As Seen in Doctor's Life May 2010
The Art and Purpose of Financing
Fifth in our series for astute investors –
in the medical field.
By Dennis J. Lynch and Dennis F. Hrzenak
Only those with substantial liquidity can avoid the frustrations of dealing with lenders, especially in today’s clime. But unless you’re on a short fuse to snag the deal of a lifetime, tying up large amounts of cash is not prudent. Even if you do, recapturing that liquidity as soon as possible should be paramount. This is true whether you’re purchasing an existing building, or you have chosen the development path.
When thinking of commercial mortgage money, most people immediately turn to banks. If you’re buying land for future development, or looking for construction money, that’s probably your only option. But in today’s market, land loans are rare and new construction money will only come to those building for their own use, or who have mitigated virtually all risk to the lender by having commitments for the majority if not all of the space from qualified users, be they tenants or buyers.
The Art and Purpose of Financing.
Banks typically do not lend without personal guarantees. Therefore, land acquisition loans, or development/construction will have that liability present. However, once the building is up and has occupancy beyond a breakeven point and particularly if you have two or three years of solid operating history to show, its time to consider refinancing the debt with a “non-recourse” lender and eliminate that contingent liability that can effect your personal financial statement and future borrowing capacity.
In a good market, and even today albeit somewhat limited, life insurance companies are the best source of long term or “permanent” mortgages. Up until the last few years, conduits (Mortgage Bankers with access to capital markets where loans were bundled, credit rated and sold on Wall Street as Commercial Mortgage Backed Securities) were also an excellent source of long term money, competing with life companies. These lenders are more likely to provide lower interest rates, fixed for longer periods with payments calculated over longer amortization periods. In some cases, fully amortized loans with no balloon provision can be obtained for 15 to 20 year terms. Banks will occasionally entertain longer term mortgages for “relationship” customers, or to balance port folio needs. Banks have also gotten into the foray of lower rates but that is only a sign of the times.
Life companies (and the conduits) are more real estate oriented and rely less on the recourse aspects. There will be personal liability for the “carve-outs” (events of fraud, misallocation or misappropriation of funds, knowledge of environmental risks not disclosed, etc.) and may be some amount of liability for some defined time period
The Art and Purpose of Financing.
if there are underwriting or market concerns. But it is not uncommon for this to be reduced or eliminated over time, as certain performance objectives are met.
Then there is the private investor, or hard money lender. In days past, these were the sources that made conservative loans, charged exorbitant rates and fees – and hoped you defaulted. But today, many private investors are pricing transactions more competitively to attract opportunities created by the absence of institutional lending. Their deals will be more expensive than a bank or life company, and they will require personal liability. But for someone who has a decent property that is just not quite where it needs to be, these sources should not be overlooked as an interim, or “bridge” situation.
Finely, do not overlook refinancing. Just because you have a good commercial mortgage is no reason to stay with it. Refinancing to get into a lower rate is fine, but there are other reasons. Money taken out through borrowing isn’t taxed until the property is sold, and then your sale price is pared against your cost. Money taken out is also getting back your equity capital. Market conditions permitting, getting to a point where one has recaptured all of his initial equity makes the return on his investment incalculable. When making this part of your investment strategy, try to stay with shorter term mortgages. Generally interest rates will be lower, and prepayment penalties – if any - will likely be lower.
Would you like to explore existing opportunities, or discuss future possibilities individually or as a group? Contact Dennis J. Lynch, PA., for a presentation.
Dennis J. Lynch, principle of Dennis J. Lunch, PA, has experience spanning three decades in the S. W. Florida commercial real estate markets. He has acquired and/or developed and managed on behalf of his investor groups, in excess of $100,000,000 in raw land and income producing properties as well as three beachfront high rise condo developments in Naples. Lynch can be reached at 239-261-1734 or firstname.lastname@example.org. Visit at www.djlpa.com
Dennis F. Hrzenak has been active for over 30 years as a Direct Lender, Mortgage Banker and now as an independent Mortgage Broker and Consultant focusing on commercial properties in Lee, Collier and Charlotte Counties. He has arranged nearly $180,000,000 in land acquisition, development, construction and permanent mortgage financing. Hrzenak can be reached at 239-433-0221 or Herzy1@aol.com. Visit at www.DFHrzenak.net