Commercial Mortgages Explained: How Lenders Underwrite the Property

Watch: Commercial mortgages in 1:55

The short version

• Commercial lenders underwrite the property's income first, then look for a covenant behind it.
• Net operating income is gross rent less vacancy and operating costs — the mortgage payment is not deducted.
• Debt service coverage (NOI ÷ annual payments, typically around 1.25x) usually caps the loan amount.
• Value is NOI ÷ cap rate, so improving income raises both your borrowing power and the building's worth.

Full video script, scene by scene

Narration, on-screen text and animation direction exactly as produced.

1. Scene 1 · 0:00–0:12

   Cold open: the building is the borrower

   Narration: In residential lending, the lender underwrites you. In commercial lending, the lender underwrites the building. Once you understand that shift, everything else about commercial financing makes sense.

   On screen: Residential: they lend on you. Commercial: on the income.

   Animation: A residential house and a small apartment building sit side by side. A magnifying glass moves from the person outside the house to the rent roll inside the building.

2. Scene 2 · 0:12–0:36

   Net operating income

   Narration: It starts with net operating income. Take the building's realistic gross rent, subtract a vacancy allowance, then subtract operating costs — property taxes, insurance, utilities, management, maintenance and repairs. What remains is net operating income. Note what is not subtracted: the mortgage payment. NOI describes the property's earning power before financing.

   On screen: NOI = rent − vacancy − operating costs (not the mortgage)

   Animation: Rent flows into a funnel. Vacancy, property taxes, insurance, utilities, management and repairs are subtracted in sequence. What emerges is labelled NOI. A mortgage payment card is held back, outside the funnel.

3. Scene 3 · 0:36–1:02

   Debt service coverage decides the loan size

   Narration: Now divide net operating income by the annual mortgage payments. That ratio is debt service coverage, and it, not your income, usually caps the loan. Most commercial lenders want somewhere around one-point-two-five, meaning the building earns twenty-five percent more than the mortgage costs. Push the loan higher and the ratio falls; when it approaches one, the lender stops. This is why raising rents or trimming operating costs can increase your borrowing power more than a bigger down payment.

   On screen: DSCR = NOI ÷ annual debt payments — target ~1.25x

   Animation: A scale with NOI on one side and annual mortgage payments on the other. A dial reads 1.25x. As the loan grows, the dial falls toward 1.0 and turns red.

4. Scene 4 · 1:02–1:24

   Cap rates and value

   Narration: The same NOI sets the building's value. Divide net operating income by the market capitalization rate for that asset type and location, and you get value. So a lease-up, a rent increase or a cost reduction does two things at once: it raises what you can borrow and it raises what the building is worth. It also works in reverse, which is why lenders scrutinise your rent roll and your assumptions.

   On screen: Value = NOI ÷ cap rate

   Animation: NOI divided by a cap rate percentage produces a value figure. The cap rate dial turns and the value figure moves inversely.

5. Scene 5 · 1:24–1:44

   Programs and paperwork

   Narration: For apartment buildings of five units and up, CMHC-insured programs including MLI Select can deliver longer amortizations and better pricing where the building meets affordability, energy efficiency or accessibility criteria. Conventional and private commercial financing move faster with fewer conditions and cost more. Either way, expect the same package: rent roll, leases, two years of operating statements, an appraisal, an environmental report, and a personal net worth statement — because lenders still want a covenant behind the building.

   On screen: 5+ units → CMHC / MLI Select. Faster → conventional or private.

   Animation: Two lanes: an insured CMHC lane with a longer amortization and lower rate, and a conventional lane. Beside them a document stack: rent roll, leases, two years of statements, environmental, appraisal, personal net worth.

6. Scene 6 · 1:44–1:55

   Close

   Narration: Bring a lender-ready file: clean numbers, defensible assumptions, and a plan for the building. Deals stall on missing documents far more often than on rate.

   On screen: Clean numbers beat clever arguments. FSRA #10874

   Animation: The building's numbers assemble into a clean one-page summary titled Lender-ready. Logo and licensing lock-up.

Questions people ask about commercial mortgages