Commercial Mortgages in Vancouver: The Building Carries the Loan

How is commercial underwriting different from a residential mortgage?

Residential underwrites the person. Commercial underwrites the property. The building carries the loan.

On the residential side, the questions are your income, your credit and your debt ratios. On the commercial side, the first question is what the property collects in a year, what remains after vacancy and operating expenses, and how much room that leaves above the debt payments.

Your own situation still matters, it just comes second. If the building's numbers do not work, a strong personal profile will not save the file. If the numbers are strong, an ordinary personal profile is often workable.

What do lenders mean by NOI and DSCR?

Net operating income is annual rental revenue, less a vacancy allowance, less operating expenses. Operating expenses cover property tax, insurance, management, repairs and common area utilities. Mortgage payments and depreciation are not deducted, they sit one layer down.

Debt service coverage ratio is NOI divided by total annual debt payments. Most institutional lenders want to see something above roughly 1.2 to 1.3, for illustration only, and the requirement varies by lender and by asset class. A ratio of 1.0 means breaking even, and nobody lends at break-even.

Two details catch people out. First, most lenders impute a management fee even if you manage the building yourself, so that NOI is not artificially inflated. Second, a vacancy allowance is generally applied at market norms even when the building is fully leased today.

The practical effect is that your own NOI figure is usually higher than the lender's. Re-run it on conservative assumptions before you submit, rather than arguing about it afterwards.

What changes when the property is held in a corporation?

Nothing problematic. Corporate ownership is the norm in commercial lending, and many lenders prefer a single-purpose entity holding just that one property, because the structure and the liability are clean.

Expect to provide corporate financial statements, incorporation documents, the shareholder structure, and personal guarantees from the principals. Fully non-recourse lending is uncommon in Canada, so in most deals you will still be signing personally.

If the company is newly formed with no financial history, underwriting leans harder on the shareholders' net worth, credit and track record. You can prepare that package in advance rather than waiting to be asked.

Multi-unit, retail, office, industrial — are they underwritten the same way?

No, and the differences are large. Residential buildings of five units and up generally go through the commercial channel, and they are usually the easiest asset class to finance because demand is steady and the cash flow is spread across many tenants.

Qualifying multi-unit projects can also access CMHC insured products such as MLI Select. That generally means higher leverage and longer amortization, in exchange for a longer process and additional commitments around affordability, accessibility or energy efficiency.

Retail and office turn on tenant quality and the remaining term on the leases. A storefront with ten months left on its lease and a building with a national tenant eight years from expiry are two entirely different files.

Industrial demand in Metro Vancouver has been strong and the asset finances well, but the environmental history has to be clean. Sites that once held a gas station, an auto shop, a dry cleaner or a plating operation tend to make the environmental stage harder than expected.

How much down payment does a commercial property need?

Generally more than a home, and the exact figure is not a fixed percentage. It falls out of the asset type, the location, the lease quality and the DSCR together. Multi-unit residential typically supports the highest leverage in the market and special-purpose assets such as hotels, gas stations and care homes the lowest.

Here is the counterintuitive part. The binding constraint is often DSCR, not loan-to-value. If the net income cannot support the payments, the lender will not advance to the loan-to-value limit even when that limit has room. In a higher-rate environment this is the usual outcome.

So asking what percentage you can borrow tends to miss the point. The more useful question is how large a loan this building can carry at today's rents and today's pricing.

What documents and third-party reports will you need?

On the property side: a rent roll, every lease, two to three years of operating statements, the property tax notice and the insurance policy. Disclose renovation or vacancy history rather than letting it surface later.

On the borrower side: corporate financial statements and tax filings, incorporation and share registry, and personal net worth statements and credit for the principals. If you have operated a comparable asset before, put it in writing, because experience counts in underwriting.

Third-party reports generally include a commercial appraisal, a Phase I environmental site assessment, and sometimes a building condition report. If Phase I flags a concern, a Phase II follows, and both time and cost go up.

You pay for these reports, and they usually have to come from firms on the lender's approved list. Do not commission them on your own before checking.

How long does a commercial mortgage take?

Considerably longer than residential. Several weeks to several months is normal, depending on asset type, how quickly third-party reports can be scheduled, and how many layers of internal approval the lender has. CMHC-related applications generally take longer still.

The time goes into two places: report scheduling and credit committee. You cannot rush either, you can only start earlier.

Build that into the subject removal period when you write the offer. The most common failure I see is not a declined application. It is a condition period too short for the reports to come back.

The bank said no. Is that the end of it?

Usually not. Banks, credit unions, mortgage investment corporations and private lenders each have their own appetite and their own list of things they will not touch. A bank declining often means the asset falls outside its internal policy, not that the deal does not work.

The cost of the alternative route is generally a higher rate, higher fees and a shorter term. That cost needs a reason behind it before it is worth paying.

The sensible use is as a bridge: take the property down or stabilise it with more expensive money, spend a year or two signing leases and firming up the numbers, then move back to cheaper capital. Decide on that exit before you borrow, not after.

Common questions