Construction and Development - Mortgage Brokers Ottawa - First-Time, CHIP, & More

A commercial mortgage broker has expertise in the many financing options for real estate loans for business purposes. This can mean purchasing a small office building or a large medical facility, buying a multi-family home with the intention of renting, or even building a church or arts center. Brokers can also help you get financing for renovations, land or expansion.

Unlike mortgage bankers, brokers can foster relationships with a multitude of lenders and investors, and those relationships are not exclusive. Thus, they have more flexibility in finding options that traditional banks cannot provide. They also take you through the entire loan process, including making sure you have everything you need to pre-qualify, and sometimes remaining available after your loan closes to assist you with anything concerning your mortgage.
Brokers work on commission, usually 0.5 percent to five percent of the price of the loan. While most handle the most common real estate financing situations, some specialize in specific industries or needs such as nonprofit organizations or commercial land and construction.

WHAT SHOULD YOU EXPECT FROM A COMMERCIAL MORTGAGE BROKER?

In general, a mortgage broker takes you through the entire loan process from prequalification to closing. Before he or she starts shopping for your loan, the broker will review your paperwork and talk to you about your specific situations in order to figure out the right option for you. You’ll also discuss your expectations for loan payments, closing costs, prepayment fees and other loan-related information.

If you are purchasing land or an existing building, brokers often bring in third parties to verify the condition of the property. This not only helps speed the qualification process but can also alert you to issues regarding the property you may not have known about.

Next, the broker seeks out your real estate financing options. Brokers should have relationships with more than one bank, and they often have expertise in other areas of business financing. In some cases, this could be a Small Business Administration Certified Development Company (SBA CDC) loan or alternative funding through a non-traditional lender such as investment companies or insurance firms. They do not settle with one deal, but bring you a list of options to choose from.

The broker then presents the best commercial mortgage options for you to consider. He or she answers any questions you have and review the details of the loan. The broker stays with you through the entire closing process, negotiating on your behalf.

If you are purchasing land or an existing building, brokers often bring in third parties to verify the condition of the property.

COMMERCIAL MORTGAGE BROKERS: WHAT SHOULD YOU LOOK FOR?

While a commercial mortgage broker can save you time researching for a loan, it does not absolve you from doing your own homework. Finding a good broker is just as important as finding a good bank. Therefore, consider several agencies before making your final decision. Here are things the best commercial mortgage brokers have in common.

QUALIFICATIONS

Look for brokers who have experience in the areas of finance, real estate and business. Most companies list at least the founder or top brokers on their websites. Also look for the kinds of deals they’ve closed:

AREA OF EXPERTISE

Most brokers don’t specialize, but many have areas in which they do more deals and feel more comfortable. However, each loan is unique – what is needed to finance the refurbishment of a condominium complex varies from the requirements to build a medical facility. Ask what deals the brokerage has closed that resemble the needs for your specific business situation.

Also, be sure to ask if the broker has worked with businesses in your industry. This can be especially important for niche businesses or nonprofits, which can have different financing needs and may qualify for other programs.

SCREENING PROCESS

In order to get the best options, your broker should have a thorough understanding of who you are and what you need. Ask about the screening process: what questions are asked, what documents you’ll need. You also have a responsibility to be upfront about what you want in a loan, such as your expectations for closing costs, your ability to pay the loan early or any considerations that could hinder a loan. The more the broker knows, the better he or she can find the best financing for your business.

SERVICES PROVIDED

All brokers should assist you with the pre-qualification process, present you with research options, walk you through the proposals and liaise between you and the lender. Other services these agencies provide include inspecting the property you want to acquire, reviewing your financial documents and providing intermittent assistance after your loan has closed, such as reviewing financial documents the lender may require annually.

COMMISSIONS & FEES

As noted above, brokers make a living from commissions on the loans they make. Therefore, like any business, they seek to get the maximum commission they can for the services they render. The average runs between one and two percent of the total loan amount, although they can span anywhere between .5 percent and 5 percent. Some brokers may also have specific fees. The most common is a non-refundable processing fee. Brokers should not get paid until the loan closes. As with any big investment, it’s a good idea to shop around and ask about rates and prices.

By law, mortgage brokers cannot charge hidden fees, tie their pay to your loan’s interest rate or get paid for steering you to an affiliated business, such as a title company they have ties with. They cannot receive a commission by both you and the lender.

A good commercial mortgage broker can save you money in the long run, even with its commission fees. However, a bad one – or a bad deal with one – can cost you thousands. There are laws to help protect your rights, but taking the time to research brokers to make sure they are qualified and familiar with your area of business and have experience securing loans or alternate financing in cases similar to yours can help you find the best broker for you. Asking questions about the process and negotiating the broker’s commission rate lets you enter the agreement with open eyes and might save you money.

LAND ACQUISITION

Financing Options

Base

Standard financing offers a fixed interest rate and is typically closed to prepayment for the term’s duration. Because land assets do not produce cash flow, standard financing is only considered when the borrower’s plans to hold the land for the long term. Borrowers must prove an ability to cover the mortgage payments from other sources (cash flowing properties or cash reserves).

Short-term/Bridge

Bridge financing addresses a borrower’s short-term needs, usually three months to three years. For land assets, short-term financing suits borrowers that intend on developing the land soon after acquisition. The flexibility gives the borrower time to finalize zoning applications, servicing requirements and other considerations prior to beginning construction. Bridge financing typically includes floating interest rates, is interest only and requires the borrower to provide access to alternative cash flows to service the mortgage.

Construction/Development

A construction loan helps borrowers manage periodic payments for contract work during the building of a real estate asset. Construction financing is available for condominiums, retail, office, industrial, retirement and purpose-built apartments. An exit strategy for the construction loan is one of the key considerations for funding (i.e. standard financing or individual sale of units).

Land acquisition falls into two categories – that held for the long term for future development and that purchased for immediate development.

CONDOMINIUM CONSTRUCTION

Condominiums are units, which are registered separately (stratified) and available for sale individually.

Condominiums are units, which are registered separately (stratified) and available for sale individually. Retail, office and industrial properties can also fall under this definition.

Financing Options

Base financing

Base Financing for condo inventory loans typically offers a shorter-term, depending upon when the borrower expects to sell the individual units. Floating interest rates typically apply with no amortization requirement.

The sale of individual units is the key consideration for this type of financing. In most cases, the borrower is expected to contribute 100 percent of the net sale proceeds from each unit sale. As the borrower sells units, the loan is paid down simultaneously until the point of liquidation. Once the loan is liquidated, the borrower is able to keep the profits from the remaining unit sales.

There may be conditions added to the loan such as a pre-sale requirement, which outlines the number of units to be pre-sold prior to funding. In this instance, they may reserve the right to approve the purchaser as a viable and legitimate purchaser.

INDUSTRIAL

An industrial project can span real estate operations including warehousing, manufacturing, transportation and logistics. This type of property typically attracts a more sophisticated developer/buyer as a result of the risk profile and operational complexities.

Financing Options

Base

Properties that generate consistent cash flow through arms-length leases are favourable candidates for standard financing. For industrial projects, this can mean properties that have leases greater than five years as well as properties that have multiple units leased to multiple arms-length tenants.

Owner-occupied projects can be considered, however, historic financial performance will be reviewed and scrutinized. Specialized industrial projects also introduce financing challenges. The risk is greater in the case of specialization as it is harder to devise contingency plans and find replacement tenants if required.

Base financing offers a term of five years or more, a fixed interest rate and is typically closed to prepayment for the term’s duration. For industrial, conventional is the most common type of standard financing.

Base financing is usually considered when borrowers want the payment predictability that comes with a fixed interest rate. However, it is important to note that a typical conventional financing term for an industrial project is five years. Longer terms are available, but there is often greater scrutiny on future cash flows. Borrowers must be able to show that longer-term leases (i.e. maturing in 10 years or more) are in place for the duration of the mortgage term.

Commercial Mortgage Backed Securities (CMBS): CMBS is a conventional financing solution available for first mortgages on established, stabilized properties (generally three or more years of stable operating history). This type of financing works well for properties with in-place, stabilized net cash flow.

An industrial project can span real estate operations including warehousing, manufacturing, transportation and logistics.

For industrial assets, short-term financing may be a strategic solution if many of the property’s leases are approaching maturity.

Short-term/Bridge

Bridge financing addresses a borrower’s short-term needs, usually three months to three years. Some borrowers choose bridge financing when they need flexibility to decide about the future of an asset (i.e. contemplating a sale, impending change in ownership structure, wanting to match mortgage term to single lease maturity or operational planning) or time to coordinate a standard financing option.

For industrial assets, short-term financing may be a strategic solution if many of the property’s leases are approaching maturity. The flexibility enables the borrower to negotiate new leases or acquire new tenants, ultimately positioning the property more positively for standard financing.

Bridge financing typically includes floating interest rates and usually allows some form of early prepayment. Consistent cash flows and strong operational histories are key considerations for this type of financing.

Improvements/Renovations

This short-term financing option enables access to a property’s equity for improvements, renovations or repairs, eliminating the need to raise funds from personal sources. The goal is usually to increase rents and/or reduce operating expenses to drive up the value of the property and make it eligible for standard financing.

Secondary

Second mortgages are often used to access equity in a property when a borrower wants to purchase another asset or renovate/repair a property. Borrowers with a first mortgage may be eligible for secondary financing on the same property. Options include standard or short-term financing. Secondary financing is an attractive alternative to refinancing, especially if a borrower wants to avoid the penalties associated with breaking a mortgage mid term.

OFFICE

An office building is a property where tenants rent out space to conduct business. Examples include single-tenant properties, small professional buildings or large skyscrapers. This type of property typically attracts a more sophisticated buyer as a result of the risk profile and operational complexities.

Financing Options

Base

Properties with stable cash flow and consistent operating histories are favourable candidates for base financing. For office assets, this can mean properties that are fully or nearly fully leased, have a majority of tenants on long-term leases and can display a consistent history of strong tenancy.

Base financing offers a term of five years or more, a fixed interest rate and is typically closed to prepayment for the term’s duration.

Base financing is usually considered when borrowers want the payment predictability that comes with a fixed interest rate. However, it is important to note that a typical conventional financing term for an office asset is five years. Longer terms are available, but there is often greater scrutiny on future cash flows. Borrowers must be able to show that longer-term leases (i.e. maturing in 10 years or more) are in place for the duration of the mortgage term.

An office building is a property where tenants rent out space to conduct business. Examples include single-tenant properties, small professional buildings or large skyscrapers.

This type of property typically attracts a more sophisticated buyer as a result of the risk profile and operational complexities.

Short-term/Bridge

Bridge financing addresses a borrower’s short-term needs, usually three months to three years. Some borrowers choose bridge financing when they need flexibility to decide about the future of an asset (i.e. contemplating a sale, impending change in ownership structure or operational planning) or time to coordinate a standard financing option.

For office assets, short-term financing may be a strategic solution if many of the property’s leases are approaching maturity. The flexibility enables the borrower to negotiate new leases or acquire new tenants, ultimately positioning the property more positively for standard financing.

Improvements/Renovations

This short-term financing option enables access to a property’s equity for improvements, renovations or repairs, eliminating the need to raise funds from personal sources. The goal is usually to increase lease rates, secure longer leases and/or reduce operating expenses to drive up the value of the property and make it eligible for standard financing.