January 12th, 2011 
Admin This article will discuss the topic of financing commercial investments in Ottawa. Please be aware that financing regulations change and this information is current as of today and subject to change based on new mortgage lending laws of the future. We have many clients who come to us interested in their dream commercial property. This can be a large multi-unit in Ottawa’s downtown or an office plaza for their thriving business. Whatever the situation, financing is a critical element of the equation to making the transaction happen. Many believe that the commercial lending system is similar to the residential system – relatively straightforward with little or no money down if required as an option. The truth is that when you enter the Ottawa commercial real estate realm you enter a world of tighter requirements for approval. No longer is your income relevant but rather it is all about the property, your credit score, and your experience. Many investors ask us, “At what point does a property get classified as commercial?” and the answer is that anything over 4 units is classified as commercial even if you are living in it. This means that you cannot finance any property over 4 units as if you were buying a residential property. Which also means a standard 5-20 % down payment does not apply. A typical commercial down payment can range from 20-30% down depending on your financial strength. This can be a major obstacle for investors looking to tap into the Ottawa commercial real estate market. The property also dictates the market that one can purchase for, meaning that banks send sophisticated analysts to appraise the property and use that number to factor in the financing.
The Property:
Whether you make very little personally or a six figure salary – when it comes to commercial financing this is irrelevant. Commercial real estate tends to be more expensive. Banks cannot rely on the personal income of the prospective lender as few people earn enough to cover the loan on a multi-million dollar investment. Thus banks use more in depth methods to qualify the investor and gauge their risk. The first consideration is always the individual. Secondly, the bank will take the property and analyze its condition, cash flow, cap rate, and run the numbers before it even considers financing for it. One must always be aware that the property is the main focus in commercial real estate and the numbers have to match in order for banks to approve. The operational efficiency of your unit and it’s earning potential are important elements if you’re an investor who plans on refinancing your existing property portfolio for the acquisition of further real estate. We touch on this at the pre-purchase phase when considering buying a property Literally keeping your house in order is always wise, especially, if you’re considering growing your portfolio and looking at larger commercial real estate.
Your Credit Score:
This goes without saying - if you have bad credit history then the banks will simply not lend to you. We use a general rule of thumb that you must have a minimum of 640 as your FICO score in order to qualify. Anything under this number will prove difficult when attempting to borrow. Your credit score will also dictate what interest rate you get. Higher scores receive better interest rates and borrowers have options if you’re considered credit worthy. Lower credit scores receive less competitive rates, and in some cases, higher interest rates than standard.
Your Experience:
Banks are in the business of lending to qualified investors; this means if a person comes forth with a large sum of cash and wants to buy a 55 unit building, they do not just give the money away. If the candidate does not have the previous experience in the commercial real estate sphere then banks will be reluctant to loan the money. Experience counts. It’s comparable to the loan on a start up business. The lender is seeking as much of an assurance of successful repayment of the loan with interest as possible. The belief is that if a new person with no experience purchases the large commercial real estate then there is a higher chance that they will fail when compared to an investor with many commercial units and lots of experience. We advise our new investors to consider larger properties at the beginning of their investment careers in an effort to enhance experience and portfolio value.
All these three factors come together to create the commercial mortgage and we work
very carefully to provide investors a big picture perspective prior to engagement so that our clients know
what they are getting into. Unlike many commercial real estate brokerages, we provide full service that
includes financing. This means the real estate agent knows at what phase the mortgage process is in and
therefore can act accordingly without the back and forth of an external mortgage agent. Furthermore
because we are a licensed mortgage firm we can get you the best rate, make it easy, and we work hard
to ensure you are approved. The commercial real estate mortgage process can take months; therefore
one small mistake can kill the deal. This is why it is critical to have an in-house team working together seamlessly through all of the stages of the property purchase process to
ensure that nothing falls through and that you get that dream commercial property you’ve always considered.
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