Commercial property finance is commonly used in purchasing or renovating owner occupied commercial properties. An owner-occupied commercial property refers to a property where more than 51% of it is occupied by a business.
These commercial properties such as office buildings, and warehouses can all be financed by commercial mortgages. As a business owner with an intention to develop your business, but without the funds or capital to do so, then commercial real estate loans are the best way to go. Commercial real estate is income-producing property used solely for business rather than residential purposes.
In order to finance the acquisition, development and construction of these properties, businesses often have to apply for commercial property finance (commercial real estate loans). Commercial property finance are mortgages on commercial properties secured by loans.
Like traditional mortgages, banks and independent lenders are largely involved in making loans on commercial real estate. These loans are granted to business entities, developers or corporations often formed for the specific purpose of owning commercial real estate.
Often times, these businesses may not have a long credit history or proven financial track record, therefore meaning lenders require borrowers to provide collateral as a way to guarantee the loan. Without this collateral, banks would have no way to ensure the loan could be repaid in the event that you were unable to keep up with repayments. Sometimes a non-recourse loan is granted which means that in the case of default or deferred payment the lender takes over the property.
As a business owner or developer considering commercial property finance it is very important that you understand the differences between commercial loans and individual loans. These differences include:
- Loan to Value Ratios:
This loan to value ratio measures the value of a loan against the value of a property. The LTV is calculated by dividing the loan amount against the purchase price of the property. High LTVs are allowed for certain residential mortgages – sometimes up to 100% – while commercial loan LTVs often fall between 65-80%.
- Interest Rates and Fees:
The interest rates on commercial loans are higher than those on residential loans. Commercial real estate loans often involve extra fees that eventually add to the total cost of the loan such as appraisal, survey fees and loan application fees to mention a few.
Commercial real estate loans sometimes have restrictions on prepayment which are designed to preserve the lender’s anticipated yield on the loan. As such, if you settle the loan before its maturity date, you would most likely be asked to pay prepayment penalties.
- Loan Repayment Schedules:
Residential mortgages are loans in which the debts are to be paid in regular installments over a period of time; they are long term loans, lasting as long as almost 30 years sometimes.
However, commercial loans typically range between 5 to 20 years or less. For instance, a lender might grant you as a business owner a commercial loan for a period of 7 years with an amortisation period of 30 years. Here, you make payments for 7 years of an amount based on the loan being paid off over 30 years, followed by one final “balloon payment” of the entire remaining balance on the loan.
5 TYPES OF REAL ESTATE COMMERCIAL LOANS:
As a business owner seeking to finance your business using commercial property finance, you will need information as well as options on what types of loans are available and the requirements for each. To help you with this information; we have compiled a list of 5 types of real estate commercial loans you can get:
- Property Development Finance:
These are short term loans used in the development of a new building project or the refurbishment of an existing property. Lenders in this case advance up to 70% of the gross development value and they last for up to 24 months (2 years).
- Portfolio Finance:
If you are a property investor with a number of rental properties seeking commercial real estate finance, this loan is just right for you. Portfolio finance is a long-term business loan offered to property investors. The ability to consolidate borrowing on these different properties into one loan is offered by the lender. Rental income also determines the serviceability of this property finance.
- Commercial Mortgages:
Commercial mortgages are more similar to individual mortgages, the differences being; the customers, the interest rates and fees as well as the maturity period. These commercial mortgages are available to a range of businesses from sole traders, to limited companies. Lenders fund up to 75% of purchase costs with terms which can be up to 30 years. The mortgage is secured against a first charge and its availability and affordability and are dependent on your business’s profitability as well as its ability to make monthly payments.
- Auction Finance:
This commercial property finance is designed for landlords and experienced property developers. It involves arranging funding in advance of an auction so you know the market value of the property and can afford it even before you walk into the auction room.
- Bridging Finance:
Bridging finance is a short-term finance solution used by both property investors and developers which provides a quick way to financing the purchasing of a property. Here, a real estate loan is used to purchase owner-occupied commercial property before refinancing to a long-term mortgage at a later date. That is, the lender would receive the first charge on your property and when the loan has come to term would seek an exit. You can read more about bridging finance HERE.
PREPARING TO APPLY FOR COMMERCIAL BASED FINANCE:
Once you have succeeded in educating yourself on the differences between commercial and individual loans as well as the types of commercial property financing available, it is then time to make a decision and apply for these loans.
The following are a few steps to help with the process:
- Consider the conditions of the collateral; this condition helps you in determining your property’s value.
- Appraise the properties.
- Submit a borrower application and title of ownership to the financial institutions.
- Agree to the lender’s terms if you are comfortable with them.
Simply put, commercial based financing is funding for existing businesses, using available properties as collateral. This article has hopefully given you some ideas on how you can use your business premises as collateral, as well as some tips on how to prepare your application for these types of loans.