Mortgage Financing Basics
by Alnoor Jiwa, Mortgage Consultant
The Mortgage Store – BC
With historically low capitalization (Cap) rates financing apartment buildings can be a very challenging endeavor. Whether you are looking at financing a building purchase or simply refinancing or renewing an existing mortgage, below we are some points to help secure the right mortgage for your apartment building:
- Rent Roll
All lenders require a current rent roll which should show a minimum of tenant name, suite number, move-in date and rent amount. If parking, storage or other fees are charged they should also be showed as a separate item on the rent roll.
- Building Operating Statements
This is an annual statement which captures the actual gross rents for the year along with all the expenses pertaining to the operations of the building. Typically a minimum of two years of operating statements are required by Lenders. Items such as vacancy allowances, mortgage interest expense or building amortization should not be included in an operating statement. Lenders look for the actual cash flow generated by the building.
- Company/Ownership Financial Statements
These are accountant prepared financial statement of the legal entity that holds title of the property. Once again a minimum of two years of statements are required by most Lenders.
- Personal Net Worth Statement (PNW)
This is a statement that outlines in detail the assets and liabilities of each of the shareholders/owners of the company that owns the building. If the shareholder of the legal entity is another company then financial statements of that company are required along with PNW statements of each of its shareholders.
CMHC vs Conventional Financing
Most apartment buildings are financed under the CMHC mortgage insurance financing program. However this program may not be the best option for some as desired loan amounts may not be achieved due to the strict underwriting rules and guidelines used by CMHC. However it can be the most cost effective way to finance apartment buildings.
The approval process can begin once all of the above noted documents have been gathered and you have in conjunction with your Mortgage Consultant determined your best mortgage option. This is a process that can take up to eight weeks given the timing of the year, nature of the property and the relative size and complexity of the overall application. Typically one should allow four weeks after all the necessary paperwork and reports have been submitted with the application. Upon receipt and acceptance of a Lender`s commitment for financing a deposit or commitment fee is required to be paid to the Lender so that a rate may be secured on your behalf. Once your deposit fee has been submitted you may book the prevailing interest rate.
Closing and Legal Work
Once your rate has been booked the Lender will instruct their Lawyer to prepare the necessary legal mortgage documentation which is to be sent to your Lawyer for execution. All mortgages have funding conditions that have to be satisfied prior to the Lender releasing the funds. Therefore it is important to know and understand these conditions so that you are able to assist your lawyer satisfy these conditions.
As a condition for providing mortgage financing many Lenders will require building reports prepared by external consultants such as Appraisals, Environmental Assessments and Building Structural or Engineering Assessments. These report requirements will depend on the age, condition of building and regulatory requirements. An experienced mortgage consultant specializing in commercial real estate financing is your best source for advice on rates and the process required to secure the best mortgage for your property.