Office building financing in British Columbia
The asset class where the leases, not the building, decide the loan.
The short answer
Office is the most conservatively underwritten conventional asset class in British Columbia. Lenders want the widest debt service cushion of any property type, they size the loan against the leases you can prove rather than the space you can show, and the weighted average remaining lease term matters more than the building.
| What the lender looks at | Why | What weakens a file |
|---|---|---|
| Weighted average lease term | The loan has to be repaid out of contracted rent, so a lender is really lending against the leases | Leases rolling inside the mortgage term |
| Tenant covenant | A single strong tenant can carry a building, several weak ones cannot | Month to month tenants, related party leases, no financials |
| Debt service coverage | Office carries the widest required cushion of the conventional asset classes | Sizing against pro forma rent instead of contracted rent |
| Vacancy and inducement cost | Re leasing office space costs money in free rent, commissions and improvements | A budget that assumes space re lets at the same rate with no cost |
Why office is underwritten harder than industrial or rental
Lenders band the required debt service coverage by asset class, and office sits at the top of the conventional range at 1.30 to 1.40 while multifamily sits at the bottom at 1.20 to 1.25. Industrial falls between them. You can see the full set of bands, and what each one does to a loan amount, on the commercial mortgage calculator.
The reason is re leasing risk, not dislike of the asset. Apartment income comes from many households on short leases in a market where the next tenant arrives quickly and the turnover cost is a clean and a coat of paint. Office income comes from a handful of businesses on long leases, and when one leaves the space can sit empty for months and cost real money to fill: free rent, leasing commissions and a tenant improvement allowance before a single dollar of new rent arrives. A wider cushion is how a lender buys itself room for that.
Lease term is the whole conversation
The number that drives an office file is the weighted average remaining lease term, measured against the mortgage term. A lender is reluctant to write a five year mortgage behind leases that expire in year two, because for the back half of the term the security is a building with no contracted income and an owner facing leasing cost. Where the leases roll early, expect a shorter term, lower proceeds, or a structure that sets money aside before it leaves the property.
Renewal options help less than owners expect. An option belongs to the tenant, not to you, so a lender treats it as a possibility rather than as income. Some lenders will give partial credit where the option rent is below market and the tenant has invested heavily in the space, because leaving would be expensive for them, but the base case is the contracted term.
The practical consequence is worth stating plainly. A lease with a strong covenant and a long term is worth more to the file than a slightly higher rent on a short one. Two buildings with identical net operating income can support materially different loans once the lender reads who is paying and for how long.
Strata office is a different file
A strata office unit is a smaller loan against a smaller asset, and the lender is underwriting a corporation you do not control alongside your own unit. Strata documents, the depreciation report, the contingency reserve fund and recent council minutes all go into the file. Some lenders will not go below their own practical minimum deal size, so the shortlist is shorter before anyone has looked at the property.
We cover what a lender reads in those documents, and what stops a file, on the strata and leasehold commercial property page.
Owner occupied office
If your own business occupies the space, the file changes shape. There is no third party rent to underwrite, so the lender reads your business financial statements, the lease between your companies has to sit at market rent, and a federal small business program may be available that an investor cannot use. The mechanics are set out on the owner occupied commercial mortgage page.
What we see go wrong
Three things sink office files more often than anything else. The first is a budget that ignores leasing cost. An owner models the building at full occupancy and forgets the free rent, the commission and the improvement allowance that stand between an empty floor and a paying tenant. A lender will not forget them.
The second is related party leases. Rent you charge yourself, or a lease with a company connected to you, gets discounted or set aside entirely unless it is at market and supported by evidence. The third is the appraisal. An appraiser applying a higher capitalisation rate than the buyer used will land under the purchase price, and the loan follows the appraisal down rather than the contract. The cap rate calculator shows how sensitive value is to that assumption, and what to do when the appraisal comes in low covers the ways those deals still close.
Office financing questions.
Looking at an office building?
Send the rent roll, the leases and the operating statement. We will tell you what the building supports and where the leases limit it.