A commercial mortgage is designed for businesses and investors who wish to purchase, build or refinance income producing commercial properties.
Most commercial mortgages and loans are fairly complicated and the process of obtaining a commercial loan or commercial mortgage is much more involved than running a simple credit check and confirming income as withmany residential mortgages. All aspects of the Borrower and the Property are taken into consideration by the lenders, such as the history and track record of profitability, the soil conditions, the zoning, the condition of the buildings, the location of the property, the tenants, the terms of the leases and their expiry dates, etc.
Lenders exercise a high level of due diligence and require copies of all relevant documents related to the property or project. Therefore, the loan process can take several months to complete and involve several lenders.
On occasion, the loan structure may include a syndicated mortgage involving several borrowers or a subordinated loan position for part of the debt and mezzanine financing.
Total Revenue, less a vacancy factor, less Operating Expenses.Operating expenses include insurance, utility expenses for common areas, condo fees, property taxes, maintenance, superintendent fees, management fees, etc. but not interest or principal payments, nor amortization.
The Cap rate plays an important role in determining the value of income producing properties. Higher capitalization rates result in lower property valuations and thus, lower loan amounts being offered by institutional lenders. Conversely, lower capitalization rates result in higher property values, etc. Cap rate are derived in several ways. For example, through a sampling of recently sold properties based on know or estimated NOI.
Investors and lenders need to ensure that the property in question produces sufficient Cash Flow in order to adequately service any debt. Typically, lenders look for a DSCR that exceeds 1.15:1 and can be as much as 1.50:1. Calculation: basically, NOI / Debt repayment (principal and interest)
The LTV ratio for a commercial mortgage or loan is dependent on the property type, its use, its location and the lender’s lending policy. The LTV can vary from 50% to 80% for conventional loans and higher for CMHC insured loans.
- Variable and fixed rate options are available. Variable rate option (prime-based) can usually be converted to fixed rate option.
- Terms may vary from 6 months to 5 years to 10 years.
- Fixed rate mortgages are the most common.
- Multi-residential buildings may be amortized over 25 years (CMHC-insured may be up to 30 years).
- Other types of properties are generally amortized up to 20 years.
- Conditions, such as pre-payments or early payout can be negotiated.
A mezzanine loan is a financing vehicle used to many finance construction projects. Mezzanine financing is a cross between a conventional loan and a direct investment. It overlays a conventional loan and offers a loan-to-cost ratio of up to 90%.
Mezzanine financing bridges the gap between traditional financing and the equity required for real estate projects, such as:
• Acquisition, redevelopment and construction projects involving all types of real estate assets
• Projects with a well-defined exit strategy
• Projects with strong added-value potential
The advantages of mezzanine financing are:
• Lower equity requirement
• Additional leverage
• Meets equity conditions required by a senior lender
The Lender’s fees for mezzanine financing usually consist of due diligence, financial audit, building inspection, environmental audit, market study and legal documentation.
Fixed Rate Mortgage: The standard model for commercial real estate lending is the Fixed Rate Mortgage. The interest rate is locked-in for the duration of the term. The interest rate is usually higher than a residential mortgage due to the implied higher risk nature of a commercial property.
Floating or Variable Rate Mortgage: A floating rate mortgage is usually based on a specific bench mark, such as the prime lending rate of one or more of the Canadian Chartered Banks or Government of Canada Bonds, plus an interest rate premium or spread based on the lender’s assessment of the risk.
Many borrowers choose floating rate loans to take advantage of the historically low interest rates available over the past few years. Floating rate loans often feature minimal or no prepayment penalties. They are particularly attractive to buyers with a one to three year time horizon, such as the acquisition of a property going through a reposition or a turnaround.
Construction Loans: Typically, Construction Loans are short-term loans utilized by borrowers to finance building costs. Each construction loan varies depending on the product, the length of the construction process, the borrower’s experience, the contractor’s experience, the borrower’s equity, the loan to value, etc.
• To qualify, the real estate must be commercial, such as multi-purpose buildings, industrial, office, commercial, retail, multi-residential (5+ units) property, etc.
• The property must be located in an active resale and rental market, where current market rents exist for comparable properties, and where the property is readily marketable.
• Lenders typically require a current AACI appraisal by one of the lender’s approved appraisers, an acceptable or clean environmental report (Phase I or II ESA), a land and building survey or Title Insurance, and possibly a building condition report by a qualified engineer
• CMHC guidelines apply for CMHC insured mortgages
• Last 3 years financial statements or equivalent
• Budget and/or cash flow projections
• An up to date and detailed rent roll
• Copies of leases
• Portfolio Summary or Analysis for multi-property investors or owners
• Site Plan Agreements, building plans, and other documents for land development and construction projects
We work with over 35 lenders, financial institutions, MIC’s, life insurance companies, investment funds and many private lenders.