Commercial Property Loans

Commercial Property Loans have a number of attributes that you don't find in other kinds of business loan.

Let's first consider commercial mortgages, and then go on to look at the types of property debt that can be arranged, and the uses of it.

Commercial Mortgages

A mortgage can be identified by the fact it has what is known as a ‘charge’ against that property. A charge is a legal document held at the land registry and identifies who has a legal claim against your property. Most of us who are still paying the mortgage for our own homes have a ‘first’ charge against the property, and this charge is held by the company who lent you the money to buy the house.

It is possible to have 2nd and 3rd charges against a property, and in respect of your own home this may be the case where you have taken out a secured loan. (for example to raise capital to buy a business, or build an extension on your house).

A commercial mortgage differs in another way to a personal mortgage in the fact that the cost or interest charged is at a commercial rate. In laymans terms this means it is higher. This is to reflect the fact of a greater underlying risk in a building being used for the purpose of making a profit, and may be adjusted higher or lower depending upon the kind of business operating from it.

Also to reflect the greater lending risk associated with commercial buildings, the amount of deposit your business will have to put down will be considerably higher than those allowed for a private dwelling. It is not uncommon that 25 to 50% be advanced as deposit. This can of course add up to a considerable sum when you consider that commercial mortgages tend to be higher in value than home mortgages (but not always).

The term of a commercial mortgage will generally be between 20 and 25 years.

Before your business can obtain a commercial mortgage, you will have to give details of the location and structural condition backed up by a report from a Chartered surveyor. The surveyor will also determine the sales value as is, and this will form the basis of any offer for finance. Surveyors reports are quite expensive, but well worth the money, as their report will highlight issues in respect of condition that may need addressing. Often, you will be able to use the findings of a surveyors report to negotiate on price.

You will be required to submit accounts for the last 3 years, and demonstrate the ability of your business to repay the loan before you are granted a mortgage.

Commercial Property Loans

Commercial property loans fall into three distinct categories:

1. Secured Commercial Loans

A secured commercial property loan is when the use of funds is not intended to be applied to the property itself, but the value in the property acts as security (protection against default) for the loan. In these cases, a legal charge (see above) is taken by the lender, which if there is already a commercial mortgage in place, will be second in line (should there be any default) to the first charge of the lender who granted the commercial mortgage.

Because of the relative security of property, and its intrinsic value, the history of borrowing has shown a low level of bad debt risk, as borrowers will go to great lengths to avoid default, repossession, foreclosure or forced sale. The result of this lower bad debt risk is that secured commercial property loans carry a much lower rate of interest than almost any other form of small business finance.

Consider consolidating other forms of business finance you have into one secured commercial property loan to save money on repayments. Competition is at its fiercest in this part of the market with many lenders trying to grab your business, so your chances of obtaining a good deal are high.

2. Redevelopment Finance

A loan taken out with the intention of using the funds to renovate or improve property with the purpose of increasing the value of the property is a redevelopment loan. The use of the surveyors valuation to establish future value subject to any essential repairs, and other elements of your proposed scheme, is almost a necessity to establish whether a project is viable or not. Again, it is often the case that the property itself is used as security for the loan.

3. Bridging Finance

bridging finance is short term, high cost finance, used to literally ‘bridge’ a period of time until longer term finance can be arranged, or an exit to a deal realised. It is often used in the property development marketplace as a way of seizing opportunities with short time frames. The nature of its use determines that it should be able to be arranged in a very quickly. In some cases (very rare) it can be used to take advantage of favourable conditions that will happen in the future. For example if interest rates were expected to move down, then it might be better to use bridging finance until a more favourable long term deal could be arranged.