Buyer beware of often onerous commercial mortgage process | RENX

As a commercial real estate agent, it is my job to prepare my clients. There is usually a process that they must go through in order to complete a rental agreement or purchase.

My focus here is to provide an overview of the steps required to loan commercial real estate.

time management

Establishing a timeframe for due diligence and financing is part of the purchase negotiation process.

Typically, the buyer ends 30 to 45 days after both parties accept the offer.

The process of getting the mortgage will take up most of the time.

Organized investigation

The first priority for due diligence in accepting the offer would be to hire construction inspectors, the surveyor and an environmental engineer immediately.

If the property is located in a larger center, we also request a “Property Information Disclosure” from the building law department.

The report usually points out the history and deficiencies of the building and sanitary permits, outstanding fire protection orders, monument and zone classifications, outstanding landscape and park requirements as well as the existence of additional zone requirements.

Then more coverage …

In addition to the above reports, the financial institution is expected to require the following items in the application process:

– registration fee;

– Copy of the purchase offer and the associated documents;

– Current rental directory and, if applicable, copies of existing rental agreements;

– personal statement of assets;

– Certificate of Incorporation;

– three annual accounts of your company;

– Review of equity or deposit;

– cost estimate for insurance;

– If the property is outside the province in which you are registered, the company must be registered outside the province;

– can request a personal guarantee (amount and duration are to be negotiated);

– Open an account with the relevant financial institution (you are encouraged to submit all your banking transactions to the financial institution providing the commercial mortgage);

– In the case of new buildings, a detailed construction budget and details of the contractor;

– Can be asked for a business profile.

Do the math

Your commercial real estate agent can help you understand the mortgage lending options that commercial lenders are likely to offer.

It is important to understand the debt service coverage ratio (DSCR). A bank requires that after the mortgage and interest payments have been made, there is sufficient net operating income to generate a surplus.

Here is an example with a purchase price of $ 5 million:

– A mortgage of $ 3.75 million (at 75 percent LTV) with a 3.5 percent amortization over 15 years requires debt servicing and interest payments of $ 321,139 per year.

– If the bank has a debt service ratio of 1.25, the property must have total net income of $ 401,424 or a surplus of $ 80,285 to qualify for the mortgage.

It is important to play with these calculations before viewing a property.

If the cap rate is too low it can be very difficult to achieve the required DSCR. A logical solution is to provide a larger deposit.

Preparation is key

If buyers go into the buying process unprepared, they may not be able to put everything together on time. This can often lead to requests for an extension of their terms.

If there is a replacement offer or the seller is unwilling to renew it can result in a frustrated contract and no deal.

Time and money spent during the due diligence phase is lost.

While the process may sound like a chore, once you’ve done your homework, prepared with the required papers, and selected a good, experienced mortgage broker or commercial lender, the entire transaction should be painless!