First Time Buying Commercial Real-Estate

[HiTempguy1]

This is just a quick, general question (and no, I have done virtually no research yet as it just occurred to me):

How would someone who has never owned property before go about acquiring a one bay shop space? Obviously, residential style mortgages do not apply. What are really obvious differences between a loan on commercial property vs a home mortgage?

Essentially, somebody mentioned about building a loft in a small one bay shop... of course, there are zoning issues, but as I am currently looking for a place to buy, a rundown, shitty shop that I could renovate would be right up my alley. I understand some of the legal issues as I have friends that have tried that sort of thing before (but not in Edmonton).

Thoughts and opinions?

[Cos]

edit: well I know less about business then i thought. Haha

[BananaFob]

There's a difference to a degree. Commercial properties are not really valued by the land/building but rather by the quality of the leases/market rents possible in that space.

When you get a mortgage the lenders will require tons of documentation like an appraisal, ESA, BCA etc etc. Banks tend to give really crappy loan to value on purchase financing, a commercial mortgage broker can generally do a lot better for you.

If you need any more help or advice with this, PM me. Not trying to advertise here but I can give you a hand as this is my line of work.

[Khalil.e]

A vacant single bay won't be priced by the income coming off of it/potential market rents. It will be priced at a comparable $/sf to that of similar properties, within a reasonable distance. New construction will obviously yield a higher $/sf.

You'll be looking at approximately 70% LTV.
Have all of your financial statements for the last 3-5 years in good order, as any lender will require this in addition to an ESA, property inspection report and appraisal (if getting this on your own, consult with lender first to engage an approved appraiser).
+RPR or condo plan
+Up to date title certificate
+Confirmation of zoning compliance

Don't forget to factor in application fees and/or other non-refundable fees.

[TomcoPDR]

And everything you do relating to commercial properties costs substantially more than residential. From property taxes, to bylaw requirements, insurance, etc...

If you're thinking about putting a residential living loft in a CONDO bay, read the condo bylaw of that complex carefully before purchase, most won't allow you to be using it as "residential purposes"... So if you were to do it, do it quietly (i.e. putting a couch, but really it's a pull out, nice "private" bedroom in the mezzanine, etc...) and DON'T trust any of the condo BAY neighbours, no matter how well you think you get along with them, just keep it to yourself, jmo.

And what all the financial guys said above, financing costs a lot more, you need lots more money down, etc... A lot of ppl who don't know wtf they're talking about will try telling you it's "cheap" to get a commercial mortgage, small bays don't cost much, etc... But yet you don't see them doing it.

Oh and plus, if you're looking for "run down" places (not condo bays, but freestanding lots with old building right)... then you're looking into environmental issue too... these gets past onto the current owners. (i.e. so if you bought an old auto wrecker yard with a small shack, you're now liable for cleaning that soil, eventually)

Good luck.

[canadian_hustla]

Originally posted by TomcoPDR
And everything you do relating to commercial properties costs substantially more than residential. From property taxes, to bylaw requirements, insurance, etc...

If you're thinking about putting a residential living loft in a CONDO bay, read the condo bylaw of that complex carefully before purchase, most won't allow you to be using it as "residential purposes"... So if you were to do it, do it quietly (i.e. putting a couch, but really it's a pull out, nice "private" bedroom in the mezzanine, etc...) and DON'T trust any of the condo BAY neighbours, no matter how well you think you get along with them, just keep it to yourself, jmo.

And what all the financial guys said above, financing costs a lot more, you need lots more money down, etc... A lot of ppl who don't know wtf they're talking about will try telling you it's "cheap" to get a commercial mortgage, small bays don't cost much, etc... But yet you don't see them doing it.

Oh and plus, if you're looking for "run down" places (not condo bays, but freestanding lots with old building right)... then you're looking into environmental issue too... these gets past onto the current owners. (i.e. so if you bought an old auto wrecker yard with a small shack, you're now liable for cleaning that soil, eventually)

Good luck.

^ this guy speaks truth.

I am a commercial banker with a large bank and completely agree with everything that was said in the post above mine. Small business lending/commercial lending is high risk and banks always look to mitigate their exposure. There is no such thing is 85% LTV unless you want private money with an interest rate of 10% or higher. Commercial rates are somewhat comparable to residential rates, albeit it depends how strong you are as a borrowing entity. If you are lucky you will get 65%-70% LTV. Anything higher than 70% LTV is bad advice as there is too much debt being deferred and the borrowing entity will be too highly levereged.

You would need to have a very strong business plan, provide not only primary but seconday sources of cash flow showing that you have the ability to repay the debt. Assuming that you have never owned property before, you will most certaintly need a guarantor. The amortization will be much less than residential property, usually around 15-20 years at most. You should expect to pay an application fee, and the bank will have the ability to review the performance of your loan on a term basis.

On the notion of the environmental aspect, the bank is empowered to ask you for appraisal, site inspection, or even a environmental phase 1 report. This is especially true for condominiums that have tenants which are auto repair shops, auto painting, drycleaners and gas stations. Phase 1 is about $5000, appraisal should cost you $3500, bank closing costs (fees + legal) should be around $5000. Expect to have $10,000-$15,000 to close.


good luck.

[tpurcell4]

There are other options available to you that allow you to get in with as little as 10% down as long as you can qualify through the government of Canada's New Business Financing program.

With that aside you will also need roughly $10,000 (plus or minus) per property's you make offers on, for the appraisal, Environmental, Engineers report, and other fees (these start at about $2500 each, depending on the size of the property).

And rates are always variable to prime, and calculated on a case by case basis (based on risk of building type, your business and personal guaranty) so it is impossible to quote what your rate would be.

You should also be prepared to provide a business plan and 3 years company financials for your business as well as your personal guarantee (your personal income, assets and liabilities) as this is your first purchase.

If you have any question please PM me and I would be happy to answer your questions or point you in the direction of someone who can.

[canadian_hustla]

Originally posted by tpurcell4
There are other options available to you that allow you to get in with as little as 10% down as long as you can qualify through the government of Canada's New Business Financing program.

With that aside you will also need roughly $10,000 (plus or minus) per property's you make offers on, for the appraisal, Environmental, Engineers report, and other fees (these start at about $2500 each, depending on the size of the property).

And rates are always variable to prime, and calculated on a case by case basis (based on risk of building type, your business and personal guaranty) so it is impossible to quote what your rate would be.

You should also be prepared to provide a business plan and 3 years company financials for your business as well as your personal guarantee (your personal income, assets and liabilities) as this is your first purchase.

If you have any question please PM me and I would be happy to answer your questions or point you in the direction of someone who can.

are you talking about canada small business financing loan? If so, yes, you can use this loan for the purpose of purchasing a property. However, the bank must use the same due dillengence/follow bank policy as if it were a conventional business loan and not backed by the government. I.E. most banks will not allow a borrower to exceed a debt to equity of 3 to 1 so the CSBFL is rarely used for this purpose.

PS - on the notion of rates, the CSBFL rate is always prime + 3% variable. 5 year Fixed option is available too, somewhere between 7%-9%

[Jason Lange]

I just went through this whole process, however I did not need to provide a business plan, there was only 2 years financial statements required, I also had to personally gaurantee the loan and provide 2 years of personal assesments. I did need to provide a site appraisal and environmental report. They allowed me to choose any length on the term up to 25 years, I went with a 15 year term, ended up getting a 5 year fixed term for 5%. They did require 25% down. Total fees were in the neighborhood of $9000.00. Which was without realtor costs. The bank I used was TD.

[variable_x]

So what are the advantages of investing in commercial real estate vs residential? Thanks guys.

[BananaFob]

Originally posted by variable_x
So what are the advantages of investing in commercial real estate vs residential? Thanks guys.

Commercial tenants are generally more stable and lock in for 5-10 year lease terms and you can generally negotiate step ups in rent. Depending on the asset class, its not difficult to achieve rates of return after debt service of over 10% per year.

[Khalil.e]

Originally posted by BananaFob


Commercial tenants are generally more stable and lock in for 5-10 year lease terms and you can generally negotiate step ups in rent. Depending on the asset class, its not difficult to achieve rates of return after debt service of over 10% per year.

Without capital appreciation and principal recapture??


Do tell where I can find such properties!

[TomcoPDR]

Originally posted by BananaFob


Commercial tenants are generally more stable and lock in for 5-10 year lease terms and you can generally negotiate step ups in rent. Depending on the asset class, its not difficult to achieve rates of return after debt service of over 10% per year.

Not if the property owner is a moron allowing shorter terms

[max_boost]

Originally posted by TomcoPDR


Not if the property owner is a moron allowing shorter terms