Sunny and cold in Victoria today, feels like snow is on the way...
Quick update on interest rates... B of C held steady earlier this week and with most signs pointing to a sluggish "Possible" recovery in the US and the strength in the Canadian Dollar the most likely scenario for interest rates in Canada is "Status Quo" for the foreseeable future. This implies the best mortgage strategy continues to be a variable rate, (Prime - .25% Residential, Prime + 1.25% Commercial) with a lender who has a competitive 5 year fixed rate (imho).
Canada Bonds
5 yr - 2.47%
10yr - 3.32%
Cheers,
D
View all of my commercial real estate listings on-line at www.naivictoria.ca
Thursday, December 10, 2009
Thursday, December 3, 2009
Business Owners Purchasing Real Estate
I wrote this simple article for the Real Estate Board Briefs, fairly surface but might steer you in the right direction none the less. I can be contacted at david@naicommercial.ca if you have any questions...
Commercial Property Financing for Business Owners
by David Brumby, NAI Commercial (Victoria) Inc. and member of the Commercial Division
Many of us have clients who own their own business and are tired of paying rent. They would like to enjoy the benefits of property ownership as they have every confidence in their continued success.
This however is a substantially different financing process than that for a revenue producing commercial property. Often small businesses try to show as little profit as possible for tax and income reasons. However, this unfortunately creates a significant issue with regards to debt servicing which may be difficult to surmount. At least one fiscal year in advance, these borrowers should consult an accountant to discuss preparation for purchasing commercial property.
As the business typically will occupy the majority of the property, if not all, its ability to service the debt will be of paramount importance. A detailed history of the business financials must be provided as well as the usual personal financial information package required to obtain financing. The lender will be looking for enough “provable income” in the financial statements to support the mortgage payment and property tax. This income can come from a few different sources such as current rent, current operating cost charges and Business Net Income. Your client may wish to claim a number of “expenses” to be added back into the Net Income but this is the type of game which most lenders are no longer willing to play.
Given today’s economic situation, securing financing is much more time-consuming. The information required is extremely detailed and must include not only a full information package on the property, its economic viability, the quality of tenant, etc. but also a full information package on the borrower (the Business) and the principle(s) of the Business.
It is important to be sure the borrower is seeking financing from a lending institution which is applicable for their specific situation. This of course is not always easy to discern. There are lending institutions that have programs which are tailored to this exact type of lending however, these institutions are frequently not where your client does their Business banking.
Most business owners would love to own their own building and in most cases, it is more achievable than one would think. It takes planning, likely a different accounting strategy than is currently being employed and an understanding of how all the factors are considered by a given Lending Institution.
Cheers
View all of my commercial real estate listings on-line at www.naivictoria.ca.
Commercial Property Financing for Business Owners
by David Brumby, NAI Commercial (Victoria) Inc. and member of the Commercial Division
Many of us have clients who own their own business and are tired of paying rent. They would like to enjoy the benefits of property ownership as they have every confidence in their continued success.
This however is a substantially different financing process than that for a revenue producing commercial property. Often small businesses try to show as little profit as possible for tax and income reasons. However, this unfortunately creates a significant issue with regards to debt servicing which may be difficult to surmount. At least one fiscal year in advance, these borrowers should consult an accountant to discuss preparation for purchasing commercial property.
As the business typically will occupy the majority of the property, if not all, its ability to service the debt will be of paramount importance. A detailed history of the business financials must be provided as well as the usual personal financial information package required to obtain financing. The lender will be looking for enough “provable income” in the financial statements to support the mortgage payment and property tax. This income can come from a few different sources such as current rent, current operating cost charges and Business Net Income. Your client may wish to claim a number of “expenses” to be added back into the Net Income but this is the type of game which most lenders are no longer willing to play.
Given today’s economic situation, securing financing is much more time-consuming. The information required is extremely detailed and must include not only a full information package on the property, its economic viability, the quality of tenant, etc. but also a full information package on the borrower (the Business) and the principle(s) of the Business.
It is important to be sure the borrower is seeking financing from a lending institution which is applicable for their specific situation. This of course is not always easy to discern. There are lending institutions that have programs which are tailored to this exact type of lending however, these institutions are frequently not where your client does their Business banking.
Most business owners would love to own their own building and in most cases, it is more achievable than one would think. It takes planning, likely a different accounting strategy than is currently being employed and an understanding of how all the factors are considered by a given Lending Institution.
Cheers
View all of my commercial real estate listings on-line at www.naivictoria.ca.
Interest Rate Outlook in December
Hello again, suns shining here in Victoria although a touch cold at 3 degrees celcius...good excuse to pick up a fedora and scarff...
Notable interest rate action the past few weeks. The 5yr and 10yr bond yeilds have been falling since hitting recent highs October 15th of 2.88% and 3.55% respectively. Yesterdays close for the 5yr was 2.39% and 3.55% for the 10yr, both rates are falling again today.
This drop is showing up in mortgage rates, the best 5yr fixed is creaping below 4.00%and the best 10yr fixed is back around 5.35%. The variable rate has broken the Prime (2.25%) level and we're now seeing Prime -.10%.
Commercial rates are moving down as well, best 5yr fixed I've seen is around 5.10% and the best 5yr variable around Prime + 1.00%. Of course every commercial deal is different with several factors influencing the final interest rate but I think it's clear rates have dropped...
My feeling is rates will likely remain down longer than anticipated and a variable rate mortgage with a Lender possessing a competitive 5yr fixed rate is the way to go...
Hope you all enjoy the Season...
View all of my commercial real estate listings on-line at www.naivictoria.ca.
Notable interest rate action the past few weeks. The 5yr and 10yr bond yeilds have been falling since hitting recent highs October 15th of 2.88% and 3.55% respectively. Yesterdays close for the 5yr was 2.39% and 3.55% for the 10yr, both rates are falling again today.
This drop is showing up in mortgage rates, the best 5yr fixed is creaping below 4.00%and the best 10yr fixed is back around 5.35%. The variable rate has broken the Prime (2.25%) level and we're now seeing Prime -.10%.
Commercial rates are moving down as well, best 5yr fixed I've seen is around 5.10% and the best 5yr variable around Prime + 1.00%. Of course every commercial deal is different with several factors influencing the final interest rate but I think it's clear rates have dropped...
My feeling is rates will likely remain down longer than anticipated and a variable rate mortgage with a Lender possessing a competitive 5yr fixed rate is the way to go...
Hope you all enjoy the Season...
View all of my commercial real estate listings on-line at www.naivictoria.ca.
Wednesday, September 30, 2009
Interest Rates
Just a quick note, interest rates seem to be continuing to fall. As of this posting, the best 5 year fixed residential rate I've seen is 3.65%...Commercial 5 year rates are hovering around 5.50% - 5.65% depending on the institution...
Pretty nice fall day here in Victoria BC, I hope they keep coming since I've let the summer slip away from me....
Cheers
Pretty nice fall day here in Victoria BC, I hope they keep coming since I've let the summer slip away from me....
Cheers
Thursday, September 17, 2009
TODAY’S COMMERCIAL FINANCING MARKET
One of the most important aspects of purchasing commercial property, more so now than ever, is the ability of the Purchaser to secure mortgage financing. With the development and spread of the “Credit Crisis” over the past 18 months, several challenges have emerged, or re-emerged depending on how far back in time you go.
One of the most significant developments in the commercial financing world is the disappearance of “Equity Lending” at higher loan to values and at the lowest interest rates. Equity Lending is generally recognized as the mortgagee lending against a property based on it’s perceived value typically arrived at via an appraisal. The Lender would accept the property’s value being based on the “theoretical” economic rent it could generate, regardless of the actual economic rent it was currently generating. This seemed reasonable so long as the Borrower could substantiate the ability to service the debt and property values were rising.
In today’s financing world this no longer exists. In general, Loan to Value (LTV) ratios have not only decreased to 65% - 70%, they are used in conjunction with the economic rent the property is CURRENTLY generating. Lending institutions are now doing their own valuation of the property by applying a “capitalization rate” acceptable to them to a proven Net Income stream which they have discounted heavily for vacancy and quality of Tenant.
Example:
The Borrower purchases a building for $1,538,000 generating Net Income of $100,000 which equates to a 6.5% Cap. Rate. The Lender feels comfortable with a 7% cap rate, which when applied to the income stream produces a value of $1,428,000. All things being equal, the Lender agrees to a Loan to Value of 70% of the Lender’s value, not the Purchase Price. As a result, the Borrower must come up with the additional $110,000 cash because the Lender has based the mortgage value on the $1,428,000, NOT the purchase price of $1,538,000.
Borrower: Net Income $100,000
Cap Rate 6.5%
Purchase Price $1,538,000 ($100,000 / 6.5%)
Lender: Net Income $100,000
Cap Rate 7%
Property Value $1,428,000 ($100,000 / 7%)
Mortgage: 70% of $1,428,000, NOT the purchase price of $1,538,000.
Furthermore, Lenders have increased the amount by which they discount the Net Income stream for the purpose of Debt Servicing. This measure is called a Debt Coverage Ratio (DCR) which has been increased in general to 1.25 from 1.10. This means the amount of proven Net Income which is used to service the debt is being reduced by approximately 25% instead of 10% for the purpose of paying the monthly mortgage payment.
Example:
Net Income $100,000
DCR 1.10
Debt Servicing $’s $90,900 ($100,000 / 1.10) annually, $7,575.00/month
Net Income $100,000
DCR 1.25
Debt Servicing $’s $80,000 ($100,000 / 1.25) annually, $6,666.66/month
In essence, the Lenders are reducing the amount of the Net Income they will allow, on paper, to be used for Debt Servicing. This reduction results in a lower mortgage amount being available and a substantially higher cash contribution by the Borrower. Now imagine this scenario playing out when a borrower needs to refinance an existing loan based on the old valuation methods!
One of the most significant developments in the commercial financing world is the disappearance of “Equity Lending” at higher loan to values and at the lowest interest rates. Equity Lending is generally recognized as the mortgagee lending against a property based on it’s perceived value typically arrived at via an appraisal. The Lender would accept the property’s value being based on the “theoretical” economic rent it could generate, regardless of the actual economic rent it was currently generating. This seemed reasonable so long as the Borrower could substantiate the ability to service the debt and property values were rising.
In today’s financing world this no longer exists. In general, Loan to Value (LTV) ratios have not only decreased to 65% - 70%, they are used in conjunction with the economic rent the property is CURRENTLY generating. Lending institutions are now doing their own valuation of the property by applying a “capitalization rate” acceptable to them to a proven Net Income stream which they have discounted heavily for vacancy and quality of Tenant.
Example:
The Borrower purchases a building for $1,538,000 generating Net Income of $100,000 which equates to a 6.5% Cap. Rate. The Lender feels comfortable with a 7% cap rate, which when applied to the income stream produces a value of $1,428,000. All things being equal, the Lender agrees to a Loan to Value of 70% of the Lender’s value, not the Purchase Price. As a result, the Borrower must come up with the additional $110,000 cash because the Lender has based the mortgage value on the $1,428,000, NOT the purchase price of $1,538,000.
Borrower: Net Income $100,000
Cap Rate 6.5%
Purchase Price $1,538,000 ($100,000 / 6.5%)
Lender: Net Income $100,000
Cap Rate 7%
Property Value $1,428,000 ($100,000 / 7%)
Mortgage: 70% of $1,428,000, NOT the purchase price of $1,538,000.
Furthermore, Lenders have increased the amount by which they discount the Net Income stream for the purpose of Debt Servicing. This measure is called a Debt Coverage Ratio (DCR) which has been increased in general to 1.25 from 1.10. This means the amount of proven Net Income which is used to service the debt is being reduced by approximately 25% instead of 10% for the purpose of paying the monthly mortgage payment.
Example:
Net Income $100,000
DCR 1.10
Debt Servicing $’s $90,900 ($100,000 / 1.10) annually, $7,575.00/month
Net Income $100,000
DCR 1.25
Debt Servicing $’s $80,000 ($100,000 / 1.25) annually, $6,666.66/month
In essence, the Lenders are reducing the amount of the Net Income they will allow, on paper, to be used for Debt Servicing. This reduction results in a lower mortgage amount being available and a substantially higher cash contribution by the Borrower. Now imagine this scenario playing out when a borrower needs to refinance an existing loan based on the old valuation methods!
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