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.
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.
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