A commercial mortgage is simply a loan taken out on commercial properties as opposed to residential mortgages or anything that is zoned Commercial. This could be a retail plaza, a large or small residential apartment building, manufacturing site, store, restaurant, garage etc. Though most available mortgage terms are almost similar to residential mortgages, they usually have high-interest rates. We have access to very good lenders in the Commercial Mortgage field and will source out the best rates and overall deal for you as a Commercial client.
The borrowers of a commercial mortgage loan include institutional investors, businesses, or companies as opposed to individuals. The business may be a limited company or a partnership. Consequently, evaluating credit score, credit history, and other aspects of business finance is more complicated with this type of property loan. This type of mortgage may also take an extended period to process because of the complexity of appraising the property in question.
As with residential mortgages, where the buyer believes that buying a home is preferable to renting, owning your place of business brings more control over the business. There are pros and cons when it comes to owning commercial property.
If you need to sell the commercial property there may not be a ready pool of buyers and so selling can take more time. The lender will likely want more of a down payment in order to lessen their risk and will offer shorter loan terms than with residential mortgages, presuming that as a business you will have more income to pay the mortgage off more quickly.
There are various “pros” to owning the property that houses your business, such as no rent increases or landlord interference or restrictions in adapting the property for your business. Reducing costs such as rent may free up more capital for the business. Owning builds equity over time as values rise and if the property is large enough, it may be feasible to lease some of it out to other businesses.
The most obvious “con” would be the ongoing maintenance of a commercial property and the fact that property taxes will be high. There may also be municipal regulations that seem excessive and might hamper growth or take time to accommodate.
Commercial mortgage loan rates are dependent on the terms of the specific loan, borrower, and condition of the commercial property in question. Recourse mortgages on stabilized commercial properties with known and capitalized borrowers are likely to get lower commercial mortgage rates compared to non-recourse mortgages on new construction or land with borrowers with limited history. Commercial mortgages are priced based on government bonds, with premiums being determined by the specific situation.
For commercial mortgages, it is challenging to compare interest rates as lending criteria are not usually advertised. The terms and conditions of a certain loan can also differ significantly. For this reason, it is recommended to enlist the services of an experienced mortgage broker. A licensed commercial property broker deals with rental apartment properties, offices, industrial properties, retail spaces, and more. The broker can connect you with various lenders.
Your preferred lender will assess the overall risk associated with your property before lending you money (commercial property mortgage). For instance, a mixed property can have a storefront and two to three floors of residential property. There is a high risk if the business area of the property is greater than the residential section (in terms of square feet). Note that commercial properties are considered riskier as the repayment process depends on the business performance.
Suppose you are an institutional investor and want to get a commercial property mortgage; there are important requirements you must meet. This bar is often set high because the value of loans is considerably high. Here are some of the common requirements you must meet when applying for a commercial mortgage.
Debt services coverage ratio: Simply put, this is the ratio of available cash to the set mortgage payment, and it is the primary criterion that many lenders will analyze to determine a borrower’s creditworthiness. Many lenders will apply a mortgage-to-value ratio and expect borrowers to invest their money into the purchase to balance the odds successfully.
Borrower’s credit history: Many lenders require a great credit score and credit history as proof that your business is creditworthy. Though there are lenders who may accept commercial mortgage applicants or real estate investors with less-than-ideal credit scores or history, such lenders are very few.
The current business situation: Suppose your business is operational; commercial mortgage lenders expect it to have a steady cash flow and profitability. Your commercial lender may ask you to provide your financial projections and business plan. Remember, your potential lender wants to ensure that you can successfully make your monthly payments on time.
The specific type of business: It is important to mention that the terms of commercial mortgage often depend on the specific type of business you own and the type of property you plan to buy. This is a quite complicated area, which is why you must enlist the services of a specialist (chartered surveyor or solicitor) to guide you.
Necessary down payment: A higher amount of down payment is expected of commercial properties. For instance, a typical down payment on a mixed property usually falls between 20 percent and 30 percent. Keep in mind that purely commercial property is usually higher, approximately 50 percent. Your overall risk profile determines the amount of down payment that you may be asked to pay.
Commercial property insurance is more complex compared to residential property insurance. For example, CMHC will not insure pure commercial real estate but can insure a mixed residential – commercial real estate with a down payment as low as 15 percent. With personal residential property, the lending institution can be assured that the borrower will prioritize mortgage payments.
But with a commercial mortgage, it’s easy for the borrower to declare bankruptcy if the business is not performing as expected and default mortgage payments. This is why a commercial lender may require security in the form of commercial mortgage insurance.
It is in your best interest to consult with an experienced mortgage broker. He or she can help you find a commercial mortgage lender with a competitive rate. However, you will have to pay the broker a finder’s fee. Mortgage broker’s fee ranges from a few thousands of dollar.
The size of the down payment will be key in alleviating some of the financial burden of owning a business overall. Paying less interest is clearly desirable as is a lower monthly payment. However a lower down payment can free up funds for operating and perhaps expanding the business itself. Different lenders will have different rules around down payments based on the financial records of the business and loan to value.
The rule of thumb for amortizing a commercial mortgage is 20 years or less, with monthly payments reflective of that. There are lenders who are in place to provide only commercial mortgages and to assist the business owner with protecting cash flow.
There are many reasons borrowers apply for a commercial mortgage. Some of these reasons include property development, a new business office, investment within the business, a new location for the business, and necessary renovation on the current commercial property. Be sure to consult with an experienced commercial mortgage broker or if you need real estate financing.
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