What’s the Big Secret About Commercial Financing?

Financing for industrial, retail, office , apartments to hotels.  Sky's the limit!
Financing for industrial, retail, office, apartments to hotels. Sky’s the limit!

So you want to buy a warehouse for your business, or a strata unit for your retail business, or think about pooling money together with your colleagues to buy a motel or apartment.  You have some of the money and know that you can probably finance the rest.  The biggest question is where do you go to get the best financing?

Everywhere you go nowadays, you will see residential mortgage rates posted in plain view at the bank. On the other hand, commercial mortgage rates are nowhere to be found. It is not even shown on any bank website. “Why is that??” , you may ask. Is it a conspiracy or just smart business practice to not show them? Let’s discuss the various points and you come to your own conclusion.

Other than personal and business credit ratings which may or may not affect the approval process, what other reasons could there be for not disclosing commercial mortgage rates?

Let’s look at 4 possible reason why the banks and other institutional lenders do not post their commercial mortgage rates:

1. Bond market fluctuation – most commercial lending is financed from the bond market.

  • financing from bond market makes it difficult to post rates as it changes on a daily basis

  • buying chunks of bond in advance before the market moves up is a big risk

    • bond market has been very unstable in the recent years. Residential rates are artificially stabilized by our government because of CMHC. Capital market does not have such luxury

    • holding a big chunk of money that is more expensive than current rates will be costly for a lender

2. Pricing is based on types of property due to various risk associated with each type

  • industrial, retail, office building, commercial strata lots etc. Not every lender would finance pubs, heavy industrial property or non-flagged hotels.  Vacancy, liabilities and various costs associated with each type have different variables.

  • each institution have their own “specialty” or preference to lend to that particular industry (they understand it better and view it as less risky than other lenders)

  • growing their portfolio or expanding their “books” of that particular business (example – some lender that are not interested in that particular sector will offer a much higher rate). Finding out which lender prefers to finance which type of property will give you the best chance of having the best terms and rates to finance your property.

3. Discounted pricing base on strength of rent-rolls /cap-rate and loan amount

  • what is rent rolls and cap-rate? Rent roll is the total rental income of all your tenants in that property (minus expense is your net operating income). Capitalization rate (Cap Rate) is the net operating income divided by the market value (selling price).

  • acquiring property with a higher capitalization rate would make financing much better but what is the magic number? How much will the lender finance base on the cap-rate of that property?

  • if the property you are buying has many tenants with different lease terms, have a strategy in place and package the loan application in the best light possible to have the most favourable terms.

4. The less you know the more they make theory

  • theory or reality? History has proven that the less you know the more the “other” party would make. Commercial financing definitely fits this theory.

  • don’t just walk directly into one single bank and request the loan.  Instead do some research and shop around 2-3 credit unions and big banks.  (It would be pretty dumb to buy the first car you see and don’t do any research or shop around first, so why do that with a big loan?)

As you probably guessed, there is no big secret as to why there is a void of commercial rates posted at the banks.  There are way too many variables that would affect the rate, also known as “pricing” in the commercial world.
If you don’t have the time to spend watching the ever-changing market conditions, I strongly advise that you seek out a commercial mortgage broker to give you the unfair advantage, an upper hand in dealing with the bank.

The amount of time and money that you would save is invaluable. Having an expert to do all the research and negotiation would allow you time to focus on what you do best, run your business. A commercial broker can potentially save you hundreds of thousands of dollars over the term of your loan.

In case you want to try your hand, here’s some tips on how to help you win at the negotiating table:

  • Have all your your financial statements (past 3 years) and net worth statement ready.

  • Find out which lender specializes in the type of your subject property.

  • Have an appraisal done on the property being purchased or refinanced by the lender’s “approved appraiser”. Having an appraisal done by a non-approved appraiser would only waste your money.

  • Ask if the seller has an environmental report or assessment previously done on the property.

  • Renewing a mortgage? Have your lease agreement updated or renew with a “new” 3 year or 5 year lease if you want a 3 year or 5 year mortgage.

  • Find out what the bottom discount rates are at competing institutions (chances are they won’t tell you unless you apply and only give you their non-discounted rate).  Select 2-3 banks and credit unions, meet for coffee and discuss your scenario.  Be warned: this is time consuming and may affect your credit score (each time a lender checks your credit, it will decrease).

Whether or not it is a financial conspiracy, use the tips that I have provided to help you win in your commercial financing negotiations.

Benefits of a hiring a commercial mortgage broker:

  1. Save tens of thousands of dollars in reduced fees

  2. Peace of mind knowing that I represent your best interest rather than the bank’s shareholders

  3. Confidence in knowing that an expert is managing the entire complicated process

  4. Free up valuable time for you to focus on what you do best or spend more with your loved ones

  5. Reduction or elimination of stress throughout the entire process

If you are a business owner, it would be in your best interest to hire someone who has expertise in commercial financing to help you. Your time is valuable, and would be better spent taking care of your business and allow the specialist to take care of your financing for you. A great commercial financier should also be able to offer expert advice and strategies that you could implement to help you grow your business in the long term.

If you do not have a great commercial broker to help you or have questions, feel free to contact me at (604) 726-7878.  I would love to help. I became the #1 mortgage broker in my community because I truly enjoy helping people with their financing challenges and giving them an unfair advantage over the bank.


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