When financing the purchase or construction of a building that offers both commercial and residential units, this loan usually falls under Vancouver “mixed-use development mortgages.”
In typical cases, these buildings are business investments for developers who want to build retail shops on the first floor, and condos on the floors above. They often aim to do this in a commercially-zoned area, such as a downtown core or shopping location.
In other cases, these buildings can be seen with traditional convenience stores, pizzerias, etc. The business is on the ground floor, and a family may live above the business that they own.
The idea behind mixed-use developments can be a great way to secure returns on investment. Namely, this is because these buildings meet two segments of market demand in real estate: residential and commercial.
Once complete, the building’s residential condos can be rented or sold-off separately from their commercial units. Whether in the short or long term, savvy developers can easily earn back the cash that was put into the property’s initial construction. Plus, when these buildings are located in high-demand neighbourhoods, real estate in these areas can be marketed at higher price points.
While this type of property can be lucrative, the complexities around getting a mortgage for a mixed-used development can be a hurdle for some. Officially, financial products of this kind fall under the domain of commercial mortgages. But, they still require specialized knowledge, because of their residential components. The tricky parts come with city zoning restrictions; if the building is yet-to-exist, developers may need to go through rezoning applications, as a first step.
That said, for those with a specific business goal in mind, these are not impossible projects to obtain commercial mortgages for. A good mortgage broker can guide you through the steps needed to finance or buy such a property.
If you are looking to mortgage the build or purchase of a mixed-use development property, we encourage you to get in touch! Our brokers have over 10 years’ experience in the field of commercial mortgages, including Vancouver mixed-use development mortgages.
Below are some answers to FAQs you may have about mixed-used development mortgages in B.C.
How much of a down payment will I need to purchase a mixed-used development property in B.C.?
Mixed-used development properties generally come with higher loan-to-value (LTV) ratios compared with residential mortgages. This means more of a down payment is usually needed, thus requiring upfront cash to put into the project.Read more
That said, there isn’t a ‘standard’ rule for the down payment required by all lenders, on any type of mortgage. The market can be competitive and ‘wide open.’ Still, the general LTV range for mixed-use developments will be in the vicinity of 50% to 75%. This means you would need 25% to 50% as a down payment to fund this type of property with a mortgage (whether as a purchase or a new build).
On average, lenders usually offer 65% loans, based on the appraised value of the property. Translated, that means 35% down.
Added costs to purchasing a mixed-use development property
Like when buying any real estate, mixed-use development purchases come with closing costs, lawyer fees, taxes and so on.
However, there is still more to know about the costs of buying this type of commercial property.
Reporting fees for the mortgage application
Firstly, you will need to pay for an appraisal, building condition assessment (BCA) and an environmental risk assessment (ERA). These reports must go into your mortgage application.
Selling price vs appraisal value cost differences
If you are buying an existing mixed-use building, your appraisal value and sale price will be different. The sale price will be based on the potential of future profit. Thus, it will be higher than its current value.
But, a creditor will only loan funds based on the current value of the building. In other words, you won’t get the whole amount, minus your down payment, from a mortgage lender. You will need to come up with the difference some other way.
Potential mortgage transfer fees and payments on an existing mortgage
If you need to buy bare land to secure a future development before applying to rezone it, you may have fees associated with the transfer of mortgage types, or the switching of lenders. You’ll also have to pay down a mortgage, or at least the interest on it, while you wait for approval on a rezoning application.
Minimum mortgage amounts and interest rates
As a general rule, larger banks will only consider mixed-use development loans that come to a minimum of $250K. In other words, if you want to borrow $249K, and use your cash to pay for the rest of the property, a bank will not consider your application. This is because they won’t earn enough on interest payments from such a small loan.
By comparison, the minimum for residential mortgages are usually around $50K. And still, these rules can vary from lender-to-lender.
So, you’ll need to consider the cost of maintaining a mortgage, and the type of mortgage you’ll qualify for. This is discussed in more detail, below.
It will also be important to note that these types of mortgages can not be insured. Regardless of the type of lender, this increases interest rates, since it adds risk.
To learn more about how insured and uninsured mortgages work, refer to the explanation on this page (it’s about residential mortgages, but the principles still apply to commercial mortgages).
How can I get the best terms and rates on a mixed-use development mortgage?
When it comes to getting the so-called, “best” terms and rates for a mixed-use mortgage, you’ll need to keep in mind that they will always be less favourable than for residential mortgages.
Plus, the added complexity of mixed-use property laws can mean that, in order to secure a loan and close the deal on a purchase, you might need to work with a lender who can be more flexible in some areas.Read more
However, keep in mind that if a lender is flexible with one or two factors, they will be strict with others. This is to minimize their own risk.
So, if you can’t get a loan from a ‘big bank,’ or an ‘A’ lender, there will be some ‘give and take’ that you’ll have to live with.
Keep reading for more detail on what we mean by “flexible,” “strict” and “give and take.”
Let’s consider your most likely circumstance when seeking to mortgage a mixed-used development in B.C.
You may get pre-approved and pre-qualified for a mortgage as a business entity with a bank. You may still need to use some personal credit to support your application.
However, if you pass this step, it does not mean the bank will approve a loan to buy any commercial, mixed-use property out there. The property you choose must demonstrate some profitability to the lender, in the event of a foreclosure.
What is the timeline like?
Ok, so, let’s say you find the property you want to buy. At this point, there can be multiple bidders racing against you. Time is of the essence.
But, you don’t want to rush into this. It’s not wise. And, with a bank, you can’t.
This is because, if you need a considerable mortgage to purchase a mixed-use development property, you’ll need to make a strong case for it’s appeal to lenders (as noted above). Based on their requirements, you’ll likely work with your accountant, lawyer and real estate agent to complete some due diligence on the property in question. We explain the due diligence you’ll need to do, below.
Due diligence takes a long time to complete. We’re talking at least a month, or longer. While it’s true that yes, all other bidders will need to do the same, you won’t know where you fall in terms of who came first, nor who is ahead or behind you on their due diligence progress.
Let’s say you’ve finally got your reports ready, and the mixed-use property is still up for grabs. You just need the extra money to pay the seller. It’s time to apply for a mortgage.
Lenders themselves need time to review your reports. Since mixed-use developments come with far more regulations than ‘unmixed’ properties, their applications will, naturally, take more time to read through and analyze. And, legally, banks can’t just hand out mortgages whenever they want. They have to ensure they are lending to borrowers who match certain criteria.
If a lender can’t get back to you in a timely manner, someone else may have put in a bid on your desired property. If that other offer is approved, you’ll lose your spot in the ‘race.’ This is, of course, how all real estate purchases work.
But with mixed-use developments and commercial mortgages, the stakes are much higher. That’s because of all the work you’ll have had to put into the process, and the length of time the lender needs to approve your application. It costs money, and time to do this.
So, to speed things up, you may want to seek lenders who can respond faster, and be more flexible. The fewer terms there are, the freer you can use the funds, like any other type of business loan.
That’s where credit unions, trust companies and private lenders become important.
Banks versus credit unions, trust companies and private lenders for mixed-used development mortgages
Banks are federally regulated and must follow federal banking policies and guidelines. Credit unions and trust companies, on the other hand, are not banks. So, they don’t have to follow federal banking guidelines. They do, however, have to follow provincial lending guidelines. Still, provincial policies are more lenient than at the federal level (at least in this regard).
In short: credit unions and trust companies can approve commercial loans more easily, and quickly, than a bank. They will have less to review and check on your application, essentially.
Private lenders can be even more flexible. They set their own terms. They care only for:
- Collateral (i.e. the value of the property).
- Your ability to make monthly interest payments.
- An assurance that you will pay that interest for a specific amount of time.
What’s the drawback? Why not just bypass the banks altogether?
The downside to flexible loans from credit unions, trust companies and private lenders is that:
- They come with high interest rates.
- They must be paid back within a shorter period of time (around 1 – 3 years for a mixed-use development loan).
- They can request a ‘lock in’ period, wherein you can’t pay back the loan to avoid interest, nor switch lenders (usually for a minimum of 6 months, but it varies). This is to secure their profit on interest payments.
Why go with a higher interest, but more flexible loan?
The idea here is that, after your mixed-use property has gotten off the ground, thanks to a flexible loan from a credit union or private lender, you can more easily demonstrate its profitability. If the cash flow is positive, and the legal compliances are in place, it will be easier to get approved for a loan by a bank.
So, for most people who go with a high-interest lender, the hope is that they can switch providers at the end of their term. If they can renew with a bank or credit union, they can likely get lower rates on their mortgage.
To learn more about how mortgage renewals and transfers can work to save you thousands, refer to this page.
Or, contact us for more information, and to get help with your mixed-used development mortgage:
What are the approval requirements for a mixed-used development mortgage?
When you intend to apply for a mixed-used development mortgage, you will be applying for a commercial mortgage (even if you plan to live in the residential part of it).
This means that you should have a solid business case for the lender as to why they should give you a mortgage. In a way, you will be ‘pitching’ an investment idea to them. They will want to see that you are a credible businessperson who has thought through your ideas, done your research, made concrete plans, and are likely to succeed.Read more
Since mixed-use properties are essentially businesses, it will be important for you, as the borrower, to have consulted with an accountant before applying for a mortgage. Your revenue projections should be in place, and all your financials should be ready to report on.
You will also want to have worked with a real estate agent. Real estate agents can help you find profitable properties, and explain the business potential for them. These ‘facts and figures’ about the property itself will also need to be documented before applying for a commercial mortgage.
Then, there is more.
Since mixed-use developments are, of course, mixed, they are regulated by laws that apply to both facets of real estate – residential and commercial. This will, essentially, double your ‘homework.’ That is, compared to buying a property that is solely commercial, or solely residential.
For example, you’ll need to ensure that residences are liveable by obtaining inspection reports. But, you’ll also need to ensure that the commercial units comply with say, fire safety regulations. Plus, the mortgage lending rules that apply to both types of purchases will also apply to a mixed-use building.
Below are some general tips surrounding the ‘pre-work’ you’ll need to do, depending on the nature of the mixed-use property you want to mortgage.
Buying existing mixed-use properties with a mortgage loan
If you are planning to buy an existing mixed-use property, you will need to show two years of past and predicted future revenue on the building. This will come from the current landlord or owner.
Is there a multi-unit residential component to the building?
If the mixed-use building has a multi-unit residential component to it, all the rules that apply to that type of mortgage financing will apply here, too.
We strongly recommend you refer to our page explaining how multi-unit residential mortgages work. Click here for more info.
Does the mixed-used building contain only one commercial unit and one residential unit?
If the mixed-used building contains a single, residential unit on the top, with a single commercial unit on the bottom (such as a restaurant, salon, office or store), then other factors can come into play during the mortgage application process.
For example, if a husband and wife are buying such a building, they can use one spouse’s full-time income to ‘back’ the loan. This will be similar to buying a home, with the same credit reports and income statements required.
Learn more about mortgage pre-approvals and pre-qualifications, here.
Whether or not the husband and wife plan to change the existing business in place, they will also need to demonstrate that the current, or future business, can support mortgage payments on the building.
It also helps to have industry experience with the type of business you want to run in the building. This can support your mortgage application.
Building new mixed-use properties with a construction mortgage
If you are hoping to finance the construction of a mixed-use property, you’ll have a much easier time if you have secured a lot that is already zoned for this use. If not, you’ll need to apply for city zoning and building permits beforehand, which can take time.
Does your building site need to be rezoned for mixed-use development?
Let’s say you want to build a mixed-use development property on land that is not zoned for such use. You will first need to buy the land with a different type of mortgage.
For example, you can apply for a bare land mortgage. You can do this as a business entity, or as an individual. In either scenario, you’ll need to provide evidence of sufficient income to support the mortgage before the land can be rezoned. A mortgage broker can help you apply for this type of so-called, ‘interim’ mortgage.
Your real estate agent should do the research to help you determine if the vacant lot can, potentially, be rezoned after purchase.
However, please keep in mind, with this method, you will have to pay monthly mortgage fees until the rezoning application goes through. This can take months, if not years. You’ll also need building permits after that.
The good news is that an initial, bare land mortgage typically comes with a 50% loan-to-value ratio. This is lower than if you were mortgaging for a mixed-use development or commercial property right away.
Is the building site already zoned for mixed-use development?
If your land is already zoned for mixed-use development, a mortgage broker will likely recommend a construction draw mortgage (a.k.a. a builder’s mortgage). These work similarly to builder’s mortgages for residential houses. They also apply when tearing down a building to re-construct a mixed-use building.
Construction draw mortgages require a lot more up-front cash than traditional financing. They also come with many more terms and restrictions.
To get an idea of how constructions mortgages work for residential home builds, see this page. Many of the same principles will apply to commercial build mortgages.
Contact a commercial mortgage broker in Vancouver (or B.C.) for more information about how this works for mixed-use developments:
How can a commercial mortgage broker help me secure a loan for a mixed-use development property?
The timeline strategy when applying for a commercial mortgage is different than with a residential mortgage. And remember, mixed-use development mortgages fall under the domain of commercial mortgages.
With residential mortgages, the best sequence is to speak to a mortgage broker before searching for a home to buy. This is so you know what you can afford.
With commercial mortgages, speaking to a mortgage broker is not your ‘first step.’ This is especially the case if you want to mortgage mixed-use properties.
When it comes to commercial mortgages, having your business documents in place will make the loan preparation work a lot easier. The better information you can provide, the better a commercial mortgage broker can present it to the banks. They can do this in a way that will justify your eligibility for a loan.
You may be thinking: “well, if I’m doing all that work why do I need a mortgage broker at all?”
The reason is because commercial mortgage brokers know how to find lenders that can work on your timeline and budget. They can also present your information in a way that will appeal to lenders. They do not just take your reports and pass them to lenders as-is.
Most business-savvy investors who seek commercial mortgages will work with a mortgage broker. That’s because mortgage experts are knowledgeable at what they do. And, since they work free of charge, there is nothing to lose by tapping into their expertise in this department.
If you are looking for skilled, commercial mortgage brokers for your next, mixed-use development property, we welcome you to get in touch!