Expand your business’ potential with a retail and office mortgage broker in Richmond (Vancouver)

You should know that, with B.C. commercial properties, the amount you pay and the amount that is used for financing will be different.

The lender will give you a mortgage based on the appraised, current value of the property. But the seller of the property will base their price on the potential of future profit. Because of this, the property price you pay will be higher than its current value.

So, in essence, you’ll need to use cash to make up for the difference in appraised value, versus the selling price. This will be on top of your down payment requirement.

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When you purchase commercial property of any type, there will be added costs that you’ll need cash for. These include:

• Closing costs, lawyer fees, taxes and so on (as with all real estate).
• Fees to produce necessary reports such as a building condition assessment (BCA), an environmental risk assessment (ERA), an appraisal and other due diligence reports (e.g. liens or taxes owing on the property). See note below.
• Mortgage transfer fees, if you have bought bare land to construct a retail or office building. When construction begins, you’ll need a new type of mortgage.

Note: if you are buying a unit within a strip mall or office building, the property management company or commercial strata management company will typically have the building condition and environmental reports you need to apply for a mortgage. Work with your real estate agent to obtain these for your commercial retail or office mortgage application.

Many entrepreneurs who seek to purchase retail or office space also consult with specialists, such as corporate lawyers, accountants and business advisors. These professionals will have their own fees, in addition to the ones listed above.

In some cases, professionals are legally necessary for the property transaction. However, even if they’re not required, lenders will take you more seriously if you have consulted with them. Plus, they can save you from a lot of adversity, and are thus worth the investment!

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Keep in mind that, in order for a B.C. commercial loan to be worth it for the lender, the loan’s dollar value should generally be higher than $250K CAD. This means that you won’t be able to put up more of a down payment to lower your fees, if it also lowers the interest that a lender can profit from the loan.

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With some real estate, insured mortgages can mean lower interest rates compared to conventional mortgages. This is due to the lower risk they offer lenders (learn more, here). However, commercial mortgages are not always insurable.

The cases where you could apply for insurance on a Richmond retail commercial mortgage are when buying:

• Licensed care facilities (i.e. long-term nursing homes)
• Retirement homes

Insured commercial mortgages are also available for multi-unit residential properties that are bought for earning rental income. You can read more about them, here.

In this scenario, the equipment and furniture in the space is already being used to operate a business. You’re taking it over, along with the other tangible and intangible aspects of the business (such as its brand recognition, its trademarks and patents, documented operations processes, clientele lists, etc.)

For a good mortgage lender to accept your financing application, they will need to see the previous two years of business financials from the existing business owner. Then, they will determine whether or not it is profitable by calculating what’s called a “capitalization rate.”

A capitalization rate is typically formulated by taking the net operating income (NOI) and dividing it by the current market rate of the property (i.e. its current asset value).

Note: it is rare to use the purchase price as the dividing factor in capitalization rate. This is because it is not entirely reflective of the return on investment that lenders can earn on the mortgage.

An ideal capitalization rate for lenders is between 4% to 12%. However, it depends on the area, the type of business, and the type of property in question.

For example, improvements on the property, or changes in the business structure can also affect future profit. This may also be taken into account in your mortgage application. But again, it depends on the lender’s criteria.

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In this scenario, the mortgage is considered based on the unit value itself and your own potential to build a profitable business. This changes the game a little bit.

Since there are no existing financials to back your case on, you’ll need to provide a business plan to show that you have your ‘ducks in a row’ (so to speak). The lender will compare your business approach with others in your area and industry, to determine if you are being reasonable.

This is where it can be extremely important to consult with a business advisor or accountant. They can help you thoroughly consider the financial aspects of your business, to better predict profitability. They can also make a ‘proper’ business plan, which will ‘speak’ to a lender with more professionalism.

Other factors a lender will consider will be about you, personally. They will want to know if you have industry experience and can succeed in your new business venture. They will check your credit history, your personal assets and other sources of income.

Ultimately, the lender will want to know that you can make mortgage repayments, in the event that the business struggles.

If you are planning to purchase a retail or office property in a busy, commercial area with plenty of foot-traffic, this can work in your favour when applying for a mortgage. If the property is already in good condition, that will be even better.

Lenders may be willing to offer a higher loan amount in these cases. This is because the property will be easy to resell, should you default on loan repayments.

In essence, the lender will account for security in knowing that they can dispose of the property to get their money back, should things go southward.

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Whether you decide to buy an existing business or start one from scratch, no doubt you may encounter costs for renovations and equipment.

In some cases, a lender will allow you to ‘fold in’ the financing of these needs with your mortgage. For example, they may offer an additional loan to help a dentist buy dentist’s chairs. Or, they may help a salon renovate, to attract more customers.

In these scenarios, the borrower would pay back the loan with the same repayment schedule as the mortgage on the property.

If you need the cash flow to be able to afford these upfront costs, then the best commercial mortgage for you will be one that can offer this deal.

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Depending on your timeline, a commercial mortgage broker may advise opting for a flexible mortgage, rather than a low-rate mortgage.

This is because low-rate mortgages with ‘A’ lenders may not be able to come through as fast as ‘B’ lenders or ‘C’ lenders. If you’re in a race to win a bid on a property, you’ll want a lender that can get you cash quickly. Afterwards, switching to a different type of lender, with lower rates, may be possible.

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With commercial retail and office mortgages, there will be terms and amortization periods, just like with residential real estate. These generally follow the principles of all commercial mortgages.

The terms can go up to 5 years, after which point you will need to renew or transfer your mortgage. These intervals are a good time to be in touch with your commercial mortgage broker, so they can get you better deals, if possible. This can save you thousands over the span of your repayment schedule.

Amortization periods can go up to 15 or 20 years. This means you’ll have to pay off the entire loan within that time period.

For example:

Let’s say you get a 3-year term with a 15-year amortization on your Richmond retail or office mortgage.

After 3 years, you will need to renew at current market rates. This can be higher or lower than the rates you currently pay.

Let’s say you renew for another 3 years. At your date of renewal, you will have 12 years left on your amortization period. You’ll continue to pay back the loan with interest, but at the new rate you received on renewal.

This process will repeat every 3 to 5 years (depending on the renewal terms you choose over the life of the loan).

On that note, we also help with renewals on existing commercial mortgages, even if your original mortgage deal was not through us. Feel free to be in touch, and we’ll shop the market to get you a deal that matches your needs.