Advantages and disadvantages of commercial mortgages

By Catherine Béchara, chartered real estate broker with the Ayotte team

Is your company or another company legally responsible for your real estate transactions? If so, it may be eligible for a commercial mortgage, which is intended for companies, not individuals, to acquire or develop a commercial property. Here’s an update on one of the main real estate financing options for businesses.

The money from this type of loan is used to purchase or develop a commercial property. The property then serves as collateral for the lender. Most major banks and other financial institutions offer commercial mortgages, which, like all types of financing, have their advantages and disadvantages. In terms of advantages, the borrowing company :

  • Relying on his creditworthiness and the net value of the property to obtain the loan that will boost his businessIn this way, you can finance new premises for the company, or renovations that will increase the value of the building – an increase in value that the lender can take into account in favor of the company in the terms of the loan;
  • If your financial situation is good, you may be able to obtain flexible repayment terms, enabling you, for example, to pay off the entire loan faster – and with less interest. Repayment vacations or interest-only payments can also be arranged for certain periods;
  • Is responsible, as a company, for the debt; its managers are not;
  • Can save on loan-related costs (interest rate and commercial mortgage insurance premium), if the downpayment required to obtain the loan is substantial. Note: such a down payment is almost always required by the lender, and can range from 20% of the building’s value for well-established companies to 35% for less established ones. The required debt coverage ratio is generally 1.25.

As for the disadvantages, they are often the flip side of the advantages. For example, it’s often more difficult to establish the short- and long-term creditworthiness of a company than of an individual. In fact, the better the company’s credit rating, the more likely it is to obtain not only the commercial mortgage, but also the advantages I’ve just mentioned: flexible repayment terms, low downpayment, and so on. Other disadvantages include the loan-to-value ratio, which is lower than for a retail mortgage. In most cases, the loan will only finance a certain percentage, often between 65% and 75%, of the property’s value. What’s more, the interest rate is almost always higher than that of a traditional mortgage.

However, as I pointed out above, a large downpayment can generate savings. Finally, the term of a commercial mortgage can vary widely, from 5 to over 25 years. As you can see, this type of loan is not a standard contract where all the clauses and conditions are already provided for. Obtaining a loan and repayment terms favorable to the company depends of course – and primarily – on the company’s long-term solvency. The figures you present to a potential lender on this subject must therefore speak for themselves. Having already obtained and paid off a commercial mortgage without any problems, or having increased the value of a revenue-generating property, will be serious assets for the company. On this second subject, I invite you to read our article Income properties: how to increase their value and reduce operating costs.

Want to know more about commercial mortgages? The Ayotte team counts some of the best commercial mortgage brokers among its partners. We’ll be happy to refer you to one of them and advise you if you’re looking to buy or sell an industrial or income property. Contact the Ayotte team.