep in mind that the valuation of the complete package of real estate, improvements, and fixtures you are trying to acquire may be discounted through the lending process which will reduce the amount of financing available to you.
If you are looking to purchase a warehouse property and want to better understand your financing options, I suggest that you give me a call so we can go through your financing needs together and discuss different commercial mortgage strategies that can meet your requirements.
Mortgage Rule Tightening Continues
“Mortgage Rule Changes Zero In On Amortization And Equity”
Last week, the Federal Government was back at it with new changes to Canadian mortgage requirements that are scheduled to come into effect by July 9, 2012.
This will mark the third major or significant change to mortgage regulations since 2008 with the last changes occurring just last year in 2011.
This time around, the focus is on reducing the amortization period from 30 years down to 25 years on government insured mortgages as well as reducing the amount that you can borrow against your home equity from 85% down to 80%.
There are estimates out in the market that in 2011, 40% of new mortgages were amortized over 30 years so this type of reduction to the available amortization period is going to likely have a significant impact on the market.
The main reasons given for these new rule changes are the increasing levels of household debt and the overheating of housing prices in certain markets, most specifically in Toronto.
Staying on the insured mortgage theme, the rules governing Canada Mortgage And Housing Corporation or CMHC, were also tightened whereby a borrowers total mortgage payments, or gross debt servicing ratio, cannot exceed 39% of total gross income. And total debt payments, or total debt servicing as a percentage of gross income, cannot be higher than 44%.
Mortgage insurance will no longer be available on mortgage requirements for homes greater than $1,000,000, which means that for higher value properties, the buyers are going to have to come up with a down payment of at least 20% to be considered for mortgage financing.
In the long run, these changes will see mortgages paid off faster and consumers saving on interest costs.
But in the short term there is going to need to be considerable movement away from non mortgage debt otherwise its going to be difficult for individuals to qualify for the lower cost forms of financing and mortgage insurance products.
And with mortgage refinancing actions effectively capped now at 80% of the property value, there are fewer lower cost mortgage options for refinancing existing debt into a home equity loan as well.
With the rule changes coming into effect in just a few weeks from now, its going to be important to clearly understand how any of these changes may impact your own mortgage situation or one that you are considering entering into.
For more information on these changes and to get expert assistance in working through different potential mortgage scenarios, I recommend that you give me a call so we can go through your situation together and get all your questions answered right away.
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Purchase Financing For Self Storage Property
“Self Storage Financing Challenges When Trying To Complete A Purchase”
When trying to secure a commercial mortgage to complete the purchase of an existing self storage facility, there can be a number of different financing challenges that can become evident during the application process.
Our goal today is to discuss the three major challenges that are most typical to this type of deal.
Being aware of each of these challenges and why they occur in the first place can allow you to take a more proactive approach to eliminate them or reduce their impact
The first major challenge I find when trying to arrange commercial financing for self storage is meeting the historical financial information requirements of the lender.
For an “A” credit lender, most will require three years of accountant prepared financial statements as well as detailed occupancy statements for the same period of time.
Most bank or institutional commercial lender criteria will require that the historical financial statements show enough available cash flow to service the proposed mortgage.
If you are purchasing an under performing property with the intent of marketing it more aggressively to reduce vacancy and make it more profitable, the financing available to you will be limited in most cases to the historical cash flow, not the future cash flow.
And if you are unable to qualify with an “A” lender initially, it may make sense to secure a sub prime commercial loan or a private mortgage to complete the purchase and provide the time necessary to improve the financials and allow for a mortgage refinancing in a year or so.
A second major challenge is getting an appraisal completed with a valuation that optimizes your loan to value potential.
While this is an income producing property, an appraiser may lien more to a cost approach or comparable sale approach to establish value which may end up providing a market value that is lower than what you paid for the property.
Or, even if the appraiser comes in with the same value as you paid, he or she may provide other remarks about area competition as an example that may end causing the lender to be more conservative with respect to the amount of financing they are prepared to extend, which will increase the equity you’re going to have to put into the deal.
The third major challenge I see with self storage purchase financing is meeting the lender’s borrower covenant and experience requirements.
If you are looking at acquiring your first self storage property, there will be considerable scrutiny towards the management team you are proposing as well as the net worth you own outside of the operation being acquired that would support the guarantee for the loan.
Or if you have existing self storage assets, there may be considerable due diligence required to review past financial performance of those assets to provide lender comfort that both experience and guarantee are sufficient for further financing.
If you are looking to finance the purchase of an existing self storage property, I suggest that you give me a call so we can go through your situation together and discuss the different financing approaches available to you.
Click Here To Speak Directly To Commercial Mortgage Broker Joe Walsh
Financing Multi Use Buildings
“Mortgage Financing Challenges For Multi Use Buildings”
When trying to arrange mortgage financing for a multi use building or mixed use property where there is both a residential and commercial use present, there can be a number of different challenges you may have to deal with in order to secure the funding you’re looking for.
So when we’re talking about a mixed use building, this could be a store on the lower level of a two story building with one ore more apartments on the upper floor.
The key point here is that the property has more than one type of permitted use.
So one of the first challenges that come along with multi use building financing is that borrowers often times think that financing will be available through a residential mortgage financing program.
Almost without exception all lenders will consider a mixed use property as a commercial deal when they consider your application for financing.
That in of itself is not necessarily a road block to get financing, but can create a few issues.
First, even though a commercial mortgage program is going to be required, you may still end up wasting considerable time with a residential lender who will take your mortgage and even get part way through the process before they say they can’t help you out right or that they will need to direct you to their commercial lending department.
Second, commercial property financing is going to cost more than residential property financing, all other things in the comparison between the two being equal. So make sure you factor in a higher cost of financing from 0.5% to 1.5% above residential mortgage rates.
And a mortgage broker that knows commercial business will understand this and direct you accordingly to appropriate lending sources whereas a broker that strictly focuses on residential may not.
What I will call the second major challenge is to work with a commercial lender that is prepared to fund your particular deal.
Banks and institutional lenders for the most part are not interest in funding multi unit buildings, especially those under $500,000.
But if you were to go an apply to a bank or institutional lender for this type of commercial property loan, they would likely insert you into the standard application process which could end up costing you both time and dollars before they end up getting around to saying no. So once again, its important to be working with a commercial lender that can actually help you with your financing requirements.
And even if an “A” lender is prepared to do the deal, their application to funding process may take 60 to 90 days to complete so you’re going to need to sure you have enough time to go through their process.
The third biggest challenge I see most often when working on the financing requirements of a mixed use property is dealing with the quality and strength of the leases in place as well as the underlying cash flow.
The leases in place and who the tenants actually are can be very important to an “A” lender.
Lenders are interested in the lease term, rate, and the financial strength of the tenants.
If the lease terms outstanding do not match up with a requested financing term, then that can be a problem.
If the tenants are mom and pop type stores or small operations, there may not be a lot of Big bank confidence in the tenant’s ability to pay over time.
Being able to effectively deal with these three challenges will go along way to getting the commercial property financing in place that you require.
If you require financing for a multi unit building, I suggest that you give me a call so we can go over your situation together and discuss different potential commercial mortgage options.
Click Here To Speak With Commercial Mortgage Broker Joe Walsh
home mortgage refinance requirements
“Understanding Home Mortgage Refinancing Requirements”
Home mortgage refinancing requirements are going to vary according to your particular borrowing scenario so lets take a closer look at the starting point for looking into this type of mortgage financing action.
First of all, its going to be important to understand the loan to value that exists for your current mortgage.
If you have a loan to value amount of 80% or less, you have a lot more flexibility with respect to looking at the available programs and products available.
If you require a loan to value amount greater than 80%, then you will require an insured mortgage which can only be provided in a home mortgage refinance scenario up to 85% loan to value.
So its going to be important to understand if 1) you will be able to secure enough funds when restricted to 85% lending, and 2) if the cost of mortgage insurance will be worth the benefit of getting that extra 5% lending amount.
Second, while there tends to not be any restrictions on the reason for home mortgage refinancing, you need to understand the costs that will go into the process.
If you are looking to refinance an existing mortgage with a fixed interest rate, then you will likely incurring a prepayment penalty of the larger of three months interest or interest differential.
Its going to be important to calculate this properly so that the cost is well understood and built into the decision making process when considering different options.
This is also something we can help you with so that the math is done correctly and provides an accurate basis to work from.
Third, mortgage refinancing effectively provides you with a completely new mortgage where you can reconsider the payment structure, prepayment options available, amortization period, and so on.
So its going to be important that whatever type of refinancing action you take will support both your future financial objectives as well as your cash flow.
For instance, many times a mortgage refinance will be done to get a lower interest rate.
In this case, you need to consider whether you want a fixed or variable rate, and will the benefit of a lower rate offset the cost of completing a refinancing action? Further, with a lower rate, you may be able to lower your payment. But keeping your payment the same as it was before will potentially allow you to pay down your mortgage faster, saving interest cost over time.
In other cases, a mortgage refinance is performed to acquire additional capital for some reason such as home renovation, debt consolidation, or estate planning.
With a higher overall mortgage amount outstanding after the refinance, will your new mortgage payments fit into your cash flow, or are you going to have to make some lifestyle changes to more comfortably manage a higher monthly debt servicing requirement? Or do you look at increasing your amortization period to reduce your payment which will see you paying the mortgage over more years and increasing your interest costs over time.
There are also times when a home mortgage refinancing can be forced due to cash flow or credit distress which may require you to consider a private mortgage or a sub prime mortgage product in the near term. The selection of these types of products should depend on how you see your financing profile in the next year or two so that you can select the lowest cost option for moving back to an “A” credit mortgage in the future.
Because there can be a number of different things to consider for any particular situation, I recommend you seek out the assistance of an experience home mortgage broker do that all the different areas of consideration can be properly explored and understood before any mortgage refinancing decision is made.
Second Mortgage Financing Options
“Second Mortgage Financing Options Basically Come In Three Forms”
Second mortgage financing options represents a loan registered against real estate directly behind a first mortgage.
A second mortgage can be arranged on virtually any type of real estate property including land zoned as residential, commercial, and industrial.
There are basically three different potential 2nd mortgage options to consider…bank or institutional second mortgage, home equity line of credit, and private second mortgage.
Depending on your financial profile and credit profile, you may or may not be eligible for all three.
A second mortgage issued by a bank is going to be similar in structure to a first mortgage in that it will have an interest rate term and an amortization period for repayment. Rates for an institutional second are going to be similar to a first, but likely slightly higher due to second place mortgage security. That being said, the rates quoted will likely be better from the first mortgage holder than a competitor due to the fact that they already control the first mortgage position.
A very popular second mortgage financing option is a home equity line of credit, or HELOC.
With this type of facility, the approved amount of the line is registered in second position against the property, but the amount advanced will be at the control and discretion of the borrower.
Interest is charged only on principal outstanding with minimal monthly principle repayment required by most lenders on amounts outstanding.
The third type of second mortgage loan is from a private mortgage lender.
A private second is typically for a period of one year but can also be for a longer period of time, depending on the individual lender.
Private 2nd mortgages also tend to be interest only payments with the full amount of the advanced principal due and payable at the end of the interest term.
A private second mortgage is very common in situations where the borrower has some level of distressed credit or cash flow where it would not make sense to mortgage refinance the first mortgage and risk getting a higher interest rate based on a weaker borrowing profile, or apply for a bank second.
This is also the most popular form of private lending due to the fact that the rate of return is higher for private investors as mortgages registered in second position carry a higher risk of loss which translates into a higher interest rate charged.
Second mortgages can be used for just about any number of purposes including but not limited to debt consolidation, renovation, child eduction, family trip, estate planning, an so on.
Selecting a second mortgage financing option is about aligning your near and long term financing requirements with the features of each type of 2nd mortgage and each unique lender program in order to arrive at the best fit.
One of the best ways to determine this is to work with an experienced mortgage broker who can go through your requirements with you as well as work through all the different options that are potentially available to you so you can make a well informed decision.
Consolidate Versus Writeoff
“Should You Try To Consolidate Your Debts Or Get Them Written Off?”
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.
Commercial Construction Financing Assessment Process
“The Commercial Construction Financing Assessment Process Determines The Amount A Lender Can Advance Against A Project”
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.
Private Home Sale Collingwood Blue Mountain
“Private Home For Sale in Collingwood Blue Mountain For Low To No Down Payment And Potential Vendor Second Mortgage”
$299,000 is the selling price for this single family dwelling located at 126 Arthur Street In the Blue Mountain, Collingwood, Thornbury Area of Ontario.
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.
Vendor Will Consider Providing A Second Mortgage To Help You Get A First Mortgage Arranged
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.
Residential Open Versus Closed Mortgage
“Residential Property Mortgage Terminology Related To Being Opened Or Closed”
When you acquire a residential property mortgage, the actual loan from the mortgage lender is going to be open for prepayment or closed for prepayment.
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.
Townhouse Development Loan
“Townhouse Development Loan
Financing Solutions”
Townhouse development loan financing is available from a number of the commercial mortgage lending sources we work directly with.
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 Plaza Financing
“Strip Mall And Plaza Mortgage Loan Financing Solutions”
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.
Multi Unit Residential Property Financing
“Multi Unit Residential Property Mortgage Loan Financing Considerations”
Multi unit residential property mortgages are available through a number of our commercial property lending sources.
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.
Restaurant Property Loan
“Restaurant Property Loan Or Mortgage Financing Solutions”
When we’re talking about a restaurant property loan, we are referring to a commercial building that is being used as a restaurant by the owner or the building has a tenant that is utilizing it to house a restaurant operation.
In either case, the main lending criteria are going to focus on the brand of the restaurant and the location. Most “A” and “B” lenders will only finance commercial restaurant properties that are branded under a national franchise or a well known restaurant chain.
This is not to say that standalone restaurant operations cannot secure commercial mortgage financing for their operations, but a commercial mortgage is likely going to be harder to come by unless a lender believes there are strong alternative uses for the building in the location where it is situated.
For business owners and property owners looking to secure a restaurant property loan or mortgage, we work with a cross section of commercial lenders that can collectively fund a variety of different restaurant mortgage applications.
All the lenders we deal with can be placed into one of the three following categories.
The first and lowest cost category would include banks and other institutional lenders such as trust companies and credit unions. Lower cost from this group also means lower risk, so the lending and funding requirements will also be the tightest.
The second group or category of business lenders for restaurant real estate properties would include investment funds, hedge funds, and other quasi institutional lenders whose focus is on deals that do not quite qualify with group #1 above. These “B” lenders will still be focused the restaurant brand and cash flow, but will also provide greater consideration for the equity in the property and other risk mitigation factors to get the deal done. Their rates will also be higher, but that will be offset by providing terms and conditions that are more flexible than what you would be able to secure from an “A” type commercial mortgage lender.
The last group is private mortgage lenders which can be an excellent source of short term financing. Once again, the rates are going to be higher, but the application and funding process tends to be shorter in comparison to the other two groups, which can make a private commercial mortgage a preferred option in situations where you have a very tight timeline to work with to close a deal, generate incremental capital, or refinance an existing mortgage.
Application Process For A Restaurant Building Mortgage
To apply for a restaurant property loan, you’re going to need to complete a commercial mortgage application form detailing out the property and potential borrowers for the mortgage.
At least three years of accountant prepared financial statements are also going to be required with more value attached to review engagement or audited statements.
All commercial mortgage lenders will require an AACI property appraisal as well as an environmental audit as well.
Resumes and backgrounds of the owners and operators of the restaurant will also be reviewed by prospective lenders as well as any other information pertinent to a particular application, restaurant brand, and location.
If you are in need of a restaurant property loan or mortgage financing facility, I suggest that you give me a call so we can go over your requirements together and discuss different options that may be available to you in the market place.
Student Residence Financing
“Long Term Mortgage Financing For
Student Residence”
If you require a mortgage for an existing student residence, or one that is in the process of being built or renovated, we welcome the opportunity to discuss your mortgage financing needs directly with you.
One of the key lending criteria for financing a student residence will be location. Lenders will want to know the distance from the residence to the school, historical vacancy rates, student housing capacity in the area, comparable student housing costs in the area and vacancy rates for similar facilities.
Basically, the local market supply and demand statistics are going to be important to any lender considering long term mortgage financing on a student housing facility.
Mortgage Application Process For a Student Residence
When applying for a commercial mortgage, lender’s will want to first have a full application completed that outlines the ownership structure for the property as well as all the related property information.
For instance, there will be a great interest in the rent roll for the residence as well as any other management information reports that are available to provide data on rents paid, vacancies, seasonality in the occupancy and so on.
From a debt servicing point of view, the application will need to provide accountant prepared financial statements for the last three years if possible as well as well supported set of projections that include a detailed listing of assumptions used to create the forecast and the source documents and logic that support the source documents utilized.
In terms of the physical property, an appraisal is going to be required along with an environmental audit from a lender approved environmental engineer.
Timelines To Completion For A Commercial Mortgage To Finance A Student Residence
From the time of application to funding, most applications for this type of financing can be completed in a 30 day to 60 day period of time.
That being said, the timelines can get extended if additional time is required to complete outside or third party work such as the completion of financial statements, property appraisals, environmental audits, market studies, and so on.
The goal is always to try and cover off all requirements as quickly as possible, regardless of the source for any one particular lender requirement.
The reality at times, however, is that the coordination necessary to meet all lender requirements to first get an approval and then get the deal funded can take longer than anticipated, due mostly to the number of people that can be involved in the application process.
So while 30 to 60 days is a good guide to work from, the sooner you can start the process the better to allow for potential timing issues down the road.
If you require student residence financing right now for a property you own or are trying to acquire, I suggest that you give me a call so we can go through your requirements together and discuss different commercial mortgage funding options that can meet your business needs.