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Commercial Mortgage Assumptions: What You Need to Know

March 27, 2023

If you’re in the market to purchase a commercial property, you may come across what’s known as an assumable mortgage. An assumable mortgage means that the purchaser can take over the existing loan when they purchase the property from the seller. Depending on the situation, assuming a commercial mortgage can be advantageous for prospective buyers and sellers.

What is an Assumable Mortgage in Commercial Real Estate?

When you assume a mortgage, you’re not just buying the property but taking on the existing mortgage loan as well, including the remaining principal balance, interest rate and repayment terms. In Canada, there are specific types of commercial mortgages that can be assumed.

If you are unclear if your mortgage is assumable, contact your lender who will inform you.

What Are the Benefits of Assuming a Commercial Mortgage?

With an assumable mortgage, it’s almost like getting a package deal, as you obtain a loan along with your property. In the ideal scenario, there are benefits for both the buyer and the seller with mortgage assumptions.

Here are some of the benefits associated with assuming a commercial mortgage:

Better Mortgage Terms and Rates

Assuming a mortgage may provide a better interest rate than what’s currently available in the market. This is especially useful if the existing loan still has a long-term and/or a lower fixed interest rate.

Cost Savings

Typically, assuming a commercial loan is a faster process that requires less documentation than applying for a brand-new loan, in turn, the lender fees are usually lower as well.

Faster Closing Time

Depending on the type of mortgage assumption, processing can be completed in as little as 3 to 4 weeks.

Higher Marketability

A property with an assumable mortgage that has favourable terms can serve as a great selling point and attract a greater number of potential buyers.

How Assuming a Commercial Mortgage Works

There are essentially two types of commercial mortgage assumptions, (i) straight assumption and (ii) assumption with replacement of covenant.

Replacement of Covenant
Replacement of Covenant

  • When the vendor and the guarantor(s) are looking to be released from the loan.
  • If CMHC insured, CMHC approval is required.

Straight Assumption
Straight Assumption

  • When the existing borrower and guarantor(s) agree to remain as part of the transaction.
  • If CMHC insured, Lender approval is required, but not CMHC.

It’s up to the seller and buyer to decide what type of assumption they want but it is still subject to approval from their lender and, in certain cases, CMHC. For example, if the seller wants a replacement of covenant but their mortgage lender or CMHC does not qualify the new buyer/guarantor to replace the existing guarantor then the replacement of covenant will not be approved. In this case, the buyer can still assume the mortgage, but the existing covenant(s) must be retained.

The type of mortgage assumption proposed will also impact how long the process takes. Once all of the required documents are received, an assumption that does not involve a replacement of covenant may take between 3 to 4 weeks whereas a replacement of covenant can take anywhere from 10 to 12 weeks. Processing times will vary depending on the complexity of the deal and volume of requests.

Documents You’ll Need to Assume a Commercial Mortgage

Documents You’ll Need to Assume a Commercial Mortgage

Since the lender is already familiar with the property when completing a mortgage assumption, there are fewer supporting documents required to complete the deal. Here’s what is needed to start the process:

  • Purchase & Sale Agreement (P&S)
  • Current rent roll
  • Property operating statement
  • Proposed borrower name
  • Proposed borrower’s financial statements for the most recent three years
  • If the proposed borrower is a newly created entity, a copy of the certificate of incorporation and article of association is required
  • Proposed guarantor’s name
  • Proposed guarantor’s financial statements for the most recent three years
  • Proposed borrower’s organizational chart
  • Proposed borrower’s bio including but not limited to real estate experience, types of properties currently owned, number of years experience of industrial and property management, number of units owned, etc.
  • If the proposed borrower is hiring a third party to manage the property, a third-party property management agreement is required
  • Anti-Money Laundering (AML) check must be completed by the proposed borrower before closing
  • Completed Pre-Authorized Deposit (PAD) form from the proposed borrower
  • A completed name change form

When it comes to commercial mortgages, working with an experienced team you can trust can make all the difference. If you are looking to acquire a commercial property and assume the associated mortgage, speak with one of MCAP’s commercial team members to see how we can assist and guide you through the process.

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