Commercial mortgages and construction loans are Real Can Financial's specialties. We work with a wide range of lenders, from institutional to private, to find you the best loan. We are specialized in arranging medium to large scale commercial mortgages, financing first and second mortgages, renewals and refinancing commercial mortgages, financing on all types of commercial real estate and portfolios across Canada.
Our expertise consists of: multi-unit residential, apartment buildings, retail plazas, office buildings, medical centers, industrial buildings, hotels and motels, schools and places of worship, properties that require stabilization (currently vacant or being retrofitted), Construction mortgages, land financing and special purpose properties.
Our added value is our knowledge of commercial mortgages, our ability to simplify the lending process, and our network and relationships with lenders. Working with our lenders' network, we deliver the most competitive structure and the most suitable financing for you to save time and money.
We will guide you through the entire process, from the application and professional mortgage consultation and analysis, to the underwriting process, review of lending offers, and negotiate the most suitable terms and rates for you.
The cost of this service is frequently paid for by securing the lowest interest rate and lower loan fees.
Applying for a Commercial Mortgage: What You’ll Need
For most investors, competitive financing is the biggest driver in achieving cash-on-cash yield as well as overall investment returns when acquiring income-producing properties. Understanding and navigating the capital markets is the single biggest challenge to investors seeking to maximize returns while funding the largest piece of the capital stack for property acquisitions. But it doesn’t have to be. Knowing what to expect beforehand can lessen the burden, and applying early can help you better understand your financial options as well as give you more negotiating power and weight behind any of your offers. While every situation is unique, here are the basics of what you’ll need in order to apply for a commercial mortgage.
Commercial Mortgage: Let’s Get Personal
While many loans are non-recourse that don’t require personal guarantees, lenders need to know exactly who they’re working with so it’s up to you to provide not only your personal financial strength as a Borrower, but equally important is to highlight your experience as an investor/operator of income-producing assets. Current net worth statements along with resumes/bio’s demonstrating track record are all important to have readily available to keep the process moving forward. Lenders will ask and verify through background checks and credit scores that you are credit-worthy to borrow the necessary funds when purchasing or refinancing your properties. Its important to be upfront with any past issues in order to establish trust and credibility with your new lender and will avoid having to explain why these issues weren’t disclosed early in the process.
What’s Your Experience
Illustrating track record and experience is more critical than ever, as lenders want to know they’re dealing with seasoned operators who know how to manage assets. In the case where this is your first such acquisition, it will be critical to add a “deep bench” to your team, whether in-house or 3rd party, in order to demonstrate competency to your skill set and management team. First time operators/investors will have a tough time convincing today’s lenders that they are reliable and credible in not only modeling operating performance but also in running the day-to-day aspects of owning commercial real estate. At the end of the day, lenders don’t want to foreclose on the property and find themselves in a position whereby they are forced to asset manage their collateral. They’re in the business of lending not operating, so it’s vital that you can demonstrate conservative projections that line up with well-known operating metrics of each asset class.
What You’re Worth
Going hand in hand with experience, lenders like to see a Borrower’s net worth matching to some extent the value of the property being acquired, along with liquidity of roughly 10% of the loan amount AFTER equity has been invested. Again, while “non-recourse” loans are generally available, the lender wants to know that the Borrower has the wherewithal to carry the property out of their own reserves should there be an unexpected dip in income to support operations and debt service. Many Borrowers will team up with multiple principals so that the combined net worth and liquidity match the lender requirements. All to often Borrowers attempt to take on too large of projects because they were able to raise the necessary equity capital, but fell short of lender required Balance Sheet strength as the Key Principal or Sponsor.
Credit Where Credit is Due
Credit scores in the past were not a major focus for lenders, as they were really relying on the property-generated income to support debt service. Since the credit crunch, credit scores are now much more relevant to determining a Lenders opinion of the Borrower’s credit worthiness. Lenders will always perform a credit check on anyone that applies for a mortgage, so if you know your credit score is less than 680, do something about it beforehand and work to bring that number up before you apply. To make the process quicker, supply the lender with all of the details pertaining to your credit accounts, which they can then compare to your credit report.
There are many more steps to successfully applying for a mortgage, but this should be a good starting point. Getting property-level information, as well as personal financials, rounded up beforehand, will make the process much easier for you and the lender once you do apply. Then you can be on your way to successfully negotiate your property acquisition with confidence!
Purchasing vs Renting
Commercial mortgages offer several benefits over renting property. One of the most significant benefits is, simply, ownership. Instead of just providing office space for your business, your monthly payments now help build equity. Also, the interest is tax-deductible, which lowers your company's gross taxable income.
Another advantage to commercial mortgages is that the loan is generally assumable. This means if you decide to sell the property while still carrying the mortgage, a qualified buyer can take over the terms of your existing loan without needing to go through an extensive approval process.
However, there are significant downsides to consider. Buying is a time consuming process. You must provide significant documentation, including all of your business financials from the last three years. This may include income, rent rolls, business plans, and other proprietary information, and takes weeks for the lender to review. Even after you receive the loan, you may still need to provide regular financial updates to the lender to demonstrate your financial stability.
In addition, you have a fixed cost that you now need to cover, regardless of how your business performs. While a landlord may be a bit more flexible about payments, commercial mortgage lenders won't be.
Finally, as an owner, you'll have increased responsibility to maintain the property, particularly if you sublet space to other businesses. Also, if you're depending on rental income to make payments, you'll have to work diligently to find tenants as units that stay empty for too long can lead to serious financial problems.
Getting a Commercial Property Mortgage
If you feel confident that your business meets the finance requirements, you're ready to start the process of obtaining a commercial property mortgage. It can take a few weeks or several months, depending on the appraisal process and negotiations, but typically takes around 60 days.
Steps to obtaining a commercial property mortgage
- Find property. You need to have a building or land in mind before applying for a commercial property mortgage – otherwise a broker cannot help you. If you’re buying a rental property, you’ll also need to have tenants lined up to show the property will be cash flow positive.
- Find a lender. Once you understand your financial commitment (see “Borrowing considerations“), you should research several lenders, or have a broker match you with multiple lenders to search out the best commercial mortgage rates and terms (see “Choosing a lender“).
- Complete a loan application. The application gets the loan process started.
- Provide documentation. The lender will need detailed financial statements from the previous three years, including business and personal records. This includes operating statements, bank records, tax returns and corporate financials.
- Hire a lawyer. Make sure you procure a lawyer’s services when purchasing a commercial property mortgage. A lawyer can help you review the terms and conditions of the mortgage and look for any undisclosed fees. The lawyer will also represent you when you close the loan to make sure everything runs smoothly.
In turn, the potential lender will take the following steps to determine whether to approve your business
Choosing a Mortgage Lender
There are two main sources for obtaining a commercial mortgage: banks, third-party lenders, (trust company or privet lender).
Banks are the most common choice. They typically offer the lowest rates, but may only work with certain industries or purchases. They also require the most documentation and may charge more fees than other lending sources.
Third-party lenders (also known as hard money lenders) can provide mortgages more quickly and with less documentation. The money comes from private sources, insurance companies, or warehouse lines of credit. Third-party lenders charge a significantly higher interest rate than banks.
We investigate many banks and lenders to find you the right mortgage at the most competitive price. We foster relationships with lenders so we can get you deals you might not be able to get on your own. We also do much of the research and background checking which saves you the time and effort of shopping around.
However, broker service comes at a price. Unlike brokers for residential mortgages, commercial mortgage brokers receive a commission based on a percentage of the total amount borrowed in addition to your mortgage-related expenses.
Commercial Mortgage Rates and Costs
The interest rate is the most important pricing component of your commercial mortgage rate. Lenders base their interest rates on the prime rate - the rate banks offer to large corporations and the most creditworthy borrowers.
The rate will vary greatly based on several factors such as the size of your down payment, the length of your loan, the location of the property, and the risk level of your business.
Another significant expense is the down payment - 20% to 30% of the purchase price. However, that money immediately becomes equity in the property. You can put less than 20% down, but it will considerably increase your interest rate.
In addition to the monthly payments, you'll also be responsible for several up-front fees that can total tens of thousands of dollars and possibly hundreds of thousands of dollars. Make sure to budget for these closing-related fees above and beyond your monthly commercial mortgage rate payments.
- Valuation fee. Appraising the value of the property can cost from $500 to $5,000 depending on the size and the type of the property.
- Environmental surveys. Buying potentially dangerous property, such as a gas station with underground fuel tanks, requires more stringent inspections. A Phase I environmental inspection typically ranges from $200 to $4,500. If the building requires a more intensive Phase II inspection, expect to pay $3,500 to $10,000 or more.
- Due diligence. The lender will run several credit and background checks to gauge your credit worthiness. This can cost several hundred to a few thousand dollars depending on the time and work involved.
- Broker fees.
- Legal costs. You may spend a few thousand dollars on a lawyer to review the contract, check for hidden charges, and ensure that the inspection work was done properly.
- Additional fees. Up-front charges such as application fees ($300 to $500) and processing fees ($500 to $2,000) may be optional based on the lender’s discretion. In some cases, the lender may refund these fees at closing.
Early Repayment Charges and Balloon Payments
Two other fees to keep in mind are early repayment charges (ERC) and balloon payments.
Unlike with other large purchases, it’s not always necessary to meet a lender in person to close a commercial mortgage. If you do the necessary research on their license, background, and references, you can iron out the details by e-mail, phone, and fax. Not having face-to-face interaction with the lender makes it even more important to have a lawyer oversee the process.
- Don’t rush to take out a hard money loan. Even though it seems appealing to provide less documentation and avoid many mortgage restrictions, hard money loans can get very expensive – as much as 5% of the loan value up front with 15% to 20% interest – and may hamper your ability to get a commercial mortgage in the future.
- If you own property but want to relieve yourself of the responsibilities that come with it, you can enter a “sale and leaseback” agreement with another buyer. The new buyer can assume your current mortgage, and then lease it back to you.