A Brief Guide to Commercial Real Estate Loans

A Brief Guide to Commercial Real Estate Loans

Commercial real estate is an income-producing property. Corporate entities often need to purchase commercial property to expand their business or investors are interested in a property to lease or rent the space to other businesses.

Either way, you will need to work with a reputable mortgage broker in North Vancouver who can get you the best terms for the property loan. Let’s take a look at some key points of commercial real estate loans below.

Commercial real estate loans vs. residential

A commercial real estate loan is very different from obtaining a residential loan. One of the biggest differences is that a commercial loan in North Vancouver is not based on your personal income but rather the assets of your company and the property itself.

What lenders look for in a company
The lender will usually request an appraisal of the property, a title search and a credit check. In some cases, an environmental and engineering verification is necessary.

The lender will also consider debt to net cash flow to debt service coverage ratio. Generally, they want a 1.1.1 ratio at a minimum and sometimes a 1.1.25 ratio. This reflects the ratio of monthly payments to your company’s net profits.

Interest rates, terms and prepayment penalties
Since commercial loans are often paid off faster, interest rates are often much higher than with residential loans. Appraisal, legal, survey fees, etc. get factored into the cost of the loan while some fees are due upfront. Others are due annually or throughout the life of the loan.

Lenders frequently set the renewal at seven years and maturity at 30 years. That’s often much longer than most companies need. Penalties for paying off the loan faster vary too.

  • Lockout penalties mean you are not permitted to pay the loan off in full for a specified number of years. A 5-year prepayment lock-out is common.
  • An interest guarantee means that even if a loan is paid off early, the lender is entitled to receive a specified amount of interest on the loan.
  • Defeasance penalties allow for substitution of collateral. So, instead of paying money to the lender the borrower exchanges new valuable collateral to pay off the loan instead.
  • Prepayment penalties are calculated by multiplying the outstanding balance by a specified prepayment penalty agreed to at the signing of the loan.

Finding the right lender in North Vancouver
With Vancouver’s highly competitive real estate market, getting a commercial loan is tough. Your North Vancouver mortgage broker is indispensable for helping you through the process.

For over 20 years, Rala Investments Ltd. has helped companies large and small get commercial loans for their business in North Vancouver. Contact us today to learn how we can help!