As a commercial real estate broker, it’s my job to prepare my clients. Typically, they will have to go through a process to enter into a lease or purchase.
The purpose of my talk here is to provide an overview of the steps required to mortgage commercial real estate.
Establishing a due diligence and funding period is part of the purchase negotiation process.
As a rule, the buyer has 30 to 45 days from the acceptance of the offer by both parties.
The process of obtaining the mortgage will take most of this time.
The initial priorities for due diligence when accepting the offer would be to immediately engage building inspectors, the surveyor and an environmental engineer.
If the property is in a large center, we also request a ‘property information disclosure’ from the building standards department.
The report typically indicates the history and deficiencies of building and plumbing permits, pending fire orders, heritage and zoning designations, landscaping and parking requirements, and the presence of requirements. additional zoning.
Then more reports …
In addition to the aforementioned reports, the financial institution is likely to request the following in the application process:
– Registration fees;
– copy of the purchase offer and related documents;
– the role of current rents and copies of existing leases, if applicable;
– statement of personal net worth;
– certificate of incorporation;
– three years of financial statements of your company;
– verification of equity or of the deposit;
– estimate of the cost of insurance;
– if the property is located outside the province in which you are incorporated, it will be necessary to register the company outside the province;
– may require a personal deposit (amount and duration to be negotiated);
– open an account with the relevant financial institution (you will be encouraged to bring all your banking needs to the financial institution providing the commercial mortgage);
– if new construction, a detailed construction budget and information on the contractor;
– a corporate pro forma can be requested.
Do the math
Your commercial real estate broker can help you understand the loan-to-value options that commercial lenders are likely to offer.
It is important to understand the Debt Service Coverage Ratio (DSCR). A bank requires that there be sufficient net operating income to generate a surplus after paying the principal and interest on the mortgage.
Here’s an example, with a purchase price of $ 5 million:
– A mortgage of $ 3.75 million (at 75 percent of the loan value) at 3.5 percent amortized over 15 years requires the principle of debt service and interest payments of $ 321,139 per year.
– If the bank has a debt service ratio requirement of 1.25, the property will need to provide a total net annual income of $ 401,424, or a surplus of $ 80,285, to qualify for the mortgage.
It is important to play with these calculations before you even visit 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 the key
If buyers enter the buying process unprepared, they may not be able to put together everything that is required of them on time. This can often lead to requesting an extension of their conditions.
If a fallback offer is in place or if the seller is unwilling to extend, it could result in a frustrated contract and no deal.
All the time and money spent during the due diligence period is wasted.
While the process might seem onerous, if you’ve done your homework, are prepared with the required paperwork, and have selected a good mortgage broker or experienced commercial lender to work with, the entire transaction should be painless. !