Helpful Notes for Mortgage / Financing (Commercial)
Even after you have provided your banker with all the reports they have requested, you will still have to jump through more hoops to qualify for the mortgage. They will not only want to see that you are buying a quality property but that there is sufficient cash flow from the rental or sales income to cover the new mortgage, property taxes, maintenance, utilities, vacancies etc. In fact, most lenders will want to see that there is sufficient cash flow after operating expenses (not including the mortgage) to cover the mortgage payments in excess of 1.2 times.
Assuming your property meets all the banks lending requirements, you will then find that most commercial mortgages are priced substantially hire than residential mortgages. Some lenders will price their commercial mortgages based on residential posted rates plus a certain percentage while others will base your rate on a spread above the equivalent yield on a Government of Canada Bond for a similar term. You will also discover that unless you are looking for a commercial mortgage in excess of $2 million there is not much room for negotiating with your lender.
Not only are your interest rates higher for commercial mortgages but most lenders will also charge you a fee to arrange the mortgage. These fees are usually between 1½% and 1% of the mortgage amount.
Now that you have come this far you discover that your lender wants to use its own law firm to represent its interests. So not only do you have to pay your lawyer but now you also have to pay the bank's lawyer to handle your mortgage transaction. Rest assured that your bank did not pick its lawyer because they were the cheapest game in town!
It is not unusual for people to find a property they want to buy only to discover that their bank will not even consider giving them a mortgage. The banks are usually very selective in choosing the type of properties they will lend on and the locations that they will lend in. If your property is unique or in the middle of nowhere you can have problems arranging financing.
Most mortgage brokers deal in commercial mortgages, but once again there are costs involved. For most commercial transactions you will have to compensate the broker for their time and efforts. Typical brokerage fees can range anywhere from 1% to 4% of the mortgage amount. The cost is usually determined by the degree of difficulty in obtaining your financing.
Investing in commercial real estate is not for everyone. The costs to enter the market are prohibitive, as are the costs to exit the market. Commercial real estate is a long-term investment so you need to do your homework and find a property that can make you money over the long haul. Unlike those late night infomercials, there is rarely any quick money to be made in the commercial real estate market.