How industrial property financing works

1. Debt service coverage ratio (DSCR)

DSCR answers one question: does the income comfortably cover the mortgage payments? It divides the property's annual net operating income (NOI) by the annual principal and interest payments.

• NOI is rental income minus vacancy allowance and the operating costs the landlord actually bears. On a net lease where tenants pay taxes, insurance and maintenance, landlord costs may be small; on a gross lease they are larger.
• A ratio above 1.0 means income exceeds payments. Lenders require a cushion above 1.0, and the size of that cushion varies by lender, property and tenancy.
• Lenders usually re-calculate NOI themselves, applying their own vacancy, management and structural reserve assumptions. That's why the same building can produce different DSCR results with different lenders.
• Some lenders test DSCR at a stress or qualifying rate rather than the contract rate.

For owner-occupied buildings there is no third-party rent, so lenders instead look at the operating business's cash flow, often using EBITDA-style measures from financial statements, and its ability to service the mortgage alongside its other debts.

2. Loan-to-value (LTV)

LTV is the mortgage amount divided by the lender's view of the property's value, usually based on an independent appraisal commissioned for the lender.

• Lenders apply a maximum LTV set by their own policy. That maximum varies by lender type, asset type, location, tenancy and borrower strength.
• On a purchase, value is typically the lower of the purchase price and the appraised value.
• Industrial appraisals often consider the income approach (capitalizing NOI), the direct comparison approach (recent sales of similar buildings) and sometimes the cost approach.
• The final loan amount is usually the lowest result of the LTV test, the DSCR test and any other policy limit. A strong DSCR doesn't help if LTV is the constraint, and vice versa.

3. Amortization & term: how it differs from residential

Amortization is the total period over which the loan would be fully repaid; the term is how long the current contract and its rate last before renewal or repayment.

• Commercial amortizations are commonly set file-by-file rather than by standard product rules, and may be tied to the building's age, condition and remaining economic life.
• Some commercial terms are shorter than the amortization, leaving a balance due at maturity that must be renewed or refinanced.
• Commercial mortgages frequently carry prepayment restrictions: closed terms, yield maintenance-style penalties or limited prepayment privileges, that differ from consumer residential products.
• Commercial mortgages are generally not covered by residential consumer rules such as standardized stress tests or insured-mortgage amortization caps.
• Lenders may include ongoing reporting covenants: annual financial statements, rent rolls or minimum DSCR maintenance.

4. Owner-occupied vs. investor / leased industrial

Single-tenant buildings concentrate risk on one tenant; multi-tenant buildings spread it but involve more turnover and management. Lenders view each differently.

5. Tenant covenant strength

For leased industrial property, a lender is effectively lending against the tenant's promise to pay rent. "Covenant" describes how reliable that promise is. Lenders commonly consider:

• The tenant's size, financial statements and history: and whether there is a parent company or guarantor behind the lease.
• Remaining lease term relative to the mortgage term, and any early termination rights.
• Rent versus market: above-market rent may not be sustainable on renewal; below-market rent may represent upside.
• Lease structure: net vs. gross, responsibility for roof and structure, and recoveries.
• Re-leasability: how quickly the space could be filled if the tenant left, which ties back to building function and location.

6. How clear height, loading & power factor into value

Industrial buildings are judged by function. Appraisers and lenders consider the features that determine how many types of occupiers could use the space:

• Clear height: the usable height under the lowest obstruction. Greater clear height allows more vertical racking and appeals to modern logistics users; lower clear heights narrow the tenant pool for some uses.
• Loading: the number and type of truck-level and drive-in doors relative to building size, dock equipment, and the depth of the truck court for trailer maneuvering and parking.
• Power: electrical service capacity matters for manufacturing, cold storage and automated facilities.
• Sprinklers, column spacing, floor load and office ratio: each affects flexibility. A very high office component can make a building behave less like industrial in a lender's eyes.
• Site coverage, outside storage and access: yard space and proximity to highways are prized in the GTA.
• Age, condition and environmental history: roof, building systems and past uses feed into condition and environmental reports.

7. Lender types: conventional, CMHC and alternative

• Chartered banks: often favour established borrowers and stabilized properties; may want a broader banking relationship.
• Credit unions: can be flexible on certain files, with lending policies and limits that vary by institution.
• Insurance company and pension-backed lenders: typically focus on high-quality, well-leased assets and longer terms, with stricter prepayment terms.
• Mortgage investment corporations (MICs) and private lenders: used for speed, transitional properties, vacancy, complexity or borrower challenges; generally higher cost, shorter term and require a clear exit plan.
• CMHC-insured programs: focused primarily on multi-unit residential rental housing. Pure industrial property is generally financed through conventional or alternative commercial lenders rather than CMHC insurance; eligibility rules change and should be confirmed case by case.

8. The application & underwriting process

1. Pre-screen: summary of the property, borrower, request and timeline.
2. File package: financials, leases, property details, ownership structure and guarantor information.
3. Lender review: lenders assess fit and issue indicative terms, letters of interest or term sheets.
4. Commitment: a formal commitment sets out amount, rate, fees, conditions and covenants once accepted.
5. Due diligence: appraisal, environmental site assessment, building condition report, title, zoning and insurance review.
6. Credit committee: many lenders take larger or more complex files to an internal committee for final sign-off.
7. Legal & funding: lawyers prepare security documents, conditions are satisfied and funds are advanced.

Ready to see how this applies to your building? Read about purchase financing or refinancing & renewal.