If a property is zoned commercial, then any type of financing that takes the property as security is going to be a commercial mortgage by definition.
But compared to other forms of commercial property, the financing process for owner occupied situations tends to be a bit different.
For non owner occupied, or investment properties, financing is accessed through a commercial mortgage program where the type of property and rents are the key determining factors as to what type and amount of mortgage you can qualify for.
In situations where the property is occupied by the owner and there are no third party tenants, business financing solutions tend to be the most relevant for directly financing the property.
This is due to the fact that the business that owns the real estate may have other debts to figure into the overall debt servicing assessment, and the cash flows to service existing and proposed future debt are going to be coming from the business operations, not from individual tenants paying fixed amounts on a monthly basis.
So while the assessment of property value and liability are the same, the lender needs to focus in on the balance sheet, income statement, and cash flow of the business operations to determine if property financing can be approved.
In effect, the borrower is trying to procure a business loan that will secured by real estate security, and potentially other assets of the company.
The Use of Funds An Important Consideration to This Type Of Financing Application
For instance, if applied for capital is going to be used within the business entity for business operations or to improve the existing property, there are going to be more ?A? credit options available to the borrower as compared to situations where the owners want to do an equity take out for a different venture.
The use of funds can specifically be for the property such as acquisition, building construction, and refinancing, but can also be for cash flow, transaction bridge financing, equipment acquisition, etc., provided once again that the utilization of funds is within the business to either improve overall security value and/or cash flow.
If an equity take out of some sort is required to move capital outside of the entity that owns the property, then these situations are more the domain of secondary lending sources like private lenders or sub prime institutional mortgage providers.
Financial Statement Review Determines
Acceptable Debt Level
The balance sheet of the business comes under its own unique scrutiny as business lenders are going to be interested in the total debt to equity ratio of the business before and after the completion of a new business loan against property.
For banks and institutional lenders, the debt equity ratio can range from 2:1 to 3:1 with higher debt equity ratios demonstrating higher risk and commanding higher interest rates.
When the debt to equity ratio exceeds 3:1 for the entire business, then secondary sources of funding will need to be considered at higher rates of interest.
The assessment of an owner occupied mortgage on a commercial property has similarity to a residential mortgage assessment with respect to how much of the cash flow will be required to service the total business debt.
Once again, if we consider ?A? credit lenders, the debt servicing ratio can range from 1.20 to 1.5 depending on the lender, the type of property, geography, and industry.
The debt servicing ratio is calculated by dividing the projected annual debt servicing requirements by the available cash flow.
The available cash flow is determined by taking the historical operating net income and adding back non cash items or portions of non cash items depending on the particular lender.
Depending on the composition of a business balance sheet and amount of cash flow being generated, the loan to value ratio can vary dramatically from one lender to another as some programs may be able to lend more based on higher cash flow and additional security.
The business loan itself will also come with different lending covenants related to the financial statements that if not adhered to can result in account default.
The bottom line is the owner occupied commercial mortgage financing can be more complex than an investment based mortgage and can vary considerably from one application to another due to the unique financial characteristics of any one particular business.
For assistance with this type of financing, I suggest that you give me a call so we can go through your requirements in detail and discuss different commercial property financing options available to you and your business.
Click Here To Speak With Toronto Mortgage Broker Joe Walsh For A Free Assessment Of Your Owner Occupied Mortgage Financing Options
Related posts:
- Commercial Mortgages For Owner Occupied Real Estate Properties
- Commercial Mortgages And Cash Flow
- Commercial Mortgage Rate And Leverage Tradeoffs
- Commercial Business Mortgage
- Orangeville Commercial Mortgage
Source: http://www.joewalsh.ca/commercial-mortgage/owner-occupied-mortgage
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