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.