Financing a commercial property in BC through your bank

Say you run a print shop in Burnaby and you've found a small industrial strata unit to buy. Your banker will want two stories that agree with each other: the building's, told through the appraisal and the condition report, and your business's, told through two or three years of statements. When those two stories line up, the approval usually moves along. When they don't, that's where the extra questions come from.

Start with your own bank's commercial banker. They know your business and can tell you early what's possible. Commercial lending isn't the same as a home mortgage: lenders look closely at the property's income and your business.

How lenders size a loan

• Loan-to-value (LTV) = loan ÷ value.
• Debt service coverage ratio (DSCR) = net operating income (NOI) ÷ annual debt service.
• Debt yield = NOI ÷ loan amount.
• e lowest result usually limits the loan.

A quick worked example

Picture a building with a net operating income of 100,000 a year. If the lender wants a debt service coverage ratio of 1.25, the most it will let you pay in mortgage payments is 80,000 a year. Run that through the rate and amortization and you get one loan amount. Then the lender checks the same loan against its loan-to-value limit on the appraised value, and takes whichever answer is smaller.

If the rent roll has a big tenant leaving next year, expect the lender to use a lower income, not the current one. Your banker can show you their own version of this math, and it's worth asking for before you write an offer.

Owner-occupied vs investment

If your business will occupy the building, the lender looks at your business's cash flow as well as the property. That can help when the building has no other tenants, and it can hurt if your last year was rough. For an investment property, the tenants' leases carry most of the weight: how long they run, who the tenants are and whether the rents are near market.

Covenants and reporting

Most commercial loans come with ongoing conditions, called covenants. You may need to send annual financial statements, keep a minimum coverage ratio or tell the lender before you sign a big lease. Read the commitment letter for these and put the reporting dates in your calendar. Missing one is usually fixable, but it's easier to keep the lender happy than to explain later.

Rates and terms

Loans may be fixed or floating. Floating rates often follow Prime rate, which moves with the Bank of Canada: key interest rates policy rate. Fixed rates often track Yield (5-yr GoC).

Know the Term (loan), Amortization, prepayment penalties and renewal terms. Many Canadian fixed-rate mortgages state interest as compounded semi-annually, so check how your commitment letter states it.

What lenders ask for

• Financial statements and tax returns.
• Rent roll and leases.
• Appraisal and environmental reports.
• Building condition report.
• Personal net worth statements and Personal guarantees.

Other options

• Vendor take-back (VTB) from the seller.
• Bridge loans for short-term needs.
• Raising money from investors can trigger securities law; see BC Securities Commission: investors.

Timing

Build financing into your subject period. Don't remove subjects until you have a firm commitment in writing.

What the income file must prove

Banks size to debt service coverage, debt yield, and loan-to-value on income they believe. That means rent roll, leases, and estoppels—not only an appraisal.

If coverage is tight, the honest fixes are equity, durable income, or a different amortisation. A prettier pro forma rarely survives credit.

I can help assemble the property side of the package.