MORTGAGES VANCOUVER  
Tips, Advice, and Explanations from a Vancouver Mortgage Broker  

Archive for the ‘Construction and Commercial Mortgages’ Category

Commercial or Residential – Multiple Suites in a Property

Wednesday, January 20th, 2010

There are a lot of properties, especially in East Vancouver, where the home has a main floor, and 3 or 4 or MORE basement suites (or carriage house). The clients often go to their bank, and are told the lender will only use 2 suites for rental income, or won’t give them ANY credit for rental income, and they need it in order to qualify.

It is usually at this point that the clients contact me, and ask me why their bank is telling them their home is commercial property, when it is a home with 4 basement suites!?

This video blog outlines the defining characteristics of what is residential and what is commercial real estate and the various financing requirements that each has. The differences are great, the down payment requirements vastly different, and the manner the banks qualify you is in an entirely different world. Watch and I’ll explain how the banks think.

Transcription of the Video Blog:

Hey everybody, it’s Rowan Smith from the Mortgage Centre.

I’m taking a lot of inquiries on properties that have 4, 5, or 6 suites in the home, and you know, East Vancouver has a lot of these especially in some of these larger, older, turn of the century homes that were built. The people have converted them over the years from being a kind of large mansion, to being a six or seven unit property.

I want to define what constitutes a commercial property versus what constitutes a residential property because the mortgage requirements, and the paperwork requirements, and the rate that you’ll pay, are heavily dependent on whether you are going to go residential or commercial (in terms of financing requirements).

A couple of things:

On a residential basis, if the property has more than 4 (four) units that is going to be constituted as commercial. There was one lender, Bank of Montreal, that used to do five units, but that is all gone. So if you have a property that has a main floor and four suites, that’s a commercial property so long as your are going to be using the income from that property to qualify for the mortgage.

There are some appraisers out there who are used to working with these five and six unit properties who have said that we have three units with two unauthorized suites, but that gets us into the issue of whether it is authorized or unauthorized, how much are you putting down, and all this. So, by and large, the rule of thumb is: four units in one property is residential. Anything beyond that (no matter how good the story or finances look) is commercial.

Now, if it’s zoned commercial, but people are using it residentially, it is still a commercial property and it will be judged and evaluated by lenders on that basis. Where you see this is (trying to think of areas in Vancouver): Kingsway, and these type of areas where there is a lot of low lying sprawl of commercial units in the basements (and you’ll have everything from nail salons to restaurants) with residential suites upstairs. If you are looking at one of these, they are “cash cows” and generate a lot of rental income when you have a commercial lease underneath generating the bulk of it, and a couple of residential units on top; often the owners will choose to live in those units and they sound great in principle, but because they are zoned commercial in a commercial area, they get treated commercially.

Now you say, “well what does that mean?”

First, you’re going to require a much heavier down payment:” probably 35% or more. There are some ways around this using expensive private financing , but if you are thinking of getting bank rates, that is what you’re going to be looking at. 35% down is number one.

Second, you’re going to need a commercial appraisal. They start at about $1,500 and they take a month! They don’t take three days or two days like a residential appraisal, so your subject removal period will have to be substantially longer.

Third, you are going to be looking at possibly requiring environmental studies. They (the lenders) want to look at the surrounding area and see if there is a fuelling station or a cardlock. Was there ever a drycleaner or any other chemical heavy, environmentally intensive, or environmentally dangerous business around you. Even though it’s not in your building, per se, but if it is within a very close proximity, it still impacts whether or not banks are going to want to finance it. Because, they don’t want to be on the hook, having to foreclose, when it turns out your property has massive environmental problems down the road.

So:

  1. Larger Down Payment
  2. Environmental Studies
  3. More Costly, Slower Appraisals

And, the environmental study could be one, two, or three stages (or phases) depending on the type of property and they type business that is in it, or has been in it in the past.

In Summary:

More than four units, you are going to face commercial guidelines, probably going to pay a higher rate, and fees as well, with a much larger down payment.

Four units and less, you can get it done under a residential basis as long as it’s not zoned commercial or in a commercial area that looks like light industrial as well. So, if you are looking at buying one of these properties and you want to know if it’s even feasible, let me just take a look at it. It will take me five minutes of our time, we’ll go over the property, and determine whether or not it’s going to fit under residential or commercial guidelines, and how best to get it financed, and what you’ll need to do so.

For the Mortgage Centre, I’m Rowan Smith.

Commercial or Residential? How to Tell How a Property is Classified and Financed

Sunday, February 15th, 2009

Not a week goes by that someone doesn’t call me and want to finance a large house that has a lot of rental potential, but can’t get financing. “The bank says it’s commercial, but it’s not!” they often exclaim, “it’s just a large house with carriage house in the back!”

My first question: “how many units are there in the property?”

Their answer: “Units? do you mean suites?”

“Yes”

Their answer: “There is five but two of them technically share a kitchen.”

In the words of Shakespeare, “Therein lies the rub…”

Most people don’t know what classifies a property as Residential or Commercial, but there are a few things you can do to sort it out ahead of time.

First off, commercial mortgages (with most banks) require 35% down, so when people hear a property is commercial (and the rates are often the same as residential – maybe better) they get upset because it means it will require a LOT more down payment. Most applicants that call me about a large house with multiple suites, often want to buy it with only 5% down in the hopes of acquiring a large piece of real estate without the large monthly payments coming from their pocket. Much better to have the tenants pay your mortgage, right?

If only it were so easy.

What are the differences between commercial and residential mortgages:

1. Commercial mortgages require a larger down payment – typically 35% (some exceptions apply depending on property)

2. Commercial mortgages require commercial appraisals which cost around $2,500 and take up to a month to get

3. Commercial mortgage usually require an environmental report that costs around $2,300 and takes around a month to get

4. Commercial mortgages often have higher rates – though some ultra low rates are available – property depending

5. Commercial mortgages are often NOT acquired by just walking into your local bank – talk to a broker

So those are the reasons people shy away from commercial mortgages. Commercial “anything” seems to cost a lot more than non-commercial: commercial flooring, commercial lighting, commercial fixtures, etc…

Here are a few things you can do to determine if a property is commercial or residential:

1. What is the zoning? If it is zoned commercial or multi-family, chances are, it will require a commercial mortgage

2. Where is it located and what are the surrounding buildings? More on this below…

3. Most importantly, if it is a property that people live in, how many units or suites are in the property. More below on this as well…

LOCATION

Location and surrounding are important. Most cities have a “city plan” for an area or a development plan and they know the way they want to properties to slowly evolve in the future. For example, the downtown east side of Vancouver favours high density, multi-family, preferrably low-income, housing OR commercial. However, some areas of Strathcona feature more industrial and heavy industrial properties with some old residential properties mixed in. So if you want to buy one of those old homes because the property has “development potential,” that is great! But you will likely need a commercial mortgage if all the surrounding properties are commercial / industrial. In other words, just the specific characterization of the subject property (the one you want to buy) is not the only thing that matters.

NUMBER OF UNITS OR SUITES

This is the NUMBER ONE type of commercial property I get inquiries about: a large house with 4 suites and a carriage house in the back with 2 suites (or some combination of 5+ suites). All but ONE bank say that anything over 4 units is commerical and requires commercial underwriting and approval (appraisal, down payment, environmental, etc…).

Why four suites? I haven’t the foggiest of ideas why they settled on that number, but all but ONE bank in the city says that if it has more than four units, it is commercial. Who is that bank / lender / trust company? I only disclose that info to my clients as that is the value that I bring to the table as a mortgage broker, and I won’t give away ALL the secrets!

The fact is, no matter how long you’ve banked with them, how good the bankers treat you, or even the fact they know you by name and you’ve had 12 mortgages with them in the past 10 years means NOTHING compared to the security they take on your loan. The property is KEY! Borrowers often overlook it just because there are lots of other houses on the street and they exclaim, “they can’t all have commercial mortgages!” And they may be right! However, the reality is a lot of those older homes were purchased many many years ago and are occupied by seniors who rent out large portions of the house in order to earn income and often have the properties without a mortgage.

So, bottom line: if it has more than 4 suites, it likely will be a commercial deal.

EXCEPTIONS

Sometimes, if a property is a large fourplex but has two illegal, or unauthorized suites, we can keep the unauthorized suites out of the equation and the lender will treat it as a residential property. I say “sometimes” because that depends heavily on th borrower’s taxable income as often the deal requires the additional income from the two illegal suites to make sense to the bank, and if they don’t include the suites, they don’t include in the income. Ergo, the client must make money from another source. This is a very tricky exception to try and ask for, and it requires the coordinated efforts of a willing lender, a solid applicant, and a good appraiser to make these deals work. I have the connections to make these possible, so give me a call if your house fits this description or is being treated as a commercial property when you don’t think it should be treated as such.

SHARED FACILITIES (Kitchens and Bathrooms)

Whenever a house shares facilities, usually lenders will call it a “rooming house” and those are possibly the dirtiest words in commercial financing right now. Rooming houses are the hardest properties to finance in the city, period. I’ve financed properties that had environmental disasters, oil spills, fires, chemical storage, mechanic shops, but I have NEVER had as much trouble getting financing as I have with a Rooming House. The reasons for this are more political than practical, and stem from the fact that most lenders “securitize” and sell off their mortgages. However, the buyers of these mortgages will usually only buy CMHC insured mortgages (government backed and guaranteed). We can thank the US Sub Prime market for making them so squeamish… When the mortgage isn’t government backed or “insured”  the lenders often won’t do the deal because they know they can’t “Securitize” and sell off the mortgage for a profit and then re-lend their dollars. This is a rather complicated, behind the scenes topic, but the main thrust of my point is that Rooming Houses are VERY difficult to finance.

I have worked on rooming houses with 32 rooms, 18 rooms, and 42 rooms, and the made sometimes $20,000 a month profit, even after the mortgage payments! To the buyer, it sounds like a great deal! However, the banks won’t do the mortgages so the rates end up being 14% (or higher) with massive lender fees and only available through private lenders. This wasn’t always the case, but the mortgage market, like the seasons of the year, changes in predictable patterns. When the mortgage market was taken advantage of (sub prime in the US) now the lenders have tightened up and Rooming Houses are a very very difficult property to finance.

Borrowers or applicants are often heard to exclaim, “but it will make $5,000 a month profit!” but when we work out the 14% loan instead of the 4.39% they saw on the TD website, it actually doesn’t work out so well. You usual need 50% down, lots of other assets, and a damned good broker to get these deals done. I have a lot of experience in this field as I have fought and worked on countless of these files and know most of the rooming houses in Vancouver by name and location.

So, if you are considering a rooming house, make sure to give yourself 45 days of “subject removal” time and make sure you have a huge down payment (35% MINIMUM) as this is the only way these properties are being purchased.

I recently undertook an exercise whereby I went down to the downtown east side in Vancouver, and took down the names and addresses of 26 rooming houses and pulled the title on those properties. I found SEVERAL lenders I had never heard of, and after doing some further investigation tracked down the actual people behind these companies and now am doing a mortgage with one on a rooming house! This list of lenders is one of my competitive advantages over other brokers, and if you know someone wanting rooming house financing, I am their guy.

Until then, happy hunting!

Commercial Mortgages versus Residential Mortgages – Rates and Rules

Sunday, December 21st, 2008

Not a day goes by that I don’t get a call from someone from my website or blog asking about my rates and then when I meet with them, they drop the bomb on me that they are talking about commercial real estate. I have to hit the brakes hard in this situation as commercial real estate financing and residential real estate financing are two totally different animals.

First off, why? The rules regarding the protection for homeowners are very different than the laws that protect business owners. Also, the lender’s rights are substantially different in a commercial transaction that in a residential transaction. If the commercial property happens to be a farm, that makes it ever MORE difficult for the lenders.

Secondly, when lenders “securitize” or sell their mortgage “paper” it means they are offering the mortgages to investors and turning a profit in the process while also getting back their money for the next mortgage. This is the way all banks operate, despite the fact that the original issuing bank happens to service the mortgage. Commercial paper, in this credit crisis, is very difficult to sell, and many lenders are tightening their guidelines to ensure that they are able to sell paper (and thus stay in business) throughout the crisis (which, by the way, is far from over).

So what exactly are the differences between a commercial and residential mortgage? The most prominent are:

1. Rate
2. Amount of down payment required
3. Pre-payment terms
4. Amortization
5. Timeline for Approval and Conditions of the Approval

RATE

IF YOU ARE FINANCING COMMERCIAL PROPERTY YOU WILL PAY A HIGHER RATE.

This isn’t something you can avoid. The BEST 5 year rate I have seen on commercial money in the past week was 5.42% on a 5 year term, but in the residential world I can get 4.70%. In most cases, I am getting quotes of 6.25% – 6.45% on 5 year terms from other commercial lenders. I always have people call me wanting to buy a property that has a commercial unit in the basement with residential upstairs. They intend to live in it (irrelevant as it is a commercial property), and are upset when the best rate I can find is 6.00% when they see my blog advertising 4.70%. The mortgage behind the scenes is different and clients need to expect this.

Rate is the lender’s return for the RISK they are taking with your mortgage. You may think the risk is small, but commercial properties are often very hard to sell, and if the lender has to foreclose (always something they consider) they want to know how long it will take them to offload and sell the property. So, the rate is higher. This is a fundamental fact that must be accepted.

DOWN PAYMENT

Secondly, commercial mortgages generally require a substantial amount more down payment. Typically, you will need 35% down payment when purchasing (or need to leave 35% equity in the property in the case of  a refinance) commercial property. This is not a totally hard and fast rule as we can often get an additional 10% financing from private lenders – but rarely more – unless the property has amazing cashflow. The normal commercial lenders want 35% down, but they will allow us to get a 2nd mortgage for an additional 10% (or whatever we can arrange). The max I have seen through conventional bank commercial financing is 80% and that was on a strata unit for a 30 year existing client of the credit union who had millions of dollars on deposit with the credit union. Normally, you only get 65% financing. You cannot get 5% down commercial mortgages (in 99.99% of cases – there are exceptions but it isn’t through banks – it is usually through the Business Development Bank of Canada who also takes an equity stake in the company in these cases).

PRE-PAYMENT TERMS

In most cases, in a residential mortgage, you are able to make lump sum pre-payments (without a penalty OR with a penalty) as well as increasing your monthly mortgage payments. Also, the banks are not allowed to prevent you refinancing (or getting 2nd mortgages). The terms in the law is that a lender cannot “clog the equity of redemption” for a RESIDENTIAL borrower. Lastly, if a borrower sells the property, the lender MUST let the mortgage be paid out.

In a commercial mortgage, this might not be the case (depending on your lender). Some lenders do not allow ANY pre-payment at all. Nevermind a penalty. That doesn’t matter. To them the mortgage is an investment with FIXED cashflow. They may not allow ANY extra payments, or ANY accelerated payments. In fact, there are a couple lenders out there who do not allow ANY payout of the mortgage (even if the property is sold!!!). This situation requires the mortgage to stay with the sold property, and is often a sticky point that buyers are unaware of if they are used to residential mortgages.

AMORTIZATION

In a residential mortgage, you can often get a 35 year (or even 40 year in some cases) amortization. In a commercial transaction, the norm is 25 years or “remaining useful life of the building.” If the building is, say, 25 years old, needs some repair, and really is only usable for another 15 years, then the mortgage will be NO MORE than 15 years – but usually only 10 (remaining economic life minus five years – for standard commercial properties – exceptions apply). This results in often FAR higher payments than clients expect if they are used to residential transactions. The higher payments can often be a deal breaker if the lender thinks the commercial property’s cashflow doesn’t support the payments (even if the client thinks they can “afford” the payments they may not “qualify” for the payments)

TIMELINE OF THE APPROVAL AND CONDITIONS OF THE APPROVAL

Most times residential mortgages can be “buttoned up” and fully approved within 48 hours if your mortgage broker is really pushing hard, but normally within 5 business days for a standard transaction. In a commerical transaction, from application to funding is normally around 60 days. The reason is that a commercial transaction has numerous additional requirement. For starters, you will need a commerical appraisal (generally takes 3 to 4 weeks) as well as a phase 1 environmental (also takes 3-4 weeks). Yes, you can get it faster, but expect the prices to double. There may be additional geotechnical studies, other more in-depth environmental studies, and even when you get it all approved, you face a much more lengthy legal process to have the mortgage registered and the documents prepared. Generally, expect 45-60 days for a NORMAL commercial deal. If it is a complicated deal with multiple properties, development potential, and/or construction and building, it may take far, far longer.

SUMMARY

So there are the differences. They are many, varied, and depending on the property or lender there can be even many more differences that this article does not cover as the number of situations and permutations are vast. If you are considering buying commercial property, PLEASE CALL ME FIRST even if just to get a layout of how the deal will look. It costs nothing for my advice and info, and it could save you a lot of time, hassle, and money.