Commercial Mortgage Rate And Leverage Tradeoffs
“Commercial Mortgage Financing Decisions Will Depend On Which of Your Financing Criteria Are Most Important”
Most business owners seeking a commercial mortgage will desire low interest rates and high loan to value ratios as real estate financing is typically one of the cheapest forms of business capital available and maximizing it can reduce the cost of capital in other areas of the business. Real estate also affords longer repayment terms which will also benefit cash flow compared to shorter amortizations on term loans.
So while low cost, high leverage may be desired, there is a trade off to be considered in most cases.
The cheaper sources of money will provide commercial mortgages in a range of 60% to 75% of the fair value of the property , with the average closer to 60%. The lower the interest rate, the lower the risk which is reflected in the loan to property value ratio. The cheaper forms of commercial property financing tend to be major banks which are also interested in your working capital requirements and in many cases will not be prepared to provide their most competitive rates for a commercial mortgage unless they are the senior lender for the business.
Term lenders that provide business financing for equipment and real estate or just real estate, have a slightly higher cost of capital than the major banks in most situations. In order to compete for your business, they will offer higher loan to value ratios that come with a slightly higher interest rate offer. If the business is strong enough financially, term lenders can provide up to 100% of the fair value of the property in the form of a commercial mortgage. The rationale is that the business balance sheet overall is still within an acceptable debt to equity ratio and the corporate and potential personal covenants are very strong to offset the high percentage of lending versus a property’s fair value. These high ratio commercial mortgages are more common among self occupied buildings where the cash flow assessment is more based on the strength of the business than any income producing tenants.
In the end, there can be a trade off between the lowest possible interest rate available and the highest amount of loan to value leverage available. A proper cash flow exercise and weighted cost of capital calculation should be able to determine which solution makes the most sense for your business.
If you need a commercial mortgage and would like to work through the different options available to you in the market place, I suggest that you give me a call so we can discuss you’re requirements in more detail.
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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