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.
About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel