Increasing Commercial Real Estate Purchase Leverage with Seller Second Carrybacks
Leverage the Kirkland Capital Group 85% CLTV Option.
In the competitive commercial real estate lending market, loan brokers encounter the challenge of finding innovative financing solutions tailored to their clients' diverse requirements. Kirkland Capital Group's (KCG) private bridge product allows a seller second mortgage option up to an 85% CLTV (Cumulative-Loan-to-Value). By reducing the buyer's cash requirement to 15% plus closing costs, brokers can significantly enhance their clients’ purchasing power, granting access to properties that were previously unattainable.
For commercial loan brokers, mastering the integration of seller second carrybacks into financing strategies can distinguish them in a competitive market. By promoting this financing option, brokers can build a compelling case for their clients, illustrating how seller seconds can effectively address funding shortfalls. This approach not only strengthens client relationships but also establishes brokers as knowledgeable advisors capable of facilitating more complex and lucrative transactions in commercial real estate.
“For commercial loan brokers, mastering the integration of seller second carrybacks into financing strategies can distinguish them in a competitive market.”
Key Points:
Primary Mortgage: Provided by KCG as an interest-only short-term bridge loan.
Seller Second: Enhances the borrower's leverage and purchasing power for the property.
Higher CLTV: Typically results in 85% total financing capacity, thereby reducing the buyer's cash outlay to 15%, plus closing costs.
Seller Second Financing
A seller may choose to carry back a second mortgage on the property for several reasons. This approach can attract buyers when the property faces challenges such as deferred maintenance, the need for renovation, or high vacancy rates. Additionally, it facilitates the sale by making the property more appealing to potential buyers who may not qualify for conventional financing. Moreover, this arrangement can provide the seller with a consistent stream of income from interest payments over time. It also enables the seller to defer capital gains taxes by spreading out the receipt of the sale proceeds.
Advantages:
Flexible Terms: Tailored agreements can meet both parties' needs. Seller seconds often have lower interest rates than primary private bridge loans and may include payment-free periods to aid cash flow for vacant or underutilized properties.
Investment Opportunities: Sellers earn interest on the second mortgage.
Enhanced Marketability: Seller financing can attract more buyers.
“This approach can attract buyers when the property faces challenges such as deferred maintenance, the need for renovation, or high vacancy rates.”
Impact on Overall Debt Load
Taking on a seller second mortgage increases the borrower’s total debt. This can impact both the debt payments on the property and the ability to secure long-term financing. When KCG underwrites a loan with a seller second, we evaluate not only the debt payments but also whether the borrower can transition out of both loans to long-term financing. As the loan broker, it is essential to demonstrate a clear plan to repay both the KCG first mortgage and the seller second.
“As the loan broker, it is essential to demonstrate a clear plan to repay both the KCG first mortgage and the seller second.”
Considerations:
Impact of increased total debt on mortgage payments.
Capability to obtain and manage future financing.
Important Considerations
Consider these points when evaluating KCG’s bridge financing.
KCG must review and approve the seller's second mortgage agreement before closing.
The borrower must demonstrate 6-9 months of interest reserves in addition to the down payment and closing costs. It is important to note that these are not lender-held reserves, but rather the borrower's personal reserves retained to cover expenses.
When planning renovations, the borrower must demonstrate the availability of necessary funds or indicate the source of these funds, such as a cash-out refinance from another property.
The first mortgage LTV ratio and the overall CLTV ratio are determined based on the lower of the purchase price or the as-is value of the property. KCG lending policies do not support loans based on After-Repair Value (ARV) or Loan-to-Cost (LTC).
Submit Your Scenario
Got a potential loan that you need a fast yes or no on? Head over to our Rapid Loan Scenario Check page and tell us about your creative financing need. Make sure to include any details of a seller second.
