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types of commercial real estate loans

The Full Guide to the Types of Commercial Real Estate Loans in Canada

Today, commercial real estate is at an all-time high – not exactly my words, but billionaire Sam Zell’s in an interview with Foxx Business. Let’s listen in to what he had to say about the sector in the video below:

So, what do you think? Do you agree?

I don’t know about you, but I think this is an industry that contains the most lucrative investment deals, which perhaps explains why financial institutions have been keen on the sector. And in this article, we look at exactly that!

We’ll discuss the types of commercial real estate loans in Canada, the different types of commercial real estate loan terms, and more.

What is a Commercial Real Estate Loan?

These are commercial mortgage loans that have been taken out on commercial real estate and are used as collateral. Borrowers of commercial real estate loans are typically corporates and businesses and not individuals.

Financial institutions in this space thoroughly analyze the borrowers for credit suitability and the rates are normally higher than residential property loans.

Types of Commercial Properties

Various real estate properties can be classified as commercial property – even residential real estate properties can sometimes be categorized as commercial properties if such properties were purchased for investment purposes.

Commercial properties are basically classified into three:

  • Pure Residential (1 – 4 units)
  • Pure Residential (5 and above units)
  • Residential Commercial Mix

These are just but a few properties that fall under the commercial category; there are a number of others that can also be classified as commercial.

In terms of mortgage approval, commercial ones take longer when compared to the residential ones; a typical commercial loan could take an average of 60 days to 12 months.

Property Occupancy

A property can either be occupied by the owner or by independent tenants/investors.

When a property is classified as an owner-occupied one, it means that the owner is using only the property for his personal use. However, this does not mean that a property is not a commercial one; if it is proven that it generates 51% of its income from the business conducted by the occupying owner, then it automatically qualifies it as a commercial property.

In case it does not meet the above threshold, then it is considered not to be a commercial property but an owner-occupied property.

The difference here comes in as a result of the income generating level with 51% qualifying a building as commercial while anything less makes it an owner-occupied property.

For properties that attract some form of rent in return for occupancy, a majority of the property is always utilized by tenants as the drivers of the property’s cash flow.

There are also investment properties known as fix-and-flip; these properties are bought in what is considered ‘a poor state’ and fixed up, and then sold for a profit.

Types of Commercial Real Estate Loans

Most financial institutions offer seven different types of commercial real estate loans; we will try to explain each in the simplest terms possible to be able to clearly understand what is likely to work for you.

  1. Purchasing: Just like the name suggests, a purchase loan is one that allows the holder to purchase commercial property using borrowed funds. The purchased property is used to generate income seeing as it falls under the commercial umbrella of properties.
  2. Cash-out: This type of commercial property financing or refinancing involves taking out a previous mortgage and paying off the equity of the property, or it can simply entail cashing out the equity of a property without a mortgage.
  3. Refinancing: Refinancing involved an outright buy-out of a loan belonging to one financial institution with another for reasons such as better interest rates, longer repayment terms, among other things.
  4. Bridge: A bridge loan is a short-term loan that is either used to entirely finance a commercial real estate property or used before a long-term financing option occurs. A bridge loan can be used to renovate a property, improve the condition, or conduct miner finishes to a property.
  5. Construction: This loan is used by commercial property owners or wannabe commercial investors to improve their businesses, construct a property, or develop it for purely speculative purposes.
  6. Fix-and-Flip: This mode of commercial real estate financing is used by small and large investors to develop properties that are later on sold at a profit. This facility is similar to the bridge loan in that it covers the deficit incurred between the time for waiting for longer-term financing.
  7. Hard-money: These are loans that are associated with more established borrows in the real estate sector. Such loans are issued without necessarily having to go through all the red tape involved in acquiring similar loans.

How Long can You Finance Commercial Real Estate?commercial loans

This is one area that commercial loans differ from their residential counterparts; the financing period ranges between five to 20 years and they normally have longer amortization periods. Amortization works like depreciation, only that it reduces the useful life of intangible assets. For more details on this, check out this post by Investopedia.

In the real estate, a typical borrower may be issued with a commercial loan that takes eight years with an amortization period of 25 years.

How Much Deposit Do I Need for a Commercial Property?

The amount of deposit you will be required to have may differ from one financier to another; however, you can expect anything in the range of 20% to 40% of the purchase amount. Generally, deposits for commercial real estate projects are always slightly higher than for residential properties.

Conclusion

Commercial real estate financing in Canada is one of the most common ways of owning a piece of the property market. Even as the demand for commercial real estate keeps soaring in Canada, financial institutions have been keen on offering great incentives to potential commercial mortgagees to become property owners through working on a negotiated interest rate, flexible repayment periods, more than 90% financing, among other things.

As we come to as close, if you’ve been dreaming of owning commercial property, there’s no better time than now when there is a global demand for real estate investments.

What do you think about the commercial real estate sector in Canada? Would you go for a commercial real estate loan?

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