Commercial Mortgages and Loans – What you need to know.
Regardless of where your business is in its journey, you will have to be very careful and wise when dealing with commercial property mortgages and loans. It takes times and effort to understand how to navigate the Commercial Mortgages process.
With guidance clients can understand what it takes to get the most attractive rates and terms.
You can save a considerable amount of money in the long term with good decision making.
This leaves you free to invest extra capital back into your business.
What are Commercial Mortgages ?
Firstly Commercial Property is defined as property that is used exclusively for business purposes. This is wide ranging and can include anything from retail shops and office sites to industrial and apartment complexes.
The commercial loans themselves are mostly issued to business entities as opposed to individuals themselves. So a Commercial property Mortgage could be set up against a Limited Liability Company or other corporate entity.
The loan would then be used for the purchase of new or existing commercial properties, or land hold.
What kind of deposit is required ?
Each Mortgage or loan can differ a lot by business type and credit history. Location can even be a factor. To put it in some perspective the total amount of funding on a Commercial Real Estate Mortgage can be anywhere between a typical amount of fifty thousand to tens of millions of pounds.
Repayment periods can also vary greatly as well. These can be anywhere between 2 or 3 years and up to 20 years.Generally speaking though most of the mainstream lenders will require a deposit of 20 – 30% on the total purchase price of the property.
The best rates are typically available with the higher percentage deposits. Many refer to this as LTV Ratio, or ‘loan to value’. In this case it would mean a LTV Ratio of 70-80%.
Considering most Commercial Mortgages and acquisitions will need considerable funding, raising deposits can be a big challenge.
What documents do I need to apply ?
See the below list as an example of what may be required for an application…..
Key parts of a Commercial Property Mortgage
There are mainly 3 important aspects to a Commercial Property Mortgage –
Comparisons between different lenders can definitely pay off. So do your research. Keep in mind what works best financially and suits your long term business ambitions and goals.
What are the Mortgage terms ?
As a general rule an intermediate term mortgage lasts around 3 years. Of course this varies. Longer term loans last usually between 5 and 25 years.
Long term loans require some kind of collateral to act as a guarantee. They may also place restrictions on your company’s ability to take financial risk in order to limit their risk.
It’s also worth mentioning that a Commercial Mortgages can be allocated to you either as a balloon payment. Or an amortized loan.
The main difference is that a balloon payments will require you to make one final lump sum payment at the end of the agreement. This is to cover the remaining principle balance as well as the interest fee for the term of the loan.
An amortized loan on the other hand is repaid in fixed installments until the agreement is complete. So varying amounts of each installment will go towards the principle balance and the interest being accumulated.
Due to the nature of Balloon Loans they are usually only offered with intermediate term loans.It’s not unheard of though for some lenders to offer 10 year balloon loans on commercial real estate.
Depending on the size of the Commercial Property Mortgage it’s likely that this balloon payment will be a considerable amount. This is because your payments will have focused on the interest as opposed to both the balance and interest.
Only opt for this type of loan if you have the cash reserve or suitable exit to allow for this. Or you are confident in refinancing when the loan term comes to an end.
What are the Mortgage Interest Rates ?
The interest rate that you are offered depends on a business’s revenues and its financial situation.
Commercial Property Mortgage rates are most of the time slightly higher than those of residential mortgages. It’s no secret that lending to businesses is seen as more risky than lending to individuals. Especially if the business is new.
New businesses don’t have established credit histories and the lender is fairly limited in the action they can take if the loan is not paid.
The specific product or type of commercial mortgage will also effect the rate.
What are Closing Fees ?
Closing fees are essentially application fees. Here you will have to pay some upfront fees for a Commercial Property Mortgage. This is to cover anything from reports, appraisals, legal expense, insurance and any other associated costs.
As a general rule any in advance fees should be not more than 2%. Just be clear with the lender what is expected of you in a cost breakdown.
That way there are no surprises.
What about a Property Development loan ?
A Property Development Loan is essentially a short term secured loan. Usually payments would be made by the lender through installments.
Property development lenders may look for –
On approval the lender will often appoint a professional surveyor in order to approve the work progress at each stage.
This then secures more funding as the development progresses. It is common practice as the lender will look to limit their risk. Typically by not advancing more than 65% of the project value.
As more progress is made, more value is added to the property.
Once complete the Property Development Loan is either replaced by the capital from the sale of the development, or by a term mortgage which is calculated on the end valuation of the development.
Fees for Property Loans tend to be higher than that of regular Commercial Mortgages. This is because of the extra commitment needed from the lender to monitor the projects progress.
Mezzanine Finance and Private Equity Finance are options for large scale property developments over £2 million. Here lenders look to take a share of the profits from the final sale of the development.
Getting a Commercial Property Mortgage the right way.
Commercial Mortgages tend to be subject to more scrutiny than traditional residential loans. It usually takes between 6 – 8 weeks to process and complete an application.
Its good practice to prepare your documents before you submit your application. Bank statements for the previous 3 -5 years are a good place to start. You should also be able to present your accounting reports, tax returns and also personal financial records.
You really want to choose a mortgage package that best serves your long term business goals.
A lender will make sure with checks and balances that you have enough operating income to service the debt on your mortgage. With that said you need to be sure you have the necessary cash flow to support your business and take it to where you want it to be.
Before committing look for financial flexibility in the package, so it can be adapted as your business grows and needs change.
What do I do next ?
With many years Commercial Mortgage experience in working with first time buyer clients to purchase premises for own use by way of Commercial Mortgage. Or to assist clients in moving to larger premises it all starts with a phone call or enquiry so we can begin to guide you through what is required.
With access to whole of market lenders via our broker contact we support you through the process from start to finish.
All you need to do is phone or complete the online enquiry form to set the ball rolling.
ShortForm Business Consultants Ltd (Company Number 10428423) provide consultancy services on behalf of Empire Commercial Finance Ltd (Company Number 08798534). We are not a Broker or Lender.