Private Mortgage for Commercial Properties

Commercial properties come in several different types.

• Industrial properties include warehouses, bulk storage, and flex spaces.
• Multifamily properties consist of five or more rental units. These properties usually generate rental income for the property owner.
• Other types of properties include strip malls and single-storefront buildings.
• Finally, multi-unit residential properties such as condominium buildings, cooperative buildings, and apartment complexes.

The process of obtaining financing for commercial properties with a private mortgage is much simpler than the process for traditional lenders. Although private lenders will still ask to verify some information to satisfy their internal lending guidelines, in general, it may actually be faster and easier.

Private lenders assess a mortgage loan application based on the allowable use according to the city by-law and its location in the neighbourhood. A property appraisal is certainly a requirement that borrowers will need to satisfy as part of the refinancing process.

Generally speaking, private lenders will allow higher loan-to-value (LTV) than traditional banks and lenders. 

When analyzing commercial real estate, one should understand the distinctions between Class A, Class B, and Class C properties.

Class A and Class B Property

Class A properties are the most expensive, while Class B properties are considered to be more functional. Class A properties are also higher-quality than Class B buildings.

Class A buildings generally are newer and built within 15 years, but older buildings can be upgraded to Class A status by making extensive renovations.

The difference between Class A and Class B properties lies in the type of tenant they attract.

Class A properties are typically more desirable to tenants because they tend to have a higher income level. Class B properties, on the other hand, have lower income tenants, but offer higher growth potential.

Some Class B properties are even upgradeable to Class A if they perform well. And while Class A properties are viewed as the safest types of investments, they have the highest potential for capital appreciation.

Class C Property

Property in Class C is an excellent investment opportunity for investors because of the lower cost of acquisition and a high potential for cash flow.

The downside of Class C properties is that they may require more ongoing management and may have fewer financing options.

Class C investments are generally suited for property managers with a solid understanding of operations. However, these properties may not be right for investors with limited resources or operational expertise.

These properties can become lucrative investments for those with good operational experience to mitigate risks.

Commercial real estate loans are different from residential mortgages in that they are meant to fund commercial properties. In addition to the standard loan requirements, commercial real estate loans often require the borrower to form a business entity.

A business entity may be a corporation or a limited liability company. Often, business entities will have to provide individual principals with a personal guarantee to qualify for the loan. Minimum individual beacon scores range from 550 to 700, while business credit scores vary depending on the type of loan and credit reporting bureau.

Oftentimes, business owners do not have the financial history required by traditional lenders. In these cases, they may be asked to guarantee the loan as a personal guarantee. Then, as the owners and principals of the business, they must pay monthly installments of the loan.

In such a scenario, where a personal guarantee may not be sufficient to mitigate the risks, a joint venture may be a reasonable option.

Private lenders are an ideal option since they are not tied to the same lending guidelines as traditional lenders which is limiting. Unlike bank loans, private lenders focus more on the value of the property and cash flow potential from the commercial properties to determine the terms of the loan. This means that they will not make any preconditions on the borrower’s credit score or debt to income ratio.

A big advantage of hard money lending is that you can beat traditional lenders’ interest rates and timeframes. While traditional banks are known for their long loan terms, hard money loans can close in just days or weeks. This is important in large development projects, as time is money. Getting a commercial mortgage loan approved faster helps you complete the project faster and avoid delays.

Origination fee can also be referred to as “commitment fee”, or any other name. It usually refers to the underwriting or processing fee. This fee can cover a variety of expenses, from processing the loan to underwriting the loan. The amount of this fee depends on the lender and the type of mortgage loan. It is always stipulated in writing so there is no bad surprise to the borrowers on the closing day. If you are not sure how much you are paying for your origination fee, it is a sign that you are not working with an ethical private lender. Be aware and find other private lenders who are transparent with their origination fees.

At Canadian Private Mortgage, we disclose our commitment fee clearly in writing from the beginning of the process.