How to get financing for commercial renovations

Should I get financing for my commercial renovations?

Unless you just bought a brand-new building, you will likely need to plan renovations while still paying your mortgage. While it can be costly, it is also a good investment. “Anytime you want to improve the value of your asset, renovating your building is the best place to invest your money,” says Mazerolle. “You want to spend on things that will give you the best return on investment when you sell. Oftentimes, it’s electrical heating, improving the kitchen where your staff works or meetings spaces.”

It also makes sense to borrow: The new setup will last years, so you can pay off the loan over a fairly long period.

Whom should I borrow from for commercial renovations?

There are essentially two possible paths to obtain financing for renovations.

Regardless of the one you choose, take a close look at the terms and conditions of the loan, and see how much flexibility it offers. Are you comfortable with the amortization period? Would you be able to postpone payments in a cash crunch?

1. Talk to your mortgage lender

Your first conversation should be with the lender that financed your commercial real estate purchase, especially if you are still paying off the loan, Mazerolle says. They know you as a client and hold your property as security for the mortgage, making new loans easier to approve.

Some banks, including BDC, offer readvanceable mortgages that let you borrow the principal you’ve already paid back without taking new mortgage security. If the original financing was for $2 million and $1 million has been paid off, you could borrow up to another $1 million for renovations under the existing mortgage, Mazerolle says.

“Commercial property buyers should be asking for readvanceable mortgages,” she says. “These are the best tools.”

2. Consider changes to your mortgage

Conversely, other institutions will be reluctant to lend you money precisely because they can’t seize your real estate if you don’t make your payments, she says. That is likely to change if you bring them onto your mortgage.

“From my perspective in small lending, I’m not going to lend you money to improve a building that someone else financed and could seize in case of a problem,” Mazerolle says. “But is there room for me to place a second mortgage on the property for which I would provide renovation finance?”

A second mortgage will give both lenders access to your property as collateral. Another option is for a new lender to take over the mortgage entirely.

What documents do I need to prepare for commercial renovation financing?

Most financial institutions will ask for the following documents:

• Company details: Information about your company’s history, current operations, strategy and management team experience.
• Financial statements: Banks typically review financial statements to understand a company’s financial health, profitability and capacity to repay debt. For larger loans, statements are needed for the past two years, along with interim statements comparing the latest period with the same period in the previous year. 
• Financial projections: Banks typically require a monthly cash flow forecast for the remainder of the current year and the following 12 months. In some cases, two years of projections may be requested.
• Personal finance information: Lenders may request more information to evaluate your net worth or ask about your credit score.
• How you’ll use the loan: Give details about the project or plans for using the financing and exactly how it will help your business.
• An official quote from the contractor: Keep in mind that the final bill is likely to be higher than the original quote. Costs routinely exceed estimates in construction work.

Issues to watch for in a commercial renovation project

Don’t skimp on the research when shopping for contractors: Check their history of completing projects and make sure they give you a firm quote. Understand how changes to the original plans will affect the costs—whether its switching paint colour or buying different electrical equipment.

“Always build contingency into any construction project,” Mazerolle says.

Take time to understand the rules. As the owner, you can hold back a percentage of the overall payment until the renovation is completed to specification. Do you know the amount and the period it covers?

Also pay attention to guarantees and what they cover. Depending on where you live, the quality of construction material may vary, Mazerolle warns.

Is a loan for a renovation different from a loan for a new construction?

A major difference between a renovation and a new construction loan is the amortization period, which is tied to the useful life of what you are borrowing for.

Commercial properties demand a fresh coat of paint or more substantial renovation every five to seven years, so the loan duration is going to match that period, Mazerolle says. A new construction loan, in contrast, can be paid back over 20 to 30 years.

Can I get financing for leaseholding improvements?

Even as a renter, it’s normal to want to remodel your space to optimize the experience for clients and customers. While leasehold improvements are regularly financed by lenders, Mazerolle says the terms of the lease and support from the building owner will make all the difference.

“The most important thing is to know your landlord. Are they cooperative? Are they helpful?” she says.

Ask your landlord if they would be able to invest by your side in the form of a landlord inducement. These are a dollar value per square foot that landlords can offer to build out the space to your specification. They are more common in new buildings. Having such a commitment from your landlord is gold when applying for a loan, Mazerolle adds.

Lenders will also scrutinize the length of your lease to make sure the term is commensurate with the useful life of the work that’s being done. If the loan comes with an eight-year amortization period, the lease should be at least that long. The last thing you want is to invest tens of thousands of dollars in a place you will be asked to leave in a year.

Next step

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