Ever thought about buying commercial estate and thought it was impossible to qualify for financing? Put away the notepad and calculator as Cory welcomes Alan Haigh, co-founder and managing partner, of Impact Commercial Group to break down how to buy and invest in commercial real estate. Alan explains how the first time investor and all the way through to a small business owner can achieve their goals of owning commercial real estate in BC.
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Tell us about yourself.
I’ve been in banking and commercial financing for about 25 years. I worked my way up over time to an executive position and then started to explore entrepreneurship. I co-founded Impact Commercial Group, a boutique commercial mortgage brokerage. We’re doing great things for great people in this town.
How do people get into commercial real estate? How is it different from buying a condo?
We get this question a lot with our first time buyers. When you’re coming from the residential side, you have one lens. On the commercial side, it’s different. It’s not necessarily more complicated; it’s just different. Difference doesn’t have to be scary.
For our first time buyers, we want to ensure there are no surprises. We model out a situation and give our clients a one-pager with the purchase price, taxes, etc. We want to make that difference more understandable for people. After the second or third conversation, things start clicking and people move into some great purchasing decisions.
If I’m a new commercial investor, how much do I need to put down?
For a residential mortgage, you qualify based on your income through your T4 or salary. On the commercial side, you look at the property’s net operating income. For example with a triple net lease, you might take the basic rent given to the landlord as the income to support the mortgage. You then filter in an amortization rate and a mortgage rate to figure out the mortgage amount. It’s not hugely complex; it’s just a different lens.
The Residential Tenancy Act can be a little restrictive. Whereas with a triple net lease in commercial, you can forecast your income better.
Are commercial mortgages insured?
For the most part, CMHC is not used for commercial real estate financing. On the commercial side, we have the federal government’s National Housing Strategy which CMHC executes. If you’re financing an affordable rental project, that’s where CMHC would get involved. But if you’re buying a $1-2 million retail unit or light industrial strata property, the banks and credit unions don’t use CMHC insurance.
When does a property convert from residential to commercial loans?
The magic number is between 4-6; every lender has it a little different. Residential mortgage rates are a little bit lower than the standard commercial rates. We work with our clients to find the best situation for them.
Can I do flips in commercial real estate? How does the financing work for commercial renovation projects?
This is where some of the complication comes in. For most lenders, they like to finance commercial investment properties that have income in place. When you’re doing a value-add project, that adds complexity to the transaction. It’s a repositioning play and we usually use bridge loans to support them.
It’s a two step process. Step one is we get you 12-24 months of bridge financing until you’re at a place where the property is stabilized with new income in place. Step two: We refinance with one of the other banks or credit unions who want a stabilized project.
Every lender has their own sweet spot. We stay in touch with all the lenders so we know how to get this done. It’s competitive out there and you have to move quickly. We want to be efficient with no surprises.
We’re seeing 2% mortgage rates for residential lending. How does that translate to commercial real estate?
You just add an extra 1% to it. The best commercial rate is usually 1% higher than the best residential rate. But every lender is different and so is every commercial asset class.
What’s the difference between having Starbucks as my tenant vs Cory’s Coffee Shop, who pays his rent 15 days late? How much attention does the bank put on the strength of the tenant and has that differed post-pandemic?
All things being equal, they are putting much more emphasis on the type of tenant post-pandemic. But depending on the location of the property, you’ll have different lenders who like different things. Your money can go a lot farther in some of these other areas outside of Vancouver, and you can get great financing.
How long does it take to underwrite a deal and approve financing?
Covid has been a challenge and approval timelines have increased by about a week. It takes longer to get the communication going.
With residential real estate, you can get a pre-approval because your income is relatively stable. But on the commercial side, the property is different, the rent rates are different, the tenants are different, etc. We work with our clients to get a pre-qualification; it’s not a pre-approval but it looks at the individual’s situation and their appropriate range.
After a property is under contract, we strive for 30 days. In that time you need the appraisal, environmental report, and possibly a building condition report. So we aim for 30 day subjects for financing. Sometimes we need 40 days depending on the complexity.
We work well with our commercial real estate partners and it’s really a team effort to bring all the unknowns into clarity for the client so we can move quickly within the subject period.
How much does the location affect lending?
Everything is so robust in BC right now that we can find a lending solution for most types of properties, regardless of the location. If you’re financing a large transaction in the city of Vancouver, there’s a certain kind of lender who will be right for that. In a smaller area with a smaller mortgage, it’ll be a different lender. You just have to find the right lender for you.
Is there a region in BC most people are focusing on?
The interior is really popping. It’s easy to do business in Kelowna. But so much has changed that the demand is now exceeding the supply. Other areas we like include Langford, Nanaimo, Vernon and Penticton. We’re seeing a lot in the Fraser Valley, Southern Vancouver Island and the Interior.
If I’m a business owner who is sick of being a tenant, what is the opportunity for an owner-occupier?
On the residential side, CMHC comes in to help people get into homes. On the commercial side, there are programs designed to help entrepreneurs secure their own properties. This allows entrepreneurs to use an operating business’s income to support a higher mortgage amount.
For an investment property in Vancouver, let’s say an investor would have to put down 40% of the purchase price for a down payment. For business owners, there are programs to get 80-100% of the property purchase. It depends on the cash flow of the business and if it can support a higher mortgage amount. This has been one of the single biggest generators of wealth for smaller businesses in the last five years.
What advice do you have for people entering into commercial real estate?
There’s an entrepreneurial aspect to commercial real estate and you need support. You don’t need to know everything. Build your team. Start with a commercial real estate adviser. Layer in your commercial mortgage broker, your accountant, your insurance agent, your lawyer, etc. Once you have 5-6 people on your team who are working to get you the right property, good things are going to happen.
Find out more https://www.impactcommercial.ca/