Commercial Mortgages

Commercial LendingCommercial mortgages are based on commercial bond yields. Just like individuals, lenders are willing to give well-managed businesses mortgages, but they use a rating system similar to that used for personal loans to decide on interest rates.

Financing for multi-unit (5+ unit) residential buildings comes in two varieties:

  • CMHC Insured (Canada Mortgage and Housing Corporation)
  • Non-CMHC Insured

CMHC is Canada’s provider of mortgage loan insurance for multi-unit residential properties (5+ units) such as rental buildings, student housing, retirement and long-term care facilities, and condominium construction.

Unlike residential mortgages, depending on the deal, it can take up to 10-30 days or more to find a commercial lender who can provide a suitable letter of interest (LOI). Then, the full due diligence stage begins, which takes even more time. Make sure you factor in that timeframe.

People with healthy down payments frequently ask why they’d ever want to pay the CMHC premium if they can simply get a conventional mortgage.

In the example below a loan with 25% down payment on an 8-unit building versus 15% down payment yields a greater return on your investment.

 Purchase

 (8-unit, wood-and-
   brick structure)

 Uninsured (75% LTV)

 

 Uninsured CMHC-  
 Insured

 (85% LTV)

 Market value

 $ 525,000

 $ 525,000

 Rental income

 $ 56,000

 $ 56,000

 Vacancy & operating
 expenses

 $ 17,000

 $ 17,000

 Net operating income
 (NOI)

 $ 39,000

 $ 39,000

 Equity

 $ 131,250

 $ 78,750

 Loan (before CMHC
 premium & fee)

 $ 393,750

 $ 446,250

 CMHC premium
  (4.5%)

 N/A

 $ 20,081

 CMHC application
 fee ($150 per unit) 

 N/A

 $ 1,200

 Total loan

 $ 393,750

 $ 467,531

 Interest rate*

 

 5.25%

 4.50%

 Annual principal and
 interest (amortization
 25 years)

 $ 28,152

 $ 31,056

 Cash flow (NOI
 minus annual
 principal & interest)

 $ 10,848

 $ 7,944

 (ROI) Return on
 investment**

 8.3%

 10.1%

 (ROI) Return on
 investment**

 (including capital
  repayment)

 14.3%

 23.3%

*In this example, an interest rate differential of 0.75% reflects the reduced rate that a lender may charge on CMHC-insured loans of this nature. Such rates are negotiated between the lender and borrower and are dependent on various factors.

**This example refers to the two most common types of return on investment: the first uses cash flow over capital invested; the second adds annual capital repayment of the mortgage to the cash flow.

The above example is for general illustrative purposes only.

 

Unlike residential mortgage financing, there is additional documentation required that details the overall financial stability of the building you are purchasing. Items such as 12 months utility bills, operating statements for a 12 month period and a signed and dated rent roll detailing terms of the leases in place are just a few of the required documents. For a more comprehensive list click here.

If you’re looking for a Commercial Mortgage, contact me today!