Commercial Mortgages in Saskatchewan
Obtaining a Commercial Mortgages in Saskatchewan on Commercial Real Estate is similar to Residential Real Estate. Commercial Real Estate (CRE) is used for business purposes. Some common examples include shopping centers, hotels, complexes, apartment buildings, and land. Financing these properties generally happens through taking out mortgages that are backed by liens against the property. In some cases General Security Agreement or Personal Property Security Agreements are additional requirements.
Finding commercial mortgages in Saskatchewan requires a few different steps than residential mortgages. Here are some of the differences:
Commercial mortgages are often approved for organizations, not individuals.
Most residential mortgages are made to individuals who want to buy the properties. However, CRE loans frequently go to trusts, funds, limited partnerships, developers and corporations. These organizations are created specifically to own commercial real estate.
These types of organizations may not have any credit score or satisfactory financial paper trail. In that case, the lender may require that the owners of the organization, the principals to guarantee the mortgage. That allows the lender to peruse the principals’ in the event of default. If the lender extends a CRE mortgage without this type of guaranty, the mortgage is called a non-recourse loan. This type of loan only allows the lender to only seize the property.
Commercial mortgages are often amortized for longer times than their term.
In Canada, both Residential and Commercial Mortgages terms have a 10 yar maximum. The amortization can be as short as the term or up to 30 years. The shorter the term, the lower the interest rate. The amortization period is generally also longer than the term, with a balloon payment waiting at the end. If you take out a $2 million commercial loan at 7 per cent, with a seven-year term, the monthly payment is $13,306.05, with a balance due of $1,822,948.28 due at the end of that term. The options available are to pay-off, renew, refinance, or sell the property.
The length of the amortization period and the loan term will influence the interest rate. The credit history and overall profile of the Borrower can have a positive effect on the final terms. The longer the amortization period, though, the higher the interest rate will be.
Commercial properties often require a lower loan-to-value (LTV) ratio.
This ratio measures a loan’s value relative to the value of the property. A lender can determine the LTV of a mortgage by dividing the loan amount by property value. So if a borrower wants a $500,000 loan on a $750,000 property, the LTV would be 66.7%. A lower LTV ratio will lead to a lower interest rate in most cases.
You can take out a residential mortgage with an LTV up to 90 percent and even higher in some cases. Most Commercial Mortgages in Saskatchewan do not exceed 75 percent. However there are some insured and/or government backed commercial loans that can exceed 75 percent. If the mortgage is just for a purchase of raw land, then the maximum LTV ratio usually in the range of between 40% to 60%.
Commercial lenders look at debt-service coverage ratio in addition to investor credit scores.
The debt-service coverage ratio compares the annual net operating income of a property with its mortgage debt service on an annual basis, including both interest and principal. In other words, this ratio measures whether a property can generate enough revenue to cover debt payments going forward.
Here’s an example. A property that generates $300,000 in NOI (net operating income) and has $200,000 in annual mortgage debt service has a DSCR (debt-service coverage ratio) of 1.5. This ratio provides lenders with an idea of the maximum loan size they should extend based on a property’s cash flow.
If the DSCR is less than 1, there will be negative cash flow on that property for the life of the loan. Commercial lenders in Saskatchewan frequently look for DSCRs that are 1.25 or higher to ensure that there is enough cash flow to satisfy the loan. However, for borrowing entities willing to accept shorter amortization periods or with properties that have cash flows that are high and stable, lower ratios may work. If the property has a volatile cash flow (an example would be hotels, which do not have long-term leases), then the ratio may need to be higher.
Interest rates are commonly higher on commercial loans.
This is due to the fact that the risk involved is higher, even with the lower caps on LTV ratios. People will let business loans go into default before they will endanger their own mortgages, making that risk higher.
Are you having a difficult time finding a commercial loan in Saskatchewan? At Amansad Financial we have a network of lenders who work with entities and individuals looking for CRE loans, even if traditional lenders have already turned them down. We also have access to private funding sources who specialize in helping borrowers whose metrics don’t quite fit what the traditional lenders are looking for. Just because the lending rules tightened in the aftermath of the recession of 2008 and continue to make credit hard to come by does not mean that we cannot help you find the funding you need. Give us a call today, and we will discuss your situation and recommend solutions.