Getting a loan can be quite an intimidating task, especially when it comes to commercial financing. The expected time frame speaks for itself – anywhere from two months to a year, as opposed to 2-3 weeks for residential loans. What else would you have to consider when venturing out into this type of real estate?
If you had thought of commercial property as a bunch of stores or restaurants, you were partially right. It actually goes beyond those, to also include residential units (subdivided into properties of 1-4 units, and 5 or more) and mixed residential-commercial – something like that beautiful row of cafés and shops you would see on the first floor of some European-style buildings. Well, these are the three basic categories, but there are more. In general terms, if you need to finance an office, a retail store or an industrial building, we are talking about a commercial property.
It’s not a matter of simple classification, though – property type determines loan conditions. Since a purely commercial building is considered to be of higher risk (repayment depends on how well the company does in the future), interest rates and down payment will be higher.
Commercial Mortgage Type
Even though it is impossible to generalize on lending criteria because each property carries its own specific risk, the max-loan-to-value ratio will vary 55 to 80%, depending on whether it is a farm land mortgage, or storefront with apartments, or anything in between. For a construction project, though, no numbers are generally given, since they will depend on many aspects of the future project.
Qualifying for a commercial loan is no simple matter either: it will depend on a range of factors, starting with the debt service coverage ratio (the ratio of cash available to cover the payment of the loan) and ending with the down payment. The debt service coverage ratio is the first aspect considered. Good credit history and a stable current business situations are obvious musts. The type of business – as discussed above – will also determine the size and the conditions of the loan, including the down payment (mixed use properties will require anywhere between 20% and 35%, while purely commercial buildings will need 50%).
Commercial Mortgage Insurance & Broker Fees
Insurance and broker fees are another important aspect to consider. If the property is 100% commercial, CMHC will not even insure it; meanwhile, mixed-use properties (and their owners) are more in luck – it is possible to get coverage for a projects with the down payment of as little as 15%. Also be prepared to keep aside several thousand dollars for your broker’s “finder’s fee”, in case they do connect you to a lender with convincing rates.
The Next Step
Despite its apparent complexity, figuring out financing is an essential step to take to make sure you don’t run out of money in the middle of construction. If that were to happen, the unfinished building would be auctioned off in parts, and you would end up losing everything that you had invested – not a desired outcome.
With the financial situation cleared up, you are ready for the next step – the surveying of the property. Read our next blog to find out what is involved.