An industrial project can span real estate operations including warehousing, manufacturing, transportation and logistics. This type of property typically attracts a more sophisticated developer/buyer as a result of the risk profile and operational complexities.
Properties that generate consistent cash flow through arms-length leases are favourable candidates for standard financing. For industrial projects, this can mean properties that have leases greater than five years as well as properties that have multiple units leased to multiple arms-length tenants.
Owner-occupied projects can be considered, however, historic financial performance will be reviewed and scrutinized. Specialized industrial projects also introduce financing challenges. The risk is greater in the case of specialization as it is harder to devise contingency plans and find replacement tenants if required.
Base financing offers a term of five years or more, a fixed interest rate and is typically closed to prepayment for the term’s duration. For industrial, conventional is the most common type of standard financing.
Base financing is usually considered when borrowers want the payment predictability that comes with a fixed interest rate. However, it is important to note that a typical conventional financing term for an industrial project is five years. Longer terms are available, but there is often greater scrutiny on future cash flows. Borrowers must be able to show that longer-term leases (i.e. maturing in 10 years or more) are in place for the duration of the mortgage term.
Commercial Mortgage Backed Securities (CMBS): CMBS is a conventional financing solution available for first mortgages on established, stabilized properties (generally three or more years of stable operating history). This type of financing works well for properties with in-place, stabilized net cash flow.
Bridge financing addresses a borrower’s short-term needs, usually three months to three years. Some borrowers choose bridge financing when they need flexibility to decide about the future of an asset (i.e. contemplating a sale, impending change in ownership structure, wanting to match mortgage term to single lease maturity or operational planning) or time to coordinate a standard financing option.
For industrial assets, short-term financing may be a strategic solution if many of the property’s leases are approaching maturity. The flexibility enables the borrower to negotiate new leases or acquire new tenants, ultimately positioning the property more positively for standard financing.
Bridge financing typically includes floating interest rates and usually allows some form of early prepayment. Consistent cash flows and strong operational histories are key considerations for this type of financing.
This short-term financing option enables access to a property’s equity for improvements, renovations or repairs, eliminating the need to raise funds from personal sources. The goal is usually to increase rents and/or reduce operating expenses to drive up the value of the property and make it eligible for standard financing.
Second mortgages are often used to access equity in a property when a borrower wants to purchase another asset or renovate/repair a property. Borrowers with a first mortgage may be eligible for secondary financing on the same property. Options include standard or short-term financing. Secondary financing is an attractive alternative to refinancing, especially if a borrower wants to avoid the penalties associated with breaking a mortgage mid term.