Commercial Mortgages and Minimum Down Payment Requirements for Different Assets and Usage

 

We continue this series of articles in regard to commercial and non-orthodox lending options that our firm offers to our commercial clients, in an effort to further educate our customers. Many potential clients who come to us for commercial and private mortgage solutions are often confused in regards to what the minimum down payment requirement is from institutional and private lenders. Commercial properties are completely different from residential ones, and are therefore financed differently as well.  In order to clarify and simplify many of the questions our clients have, we will go over several major methods of thinking that banks and private lenders employ when ever a file is analyzed and underwritten.

When it comes to financing Canadian commercial properties with a commercial mortgage, most institutional leaders will have firm requirements in place, particularly regarding the down payment or equity requirement and the property income requirement. In this article, we will concentrate on several ways to properly calculating how much down payment is required for an acquisition or for financing commercial real estate assets, using industry experience and proprietary programs implemented by our firm.

The classic institutional commercial mortgage program assumes that a 35 percent down payment comes from the client acquiring the asset. This is the way commercial mortgages are historically set up in Canada. There are also security and risk reasons for the banks to require such a large down payment amount. When it comes to the acquisition of a commercial office building, office/retail space or industrial buildings, this is a proper level of down payment that we normally advise our clients to have in order to make sure that equity component is satisfied.  Now, if 35 percent down is not available, secondary financing, from our private fund, may be available for marketable properties in liquid areas in Ontario. Our knowledgeable associates will be able to quickly determine if secondary financing available for a given asset, therefore saving an additional 15 percent of equity required on purchase.

If the goal is to acquire multi-residential buildings, 15-20 percent down is normally enough assuming the income component is satisfied. This option also assumes that CMHC mortgage insurance will be granted for a commercial mortgage placed on the acquisition. If CMHC does not grant mortgage insurance for this acquisition the down payment requirement could go up to 25-30 percent depending on the quality of the asset and the geographic location of the asset. So, in order to be safe, we typically suggest having a 25 percent down payment for any multi-residential purchase in Ontario.

One of the most common requests we get involves financing a commercial mortgage for gas station acquisition. This involves an uncommon type of institutional financing, since most A lenders in Ontario simply don’t finance gas station acquisitions or refinancing.  Only major corporations with multi-million dollar revenues have the ability to approach institutions for gas station mortgage financing. Our firm has established methods of financing gas stations with a leverage of about 50-55 percent. What does this mean for a potential purchaser? Before considering any purchase of a gas station, 45 percent down is a typical amount required to be sure that such an acquisition can take place and close successfully.

 

If the client is purchasing a commercial unit with 50 percent or more used for his or her own business, assuming the client’s company has strong income, we have proprietary program that allows up to 90 percent financing and in some cases up to 100 percent financing. This program is very limited and requires amazing financial performance of the company and exceptional credit rating of the owner of the company.  We have not seen many clients who can qualify for 10 or 0 percent commercial mortgage financing but we always review such a possibility with every client purchasing the asset for their own use.

Vacant land acquisition is another one of our area’s of expertise. Vacant land assumption, that is zoned for construction has a small chance of being financed by most lenders in Ontario. However, in most cases it is financed with private commercial mortgage solutions. Our firm has financed many land parcels within Ontario with private commercial mortgages and as a rule of thumb, we suggest 35 percent down for such an acquisition. In many cases, 30 percent down will also work and in some exceptional cases, 20 percent down will work as well. Ultimately, we suggest clients take advantage of our knowledge and expertise when planning for such an acquisition.

We will continue this series of articles, and as always we wish our clients plentiful and meaningful financing, which we are always happy to structure!

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