Purchasing Commercial Property for your Business

You have your eye on the perfect commercial property for your business. However, the prospect of financing the purchase is a nerve-racking thought. You’ve heard the horror stories of lenders approving and then at the eleventh hour declining the financing! Where do you start?

Action item #1: Talk to an independent Commercial Mortgage Broker. Based on the information you provide them they will identify a suitable lender and guide you through the entire approval process.

The Approval Process

Securing a commercial mortgage for the purchase of commercial property can be quite complex. There are some key steps and milestones that have to be achieved. Being prepared for each step can ease the anxiety and certainly the stress.

It needs to be noted that each commercial application has it’s own unique nuances so this is not a cookie cutter type process. Time lines vary, depending upon lenders and lender work load. Costs vary, so this article is only meant to be used as a rough guide.

Step 1 – Obtaining a “Letter of Intent” or “Discussion Paper”

The objective of Step 1 is to identify a suitable lender and to then obtain from them what is termed as a “Letter of Intent” or “Discussion Paper”. This document is not an approval but simply outlines a tentative loan structure, typically based on the following core documents:

• A completed application and consent form
• A copy of the Purchase Agreement including plot plans etc.
• A copy of your companies accountant prepared Financial Statements

In addition to loan amount, interest rate, and payment options, the document will outline the other core documents that are required in order to determine if financing can be approved.

Step 2 – Obtaining an “Offer of Finance” or “Letter of Agreement”

In order to obtain an Offer of Finance, the Letter of Intent must be accepted and all supporting documentation must be provided to the lender such as:

• A Commercial Appraisal.
• An Environmental Phase 1 study.
• References (both client and supplier)
• Further financial information such as aged accounts receivable and accounts payable information, as well as an interim financial report.

There is usually a request by the lender for an application fee at this point.

It should be noted that when purchasing older properties, there could be a request for a Structural Inspection Report which would include a Mechanical / Electrical inspection.

Assuming all information supplied is accepted, the lender will issue an “Offer of Finance”. This can be considered as an approval for financing. The information contained within will outline the loan structure, perhaps very similar to that which was reflected in the Letter of Intent.

Step 3 – A visit to the Lawyers Office

By signing the Offer of Finance you are accepting the terms of the loan agreement. A formal Mortgage document is then generated and a visit to a lawyer is required. It is not uncommon for two lawyers to be involved at this point, the lenders lawyer and the borrowers lawyer. The cost of each lawyer is typically the responsibility of the borrower.

In a future BLOG we’ll discuss the timelines and costs that you should typically expect when purchasing commercial property.

About the Author

Matthew specializes in helping business owners add VALUE to their business by building a Sellable, Financeable Business. He is licensed by the Real Estate Council of Alberta as a Commercial Mortgage Broker and Real Estate Associate. He can be reached at (403) 374-1604. For more information please visit http://www.businessfinancecanada.com

Permission to reproduce this article in its entirety will only be given if, reference to the author and the company web address accompanies the reproduced article.

Client Comments

My wife and I recently purchased an existing business in Calgary. Matthew Buxton found us the best financing option and rate since as he was able to shop and compare different mortgage companies. Matthew was well versed in business needs and financing options. Courteous, thorough and knowledgeable is how we would describe our experience with Matthew.

MM & DM

Financing the purchase of a Business – What the Lenders look for!

Lenders look through all applications to determine RISK. If you have bad credit, the deal is perceived as HIGH RISK. If you are not providing the lender with the information they need then the deal will be perceived as HIGH RISK.

If you want to increase your chances of getting that loan, provide satisfactory information to the lender that addresses these 5 commonly overlooked areas:

1. The lender must have confidence that the new owner of a successful business will manage the business in the same way as it has been managed to date.

2. Lenders like to see systems in place that make the business work like clockwork.

3. Lenders like to understand the skill set of the new owner. Business experience is a definite asset. If the new owner does not have industry experience, as it pertains to the business being purchased, then the lender will want to look at the next level of management and their knowledge / experience level.

4. Some lenders like to see Vendor take backs. It is not critical but in effect reduces the RISK to the lender.

5. Finally, there must be a meaningful down payment and an understanding of were it came from. Less down, translates as more RISK. Higher risk, translates into higher interest rates, more security being requested by the lender (for example a Personal Guarantee), or a declined deal.

A Final Thought
I know one lender who watches out to see what car you drive when you pull up for the meeting. In their minds if you want a million dollars and your driving a piece of junk – it could be a red flag.

Whether you agree with this qualification method or not my point is that you must not overlook the details. Most importantly be HONEST! There are many methods used today to cross reference all the information within the application to ensure it is accurate and truthful.

Invest in Your Mortgage: Invest in Yourself

Question: How different would you have felt this past year if you’d had no mortgage payments to make, because your mortgage was paid off?

People invest in all manner of things because they want to get ahead. Perhaps you want a more lavish lifestyle, or just simply want to take care of your family and prepare for retirement. (Don’t forget your retirement years can last longer than your working years!)

Here’s my question: are you investing in the right things?

Read More…

Mortgage Broker VS Bank

What is a Mortgage Broker? What does a Mortgage Broker do?

Surprisingly I get asked this question a lot. Then again only 30% (approximately) of all mortgages are funded through a mortgage broker in Canada. In the US this ratio is in the 90% range. Why is that?

Education is one factor.

There is no doubt in my mind that there is a huge difference between securing a mortgage through a Mortgage Broker vs the bank. I developed a chart that reflects some of these differences, titled Mortgage Broker VS Bank.

In summary it only stands to reason that if I work for ABC bank I can ONLY offer you a mortgage product that ABC bank offers. The mortgage products from ABC bank will not be suitable for everyone. However if I work for an independent Mortgage Brokerage who has access to all the different lenders across Canada,  it stands to reason that I will find the perfect mortgage product at the perfect interest rate for you – and it may likely not be a mortgage from ABC bank.

Now some will say that there are one or two lenders who hate the concept of Independent Mortgage Brokers. This is true, and there are also “bank owned” mortgage brokers who are mandated to do X amount of business with their owners. Essentially, they are not “INDEPENDENT” and one could argue do these company’s really have your best interests in mind?

You only have to be in the industry a few months to realise the value of an independent mortgage broker to…. EVERYONE.

Give an Independent Mortgage Broker a try – you will not regret it.

Credit Bureau’s Part 2

Credit Bureau’s Part 2

OK so in Credit Bureau’s part 2 I wanted to talk about how to maintain a high “beacon score” or more to the point provide some tips / FYI’s on what can destroy your beacon score.

For some it’s obvious but I’ll mention it anyway – pay ALL your bills on time. I cannot tell you enough, in this market and the way things are even a late payment on a SEARS card can change which mortgage product you can qualify you for. (Speaking of SEARS I don’t even have their card and they drive me nuts. I see it every week – a SEARS late payment).

Promotional items – Some banks are even offering appliances now?! Let me translate what they are really saying – “Our rates are not the best available. We don’t want you thinking about that so we’ll give you an appliance. But wait – someone needs to pay for it and it won’t be Mr. Bank so it’ll have to be you; hidden in the higher interest rate you are paying”. Anyway I digress…

“Apply and we’ll give you some FREE stuff” (typically seen at the big game) and is another method to negatively effect your credit score. If you need a credit card, get professional advise.

Applying online seems to be the flavor of the month but once again the more times you apply, the more hits on your credit score that in turn negatively effects your credit score.

Finally, exceeding your maximum limit. Now we both know you can do it, yes. The bank want you to do this, BUT it is also another way to destroy your credit score.

This stuff is not rocket science, go to EQUIFAX and ordering the POWER SCORE report for $23.85. It has lots of great information.

A side note…

It seems that people in all walks of life and in various countries do not care about this stuff. Their attitude is to spend now as they know they are heading for bankruptcy next year. It’s sad in a way because this is short sighted and just propagates the mess we are all in at the moment. The industry will improve, values of homes will increase again. It will be OK. More to the point we are all one step closer to retirement age and whatever that age is for you – would anyone in there right mind want to work past it? If you don’t plan for it, perhaps abuse the current system, you will be working well into your retirement.

Food for thought…

Canadian Credit Bureau’s… Part 1

Before I start I wanted you all to know that this is my first BLOG post! Veteran BLOGGERS bare with me… I’m learning but very excited about posting regular BLOGS – you’ve got to love technology!

Credit Bureau’s

Over the years I’ve likely seen thousands of credit bureaus. I can honestly say that a very large percentage of these have errors or information that has not been updated. How does this happen? I’ll give you a couple of examples:

Collections are one item that crop up regularly. Even though the client has paid the collection the collection agency has not updated the bureau. If the client does not check their credit bureau regularly they will find that when they come to apply for a mortgage there is still am outstanding collection.

This scenario can be applied to Credit Cards, Student Loans and all other forms of credit.

My advice before anyone applies for a mortgage loan or talks to a bank about a loan, is check your own beacon score. This can be done my going to EQUIFAX and ordering the POWER SCORE report for $23.85. Review your report and follow the instructions if there is anything that is inaccurate.

A word of warning here is that there are company’s offering FREE reports. From what I see and have experienced THESE ARE NOT FREE REPORTS! They rope you into a monthly program that costs money and which in my opinion is a waste not to mention deceptive.