How First Source is adapting in this high rate environment
This article was provided by First Source Mortgage Corporation.
What is bridge lending, and why is there a focus on short-term loans? Contrary to belief, it's not as complicated as it may seem. First Source Mortgage Corporation (“First Source”) operates as a commercial bridge lender.
Bridge financing plays a pivotal role, offering financing solutions for real estate properties otherwise ineligible for traditional loans. Private lenders in this niche can process commercial real estate loans faster than banks, coupled with a higher risk tolerance. Essentially, they offer short-term financing as a “bridge” until borrowers secure long-term financing from mainstream lenders, such as banks.
The applications for bridge financing are varied and may encompass tasks like rezoning land for development, repairing structures to boost rents, or constructing new properties. Traditional lenders, like banks, often shy away from these ventures, particularly with smaller borrowers due to the perceived risks.
Commercial bridge loans are structured differently from conventional financing. Instead of amortized blended payments, bridge loans are interest-only. Borrowers pay interest typically over 12-24 months and settle the principal at the term's end. Given the heightened risk, commercial bridge lenders impose higher interest rates, generally a spread above the Prime Lending rate, and these rates are often variable.
The prevailing economic climate brings its challenges, notably surging inflation and interest rates expected to persist in the foreseeable future. This backdrop has escalated costs, stalling numerous real estate development projects. Recognizing the crucial role of cash flow and liquidity in such a scenario, First Source has strategically shifted its focus towards real estate propositions that ensure cash flow and are more liquid. The key question we probe is: Can a property generate enough cash flow to offset debt and rising costs in this high-interest and inflationary environment? In the realm of land financing, our attention is on properties with substantial pre-sales, both residential and commercial.
Although access to capital remains a hurdle for many commercial real estate borrowers, high-net-worth clients seem to be the exception. First Source identifies a lucrative opportunity to finance low-risk borrowers, primarily in bustling urban centers. This gap has allowed private lenders to establish a vital foothold in the market.
Private Commercial Lenders with proven track records and compliance earn the trust and preference of brokers and investors. First Source places immense value on fostering solid relationships with its broker and investor community, considering them pivotal to its operations. We collaborate with brokers across the spectrum of experience, equipping them with a clear lending criteria framework. Our expertise in real estate serves as a reliable resource for brokers forwarding financing requests.
Why venture into commercial real estate mortgages? The commercial real estate domain offers a plethora of benefits not present in its residential counterpart. It caters to astute investors willing to embrace higher risks. The premiums on commercial mortgages, although higher, translate to enhanced yields for investors. Investors have options ranging from land and income-generating properties to construction loans. While land loans might be speculative, they cater to investors seeking long-term investments with potentially higher returns. Conversely, properties such as business spaces or apartment complexes tend to have reduced tenant risk, thanks to a diversified tenant base. The focus in commercial real estate lending is primarily on cash flow and loan-to-value ratios, often resulting in loans with lower loan-to-value compared to residential mortgages.
First Source emerges as a conduit for investing in commercial real estate mortgages, an ideal avenue for investors reluctant to allocate substantial capital towards buying commercial property directly. Investors can channel funds into specific commercial properties via syndicated mortgages, granting them the autonomy to base decisions on parameters like location or project type. For those eyeing a wider exposure across the Greater Toronto Area, the First Source Mortgage Fund (“the Fund”) offers an opportunity to invest in a diversified mortgage pool. The Fund also extends the perk of being held in tax-advantaged accounts like RRSPs and TFSAs.
In conclusion, investors can either opt for a diversified mortgage pool through the Fund or directly delve into syndicated mortgages.