Unlocking commercial mortgages

Published by John Walsham on 29 September 2023

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Despite the challenging economic environment business owners continue to seek a commercial mortgage to fund the purchasing, expansion, renovation or refinancing of commercial premises. 

A commercial mortgage can allow a business owner to seize growth opportunities that would otherwise be out of reach. But, as with all borrowing, there will be conditions attached. 

Owning a property offers businesses greater control and flexibility whilst shielding them from increasing rents. It also offers flexibility to modify a building to better suit the business and to sublet redundant parts of a building adding additional revenue streams. 

Finding the right premises can however take time, although it is not uncommon for the property’s freeholder to consider selling property to an existing tenant. It is a conversation that should not be overlooked. 

Commercial mortgages typically come with longer repayment terms, often up to 20 or 30 years. This extended timeline allows for manageable monthly payments, reducing financial strain on a business. 

Business owners can expect commercial mortgage lenders to provide a commercial mortgage of up to 65% of the value of the property. However, a lender will also want to understand your business plan and financial projections which will be reviewed in conjunction with your current trading performance.  

The lender will always review the quality of the asset being purchased via an independent professional valuation, including, a review of the quality of any tenants in situ. In addition, you can expect that valuation to also include a review of environmental considerations such as energy rating and contamination. We would expect some lenders to offer more favourable interest rates for a highly energy efficient building and, conversely, may not be willing to offer finance for those buildings with poor energy efficiency ratings.  

It is important to consider whether the asset is to be purchased through the existing trading company or whether an alternative structure should considered, such as a separate property or holding company. Your accountant can advise you on the best structure. 

Even where the tenant is effectively the buying business (operating company or property company structure), a commercial lease reflecting the value of the property will be required between the two entities. The lender will structure their lending by taking into account the annual income under the terms of the lease, which on occasions can mean a loan offer well below 65% loan to value. If the tenant is a third party, then the same assessment is made as it is the tenant income which will primarily cover the loan repayments. 

In the event of a shortfall in the desired funding, lenders may ask the trading company for a guarantee to support the lending request to increase the funding available. 

Additionally, lenders will look to tie in key individuals in the business via personal guarantees for at least 10% of the loan amount to ensure continued commitment to deliver upon the financial projections. 

Following a satisfactory valuation business owners can expect a formal loan offer; it is important to seek both fixed and variable loan offers and make a choice dependent on your views of future base rate levels. 

Recognising the number of third parties involved you can expect fees to be payable to a number of professionals including a valuer, solicitor, accountant and the lender. The lender’s fee will tend to be a percentage of the loan amount and can be between 1.5% to 3%.  

Buying and holding commercial property is complex. Business owners are advised to speak first to an accountant and solicitor before starting negotiations and opening discussions with lenders. 

To learn more about commercial mortgages, please contact us today

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