Your Complete Guide to Commercial Property Finance Options
The world of property finance can seem like a mind field. With so many options available, it can be difficult to know which one is right for you.
The Commercial Property Finance Guide is a comprehensive guide and tells you everything you need to know about the process.
Commercial Property Funding is a massive investment in time, no matter which product you are considering. As well as considering the internal aspects of your own acquisition, you need to explore and understand the external factors, such as ‘will Brexit affect the buying process?’ Will the economy or the sector you are buying into maintain sustainability for the term of your agreement?
If you are looking to build a housing development site, does the demographic wage for that area’s local housing market match your asking price for each house developed? Does the regional growth for that area justify the demand for that level of development?
If you are looking to buy Commercial Property to rent out, what are the current levels of occupancy on the surrounding areas or that particular Industrial Estate? If the premises are designed for that specialized manufacturing, are there any external factors that could diminish the need for that specialized product? Are the premises sustainable and attractive to other tenants? If not, how much would it cost to convert the premises to make them attractive to other buyers?
Property Investments are attractive for their yield returns. The yields can be affected not only by the wider economy, but regional factors – for example, London demographics versus outer areas of the M25. Are the high streets a sustainable commodity to invest in or are we, as a nation, becoming more transient and buying online? Would it be better to buy premises near a rail network, or further out in rural areas? What is attractive to you also needs to be of benefit to the eventual and any future occupier of the premises.
Understanding the external factors and their potential impact on your property will place you in a stronger position for the future.
Continue reading to learn everything you need to know about Commercial Property Finance Options, or use the links below to jump to a specific section.
Commercial mortgages are available to a wide variety of businesses, from sole traders to limited companies. They are a very versatile method of raising funds for property purchase, property refurbishment and capital restructuring.
The lending criteria will be based on the ability of the business to service the loan repayments, which is aligned to the profitability and cashflow of the company. Ideally, most banks and Finance Houses will look for a two times services coverage of the loan repayment, but in certain circumstances this can be relaxed.
Four things to think about when considering a commercial mortgage
1. Can your business cover the cost?
This first point is an important one. When calculating this, think about the current rent that you are paying and whether a commercial mortgage will help to reduce this burden. Examine your business plan to forecast what the growth projection holds.
2. Title Issues
Title issues are an area of law that can be challenging to comprehend. Thankfully, Land Registry has now digitised this service, so it is straightforward to get a clear picture of your proposed property and obligations. Make sure that you and your solicitor establish:
- Where the legal boundaries are, and whether there are any on-going disputes with neighbours
- Whether the property is a leasehold or a freehold
- Non-adopted roads (you may be responsible for the upkeep of any roads that are not council-owned)
- Ground rents
- Environmental factors
3. Environmental factors
Environmental factors can have an influence on certain types of property. If your land has been used for industrial purposes in the past, it will need testing to achieve a clean bill of health before your project can go ahead. Or you may incur considerable expense in cleaning up your property and maybe those around it.
4. Choosing a solicitor
Choose your solicitor wisely. Commercial property mortgages can be highly complex, and inexperienced solicitors may not anticipate all of the intricacies. This means that an enticing quote can escalate, and good deals can be lost. When it comes to commercial mortgages, experience counts.
Property Development Finance
Property development finance is a flexible way of financing the development of commercial and residential properties for onward sale to third parties or heavy refurbishment of existing properties. Typically, a deal can be financed if the business can inject the funds to purchase the land, with finance available up to 85% of overall costs – normally capped out at 65-75% of Gross Development Value (GDV).
Six things to think about when considering property development finance
1. Planning Permission
Planning permission involves many quirks. If you are not sure about the status of your property, the planning portal can help. Your local authority will be able to advise you on how to move forwards with Permitted Development (PD) which includes the type of permission that you will need for each type of property. Once you have completed the paperwork, your conversion dreams are a step closer to becoming reality with the help of development finance.
2. Offsite Issues or Works
Also known as ‘Grampian Conditions’, updated in October 2018, nearby offsite issues or works may delay the start of your project. Pre-commencement condition legislation can be found at the UK government portal. Such conditions might include risk surveys, highway reports, protected species and flood reports – in short, anything that might affect your development, or which might cause your development to affect the surrounding environment.
3. Soil Type
This is one that you want to get right. Soils have different temperaments, and many structural collapses occur as a result of invisible details, such as a thin layer of clay that causes foundational shifting. If you know how your soil is going to behave, both you and your investors can take steps to ensure that the development is going to be structurally safe.
Many successful developers say the risks are all in the ground, as they cannot be seen or costed until you start work without a ground survey.
4. Financial Health of the Project
If you don’t have experience of this, don’t panic. At BFS (UK) Limited, we offer this service. One of the reasons that forecasts are important is that they give a true blueprint of the financial health of a project. A solid plan is as good as a robust foundation in property development. You should think about the finance that you can afford to invest, the time that you can commit to the project, and the knowledge that you are bringing to the table for both short- and long-term plans.
5. Neighbouring Land
When it comes to property development, you need to know not only about your own land – you also need to know about everything that borders it. If your development needs an access road – even if this is as small as a driveway – your local council may require the payment of a bond. Make sure that you factor this in when making your calculations and application.
6. Track record
Many lenders will only support development projects where the borrower has a proven successful record of similar developments, without experience it may be necessary to consider a joint venture with a proven developer or contractor.
This refers to property ownership for anything other than self-occupation. This enables you to build a comprehensive property portfolio to, for example, save for retirement or provide ongoing income for your family. Typically, finance is available up to 80% of the property value with interest-only options available, and lenders tend to look for a minimum 125% coverage of the repayments by rent at a stressed base rate of 3.5%.
Six things to think about when considering investment/portfolio finance
1. Financial Forecasting
Drawing up a forecast will help you to calculate this. No matter how large or small, a project benefits from having a clear financial plan. The primary figures are:
- Stamp duty
- Legal costs
If you are looking to secure finance to help with your property purchase, you will be hoping for a Decision In Principle (DIP) – sometimes known as a ‘mortgage promise’. To get a DIP, you will need to demonstrate that you can afford the basics and that you have a clear plan of how to turn your investment into a profit.
2. Are you trading under the correct banner?
Personal Liability and tax treatment differ between Limited Companies and Partnerships or sole traders, which can have an impact on the security of your finance. Even if you feel like your finance has the correct status, it is worth checking with an accountant or broker to ensure that you are trading under the correct banner.
3. Management Charges
With great power comes great responsibility, and this is reflected in today’s management charges. These place complex legal responsibilities upon landlords, which include disclosure of information to clients. The government has issued guidelines, and it is important to get advice about these before venturing into your investment finance.
4. Repayment Options
Whether or not you pay interest-only or Capital, repayments will affect both your short-term and long-term financial planning. Interest-only repayments are often popular with investors who are growing a portfolio. However, for this strategy to work, there needs to be an exit plan in place. Speak with your financial adviser about the best repayment option for you.
5. Impact of Brexit
The Royal Institution of Chartered Surveyors (RICS) is cautioning that Brexit has caused uncertainties in the property market. These include falling prices, as well as longer durations for the completion of property sales. As of the close of 2018, the average duration is nineteen weeks – a record-breaking length. It is also important to note that this is a geographical ripple effect that is spreading outwards from London and is particularly affecting the Capital, the south-east, and East Anglia. Political forces are always a fairly wide and unpredictable variable in property markets, and when Brexit settles, the property market is likely to calm. However, when considering an investment property, it is worth looking at the broader picture when making your calculations.
6. Life Insurance
This is a detail that can often be overlooked in the excitement of starting a new property journey. Property investors are often unaware that loved ones are likely to be plunged into the mortgage application process unless the paperwork is taken care of in advance. Life insurance can be used to effortlessly pay off mortgages or inheritance tax, but only when it is set up correctly. Speak to your broker about how to avoid unnecessary inheritance tax bills.
This is a general term that refers to short-term finance in relation to the purchase or refurbishment of property. It enables you to move quickly to secure desirable properties and, whilst it is more expensive than traditional forms of property finance, it gives you the ability to exploit property transactions at short notice. These types of loans are typically available up to 65% of the 90 day value of the property, with interest rates ranging from .75% per month to 3% per month. With fees of 2% on entry of the loan and 1% on exit of the loan. It will be prudent to point out with bridging facilities an exit strategy is always required to be in place at the outset. Terms range from 3-18 months
Four things to think about when considering bridging finance
1. Have an exit strategy
An exit route refers to the termination of a financial agreement. It is an important consideration that financiers use to calculate risk. This is done in the planning phase of the agreement, so that all stakeholders understand the details.
Exit strategies are usually based upon meeting profit objectives, such as completing a refurbishment project that enables a property to be sold with equity. In some cases, exit strategies are put in place when an investment has not met its planned targets, and a different type of financial solution is needed.
2. Do the calculations carefully
As short-term financial solutions, bridging loans can be expensive. In projects where returns are guaranteed, this can make perfect sense. Snapping up desirable properties and refurbishing them is a form of investment that often radically exceeds bridging loan APR. However, sit down with your broker and do the calculations carefully. If the numbers do not add up, you might find that this is an option that costs you money.
3. Have a Plan B
Even experienced property investors often have the odd surprise. One of the reasons that BFS (UK) Limited encourages clients to be thorough with the legal documentation is to limit this risk, but planning for every eventuality is almost impossible. What will happen if your beautifully refurbished property fails to attract a tenant? Or if your commercial mortgage application – a normal step after a bridging loan – is declined? Having a Plan B for your exit strategy is not only important, it can help to secure the confidence of a financier.
4. And a Plan C
Many investment properties are bought with clear, legally binding, articulate planning paperwork. Others are purchased with dreams, visions, and hopes.
In the rapid-paced world of property development, quick decisions are the norm. This means that some of those dreams and visions are purchased with a risk.
If your planning permission is refused, it is vital to have not only a Plan B, but also a Plan C. Make sure that these are clearly in place when calculating your bridging loan, as your profit and exit strategy may be affected if these details have not been thought through.