Author Topic: Commercial Mortgage Renewal Dilemma (Canada)  (Read 1219 times)


  • Pencil Stache
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Commercial Mortgage Renewal Dilemma (Canada)
« on: December 03, 2019, 07:05:51 PM »
A couple years ago I bought a commercial property that needed a ton of upgrades - it was basically a 'distressed' property on the brink of being condemned.  The seller had managed to piss off everyone - bank, town, neighbours, fire department, tenants.  So I got it for a very lowball price ($650k).  In the past two years I worked on upgrading the building and repairing relationships and have now cleared all the outstanding issues and the value currently stands appraised at $1.2M.  There are 45 rental units, including 33 storage lockers, 10 art studios and two apartments.  Aside from a couple of small lockers (there is always a slow turnover) it is fully rented.

Monthly rents vary between $6700 and about $7200 (when fully rented), though I am about to increase rents by at least the rate of inflation.  Some of the units have long term tenants and I will have to raise them a bit more to bring them into line, but it will be a slow burn.  Within about 5 years I'll have rents up to about $11k.  Monthly labour at this point amounts to a few hours of cleaning and interacting with customers.  I spend nothing on advertising, storage is limited and in high demand in our community.

Not including sweat equity, I put about $110k into the upgrades, largely on upgrading the fire security and sprinkler system and drywalling all 46 rooms myself, as well as a bunch of electrical and plumbing upgrades (I opened one wall and found an 18 year old electric water heater that was operational, keeping water hot and not actually connected to a single sink....)

When I bought the place I used a shareholder loan from myself to my LLC of about $80k, then another of the remaining 110k.  I am about to renew the mortgage on the place and have to decide whether to increase the amount of the mortgage to repay myself the full shareholder loan (which takes it off my personal books and leaves all the debt in the LLC).

My choices are as follows:

1.  Increase the mortgage by $180k, repay my personal loan to the company and clear my personal books.  That transfer would be tax free as it is not income, but future income from the company is going to be taxable.  Of course there will be less flexibility in the books as the mortgage payment will be higher (~$4000 vs $2800).

2.  Leave the shareholder loan in place.  Collect interest each year.  When/if I ever sell the place then $200k will be immune from any tax.  A bit more flexibility in terms of monthly income, but it all pretty much goes into savings anyway.  I can, possibly, repay the loan much more slowly but leave the bank out of it.

Tax ramifications:  In Canada income on storage units is taxed at 50%, however that will never happen as any 'income' will be zeroed out by wages to me, which will then go directly into my tax sheltered accounts (RRSPs).  Capital gains tax is on 50% of any realized value increase, which would be less if the loan is not repaid.

On the other hand, I generally take the 'simpler is better' point of view, and I really like the idea of zeroing out the shareholder loan and letting the business run on its own without owing me anything.  That way if some black swan even happens (fire, lawsuit etc) then I at least will have already cleared my own direct investment.

Advice or thoughts?


  • Bristles
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Re: Commercial Mortgage Renewal Dilemma (Canada)
« Reply #1 on: December 05, 2019, 08:02:14 AM »
Simpler is better, but carrying a loan to yourself on the books is not really a bad idea. We have a large shareholder loan (~$600k) that we don't have any intention of paying off, unless it ends up needed at some point down the road. We make monthly interest payments on it and make periodic additional principal payments as needed. It's nice to have that flexibility. Make sure the documentation on the loan is airtight. Given your valuation increase I doubt you'll end up losing the principal of the loan.

We are in a similar situation but did the initial cleanup and un-pissing-off of tenants 25+ years ago. (Wow, that's hard to believe!) We've since spent millions in upgrades all from cash flow. It's been a long and really great journey! Bringing some long term tenants up to market rate has been a slow process but we're there. We only have one tenant left that was here when we took over the building but they're at a reasonable rate for us now. When we started they were way low.