Commercial real estate financing

How it works

Commercial property financing may support owner-occupied premises or investment property, with different underwriting approaches. Lenders assess property value, income or business cash flow, security, and borrower contribution.

Where it can fit

Build a full project budget that includes closing costs, appraisal, environmental work, improvements, taxes, and contingencies. A property purchase can strengthen a business while still tying up working capital that operations need.

Look closely at the trade-offs

Amortization and term are often different. A loan amortized over a long period may mature much earlier, requiring renewal or refinancing. Consider vacancy, variable rates, maintenance, tenant concentration, and balloon risk where relevant.

Identify the income that will service the mortgage

Owner-occupied property relies on the operating business’s ability to support premises costs. An investment property also needs a careful rent and expense forecast. Prepare separate property and business views where relevant so a strong-looking building does not hide a weak operating company, or vice versa. The OCC handbook describes property-specific underwriting risks; Canadian lender requirements and individual agreements must be assessed separately.

Source: BDC: Commercial real estate financing · OCC: Commercial Real Estate Lending handbook

Worked example: the down payment is only one cash need

A fictional business agrees to buy premises for $1 million. Assume a proposed lender will advance $700,000, leaving $300,000 of purchase equity. The business also budgets $35,000 for closing and professional costs, $65,000 for improvements and $50,000 to protect operating cash during the move. Its total cash requirement beyond the assumed mortgage is $450,000, not $300,000. This is not a standard loan-to-value offer or a schedule of actual closing fees.

If the company has $400,000 available, it is short $50,000 before any overruns. Removing the operating buffer makes the spreadsheet balance but changes the business’s resilience. Instead, identify which costs can legitimately be financed, phased or reduced. Have the lender confirm those possibilities before signing commitments that depend on them.

Test maturity as well as monthly payment

Ask for the repayment schedule and the balance expected at maturity. A long amortization can lower monthly principal payments while leaving a substantial balance to refinance when the term ends. Model what would happen if rates are higher, property value is lower or business cash flow is weaker at that time. A renewal assumption should be visible, not buried in a spreadsheet.

Review appraisal, environmental, insurance and legal requirements early. Check whether leases, zoning and intended occupancy support the proposed use. Compare repairs and ownership costs with the rent the business would otherwise pay. Financing can make an acquisition possible; it does not remove the need to assess whether the premises suit the business for the years ahead.

Prepare a separate first-year premises budget that includes payments, property operating costs, maintenance and moving-related disruption. Compare it with a continued-rental case using the same business sales assumptions. Keep potential appreciation out of the cash available for routine payments unless a real sale is part of the plan. This comparison helps the owner assess whether buying supports operations, rather than assuming ownership is automatically the better decision because a lender is willing to finance it.

• What cash is needed in addition to purchase equity?
• Which income supports payments, and how sensitive is it to vacancy or weaker trading?
• What principal balance remains at maturity?
• What conditions must be satisfied before funds are released?

Your next-step checklist

• Purchase agreement and property details
• Operating or rental cash flow
• Down payment and closing funds
• Appraisal and environmental conditions