Commercial Mortgages And Cash Flow
“Always Remember That Commercial Mortgage Lenders Are Cash Flow Lenders”
Almost with out exception, any bank or institutional lender will characterize themselves as a cash flow lender when it comes to real estate.
Sure, the value of the property and its condition are going to be important factors as well, but without cash flow there isn’t going to be a lot of interest from low rate providers like banks.
There are some exceptions to this when it comes to private lenders with respect to lower rates, but even lower rate private mortgage lenders are going to be interested in cash flow to a certain degree.
For a commercial property, there are basically three different cash flow generating scenarios.
The first and most common one is rental income from the tenants of a commercial building. Here a lender is going to be interested in all the specific leases or rental agreements in place, the strength of the individual tenants, and the amount of time remaining on occupancy agreements. In some geographies, its not unusual for a commercial mortgage lender to require that at least 80% of the leases or tenant agreements in place have at least as many years remaining on the agreements as the mortgage interest term that is being contemplated.
This is a good example of how you can set yourself up for better long term financing by getting tenant agreements in place for longer periods of time prior to applying for a commercial mortgage.
The second form of cash flow is the business revenues generated from a self occupied or owner occupied situation where the property owner is running a business within the building as effectively his or her own tenant.
In these cases, the financial statements of the operating company or companies occupying the commercial building are going to be scrutinized for cash flow to see if there is sufficient net cash to service the required commercial mortgage.
Sufficient cash flow will vary by lender with unique additions and subtractions to the income statement for non cash items. For the most part, the debt servicing requirement will fall in the range of 1.2 to 1.4 times the annual debt servicing. Put another way, the net adjusted business cash flow must be 1.2 to 1.4 times the annual principal and interest payments on the mortgage.
The third source of cash flow for commercial property financing is a combination of the first two whereby part of the building is rented out to unrelated third parties and part of the building is owner occupied.
In this scenario, all rent rolls and business operating company financial statements will be collectively reviewed to assess cash flow and debt servicing capacity.
If there isn’t sufficient cash flow to qualify for commercial property financing with a bank or institutional lender, then secondary lenders and private mortgage lenders can also be considered, but they will also have an interest in cash flow due to the higher loan amounts associated with commercial properties, and the need for the borrower to service debt on a monthly basis.
If you are in need of a commercial mortgage or are just planning ahead, I suggest that you give me a call so we can review your situation and discuss different commercial mortgage financing strategies that you could utilize either now or in the future.
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