Commercial mortgage roadmap
Commercial financing, mapped.
From defining the deal to reading the statements, sizing the loan and staying on side of your covenants. Eight stops for owners and investors in Ontario.
Stop 1 of 8, Spring
Define the deal
Commercial financing starts with the deal itself. Lenders look at what you're doing, the property type, how long you plan to hold it and how you'll eventually repay or refinance.
- Acquisition, refinance, construction or a bridge to stabilization.
- Property type: multifamily, retail, office, industrial, mixed-use or owner-occupied.
- Your hold period and exit: sale, refinance or long-term ownership.
- Who the borrower is: you personally, a corporation, or a partnership with guarantors.
What a lender focuses on
- Purchase price versus appraised value
- In-place income and lease terms
- Your equity and where it comes from
- Your experience with similar properties
Illustrative. Every lender has its own criteria for each deal type.
Stop 2 of 8, Spring
Reading your balance sheet
A balance sheet is a snapshot of what a business or borrower owns and owes on a given date. Lenders use it to judge financial strength and how much of the business is funded by debt.
- Assets: cash, receivables, property and equipment.
- Liabilities: mortgages, loans, payables and other obligations.
- Equity: what's left for the owners. Assets always equal liabilities plus equity.
- Lenders watch liquidity (cash on hand) and leverage (debt compared with equity).
Assets = liabilities + equity
- Assets
- $26,100,000
- Liabilities
- $16,700,000
- Equity
- $9,400,000
Debt-to-equity: 1.78. Lower means less of the business is funded by debt.
Simplified example. Real statements break these down further, and lenders review two to three years of them alongside your personal net worth.
Stop 3 of 8, Summer
Reading a profit and loss statement
The profit and loss statement (income statement) shows how a business performed over a period. Lenders read it to understand how reliable the cash flow is that will service the debt.
- Revenue, less operating expenses, gives operating income (often close to EBITDA).
- Interest, depreciation and taxes then reduce it to net income.
- Depreciation is a non-cash expense, so lenders often add it back when assessing cash flow.
- Two or three years of statements show whether results are stable, growing or declining.
From revenue to the bottom line
Revenue$3,600,000
Operating income (about EBITDA)$900,000
Pre-tax net income$460,000
Simplified, before income tax. Lenders typically review two to three years and ask about one-time items.
Stop 4 of 8, Summer
The property's income: NOI and cap rate
For income-producing property, the building's own income matters as much as the borrower. Net operating income (NOI) and the capitalization rate connect that income to value.
- NOI = rental and other income, less vacancy and operating expenses, before debt payments.
- Cap rate = NOI divided by value. It reflects the market's view of risk for that asset.
- A lower cap rate means a higher value for the same NOI, and vice versa.
- Lenders and appraisers apply their own vacancy, expense and reserve assumptions.
Net operating income, then value
Taxes, insurance, utilities, repairs, management.
Gross potential rent$2,100,000
Less vacancy (5%)$1,995,000
Net operating income$1,440,000
Indicated value (NOI ÷ cap rate)$24,000,000
Illustrative. Cap rates vary by property type, location, quality and market conditions. Appraisers set the value a lender relies on.
Stop 5 of 8, Autumn
How much a lender will lend
Commercial loans are sized by two tests at once: loan-to-value (LTV) and debt service coverage (DSCR). Whichever produces the smaller loan usually sets the amount.
- LTV caps the loan at a percentage of the appraised value.
- DSCR caps annual debt payments at NOI divided by the lender's minimum ratio.
- Rate, amortization and the qualifying rate all change the DSCR result.
- Each lender and program sets its own limits.
Two tests, one loan amount
Loan by LTV (75% of value)$18,000,000
Loan by DSCR (1.25x)$16,109,598
Indicative loan, limited by DSCR$16,109,598
Illustrative. Uses Canadian semi-annual compounding at the rate entered; lenders may size on a higher qualifying rate, with their own NOI, amortization and limits.
Stop 6 of 8, Autumn
Who lends on commercial property
Different lenders suit different deals. The right one depends on the asset, the size, the borrower's strength and how much flexibility the deal needs.
- Banks and credit unions: relationship lending, often with recourse and covenants.
- Life insurance companies and pension lenders: long terms for stable, high-quality assets.
- CMHC-insured multifamily programs: longer amortizations for eligible rental buildings.
- Private and mezzanine lenders: speed and flexibility, at a higher cost.
Matching the deal to the lender
Relationship-driven lending, often with personal or corporate guarantees, financial covenants and shorter terms.
Longer terms and competitive pricing for stable, well-located, high-quality assets, usually with stricter criteria.
Insured programs for eligible rental buildings of five or more units, which can allow longer amortizations and higher leverage.
Speed and flexibility for transitional or complex deals, at a higher cost and usually for a shorter term.
General descriptions only. Availability, terms and appetite change with the market and the specific deal.
Stop 7 of 8, Winter
Term sheet and due diligence
Once a lender issues a term sheet, the deal moves into due diligence. Organized documents keep timelines on track and avoid surprises late in the process.
- Appraisal and, where required, environmental and building condition reports.
- Rent roll, leases and tenant estoppel certificates.
- Zoning, permits, title, survey and insurance.
- Borrower and guarantor financial statements and net worth.
Due diligence tracker
3 of 8 items complete
Typical items only. Each lender and deal sets its own conditions.
Stop 8 of 8, Winter
Commitment, closing and the years after
The commitment sets out covenants, guarantees, reporting and fees. After funding, the loan is monitored, so planning for reporting, covenant tests and maturity starts on day one.
- Covenants such as a minimum DSCR or maximum LTV, tested over the term.
- Personal or corporate guarantees, and what they cover.
- Annual financial statements and rent rolls sent to the lender.
- Renewal or refinance planning well before maturity.
After funding: covenant tests
- CommitmentTerms, covenants, fees
- LegalSecurity, guarantees
- FundingConditions cleared
- Every yearStatements and rent roll
Annual debt service: $1,152,000
DSCR 1.25x: covenant met.
Illustrative covenant: minimum DSCR of 1.20x tested annually on reported NOI. Actual covenants are set in each commitment.
Funded. Now let's keep it that way.
Bring the deal, the statements and the rent roll. We'll start with how a lender will read them.
Book a Mortgage ConsultationThis roadmap is general information about commercial mortgage financing in Ontario. It is not investment, accounting, legal or tax advice, and it does not assess whether any property is a suitable investment. Every example is illustrative; lenders apply their own underwriting, valuations and limits. Qualification depends on lender underwriting. Rates, terms, fees and penalties vary by lender and are subject to change. Examples are illustrative only and are not a commitment to lend.