A few things to consider for your upcoming commercial mortgage renewal

Commercial mortgage renewal: do it right for maximum benefit

1. Start early

I would suggest at least 4 – 6 months in advance of the mortgage maturity, depending on your circumstances, this lead time is necessary to keep your options open. You will need time to:

• Consider your strategic corporate borrowing needs;
• Prepare paperwork and documentation necessary for the renewal;
• Commercial lenders will need extensive lead time to consider new loans and, lately, even need time to coordinate renewals;
• You may need additional time to narrow down your selection of lenders based on negotiations on lending terms;
• Consultant reports (e.g. appraisals, engineering, and property assessments and environmental) take 1 or 2 months to complete and must be done prior to closing; and
• The legal paperwork will take some time to prepare and are dependent on lawyers busy schedules.

2. Considering corporate needs for the renewal terms

As well as ascertaining the amount of the commercial mortgage renewal it will be necessary to strategically consider whether you would prefer short or long-term financing or fixed and/or variable rate financing. Some of the items to be factored into this decision are: 

• The likelihood of a sale of the property;
• Upcoming major expenditures (e.g. leaseholds, capital improvements) for the property or for other corporate needs;
• The expectation for future interest rates and/or availability of capital in the capital markets for your type of financing.

The goal here is to define as closely as possible aspects of your corporate borrowing needs.

3. Preparing documentation and other analysis

All lenders require due diligence documentation and depending on whether this is a new lender or the existing lender, some, or all, of the following documents may be required. Note, it is generally useful to have these filed electronically since all lenders (and most lawyers) will accept and appreciate documentation in this fashion:

• A summary of the current mortgage maturity date, amount and terms;
• A copy of all current leases, lease amendments, recent lease renewals, offers etc.;
• Rent roll summary(s);
• Financial statements (at least a few years) for both the borrower and any potential guarantor or indemnifier;
• Budgets for the upcoming year and any capital expenditure forecasts;
• Additionally, it may be necessary (depending on circumstances) to consider the need for preliminary appraisals or environmental or engineering/property assessment reports. Please note, however, that final reports are generally only required after terms have been agreed with the lender of your choice, are expensive and must usually be prepared by only pre-approved consultants of your chosen lender.

4. Considering which lender(s) to approach

The easiest, quickest and least expensive situation will be when you simply wish to renew the existing mortgage with the existing lender at the renewal amount since, in most cases, there will be less consultant reporting, less legal fees (and paperwork) and less lender’s fees.  If, however, it is necessary to substantially increase the mortgage amount and/or materially change some other aspect of the terms of the loan, it maybe wise to approach several (3 – 4) lenders. This can be accomplished in a few ways:

• Approaching lenders with whom you currently already have an existing business relationship (including the existing lender);
• Approaching lenders who have been referred to you as likely sources of funds; or
• Asking a mortgage broker to assist in searching for the appropriate lenders.

You should be aware that, unlike residential lenders, commercial lenders are somewhat more unpredictable. Most commercial lenders focus on only certain types of loans. Therefore, not all commercial lenders may be interested in your mortgage renewal. Example, the size of the loan matters to some lenders and in almost every case, the type of property will be a major consideration.

Since this is the case, serious consideration should be given to hiring a mortgage broker who will have experience in sourcing lenders who are more likely to be interested in advancing funds for your mortgage at competitive rates and at competitive terms. A mortgage broker is also useful in suggesting appropriate terms for the refinancing to best suit your needs. A mortgage broker will, in most cases, tender your loan application to several financial institutions to keep the lending fees and interest rate as competitive as possible. Mortgage brokers do generally charge a fee for their services; however, I have found that in many cases the fee is saved in pay back by lower interest rates and/or lender fees.

5. Getting the mortgage commitment

• The first step will be to meet with your short list of potential lenders and/or the mortgage broker and present your corporate needs from Point 2 above (i.e. amount of loan, desired interest rate, desired term etc.) and your package of information as discussed in Point 3 above.

Once the lenders have reviewed your information they will make a determination if they are interested in lending. Interested lenders will send you a draft Term Sheet which will spell out the following:

• Interest rate(s);
• Fixed or variable components of the loan;
• Length of the term;
• Security requirements;
• Deposit requirements;
• Lenders fees;
• The consulting report requirements.

Please note, that these terms can be further negotiated at this stage. The mortgage broker will be helpful if you have one and it may be useful to involve your corporate lawyer for his/her input.

Once the appropriate Term Sheet has been selected and negotiated with the target lender, the lender will approach their lending committee to get a Commitment Letter based on the Term Sheet.

The Commitment Letter should include most of the agreed terms of the Term Sheet but may have some differences based on requirements of the lending committee. These may need to be further negotiated before final acceptance by both parties. Please also note, that at this stage there will likely be a requirement for a non-refundable deposit (at the term sheet stage any deposit will likely be refundable).

6. Preparing final paper work and consulting reports

Once a Commitment Letter is signed by both parties, you will need to proceed to have your lawyer contact the lender’s lawyer and provide any necessary documents. In most cases, your initial documentation from Point 3 will be useful, but also expect additional requirements. Unless completed beforehand, you will need to coordinate the final consulting reports required by the Commitment Letter. This will include, in most cases, an environmental report, an appraisal and a property assessment report.

On the day of closing or just before, there will be the usual mountain of paperwork to sign such that funds can be advanced, and/or the previous mortgage can be rolled over.

As always, a professionally staffed and trained property manager should be able to help you through most of this process including assembling the required paperwork, selecting a suitable mortgage broker and/or lender and helping in negotiating suitable terms.

A commercial mortgage renewal is an opportunity for you to negotiate better terms for yourself.  So take it seriously, plan and prepare and make it work for you.

Article by: Paul McVeigh – General Manager, Armadale Property Management