How to finance your first commercial property

Some investors choose to obtain a commercial loan by dealing directly with a bank, while others choose to engage the expertise of a broker to secure the best deal.

However, before deciding which path you choose, there are some key questions that property investors need to consider.

What type of commercial property do you want? Is it a shop, office, industrial warehouse or something purpose-built such as a childcare centre or a service station?

ING national sales manager commercial John Kolyvas said the location of the property was also a key consideration.

“Commercial purchasers usually look further afield than residential investors. Will the property be regional or metro-based? What cities or towns are you looking at?” he said.

Other factors to consider include the lease tenure and strength of the tenant, and how much equity you will need to contribute to the purchase.

“The broker will want to understand your overall financial position and whether this transaction makes sense, the type of property you’re buying, why you want to buy the property and whether you understand the risks associated with investing in commercial property when compared to residential,” Mr Kolyvas said.

“It’s not unusual for a bank to require a valuation to be completed [at your cost] on a property before they assess a loan. Valuation costs for commercial property are a lot higher than residential property.

“Once you have an idea of the above, talk to a specialist commercial broker to discuss the transaction and get advice.”

Mortgage Choice Berwick commercial and residential lending specialist Alston Soff said it was important to prepare a list of questions before you speak to a bank.

This includes ensuring you are directed to the right area/person for your requirements, and to be aware of whether you will need a larger deposit. And would this mean borrowing against additional security?

Here are some pros and cons of applying for commercial finance through a broker or dealing direct with a lender.

Lenders

Valiant Finance commercial lending specialist Isabella Bilaver said if you had an existing relationship with a lender, it might be possible to leverage this with a proven repayment history and thorough existing knowledge of your business.

However, Ms Bilaver said the application process could take longer and was often a deterrent because you could be waiting months for approval.

Dealing direct with a lender also meant less choice and uncertainty about whether you were getting the best deal, she said.

“Going directly to a bank means you have access to limited options,” Ms Bilaver said.

Mr Soff said not all banks had commercial property specialists if you just walked in, so it was important to request a face-to-face meeting with a small business specialist.

“They are the ultimate person who takes the transaction forward and helps a client,” he said.

Mr Kolyvas said it was important not to limit your search.

“Some of the smaller banks offer longer terms and can be more generous with the amount they can lend you,” he said.

“Some banks may offer you a shorter term to get you a sharper rate but this may mean that you need to re-apply to renew your facility earlier.”

Brokers

A faster application process and greater negotiating and bargaining power were among the benefits of using a broker to set up your commercial property loan, Ms Bilaver said.

“A lot of the heavy lifting is done for the customer.”

But there “may be fees involved depending on the broker you go with”.

A broker could determine what segment your investment fitted into and take you to the correct person within the bank, Mr Soff said.

“Credit appetite and commercial interest rates differ greatly between banks and a good broker should be across what is available from a number of lenders to ensure you get the best solution,” Mr Kolyvas said.

Tips for getting the best deal

The location of your commercial property can play a part in the success of obtaining commercial finance.

“Consider where the property is located. Rural areas can be viewed as higher risk by some lenders, and others have postcode restrictions meaning they won’t lend in select areas at all,” Ms Bilaver said.

Ensure you provide as much supporting information regarding your personal financial situation as possible so your broker can present the information to the bank as a “scenario” before formally lodging an application, Mr Kolyvas says.

“Look to get an indication of rates, fees and terms based on your circumstances from the bank before lodging an application,” he said.

“Be wary of how the bank structures your interest rate. Some may charge you interest on the debt you use, but others may want to charge you fees and charges based on the limit of your loan – this may mean that you’re paying for debt you’re not using.”

Mr Soff said in addition to securing a good commercial property loan interest rate, a broker could also help clients on the servicing of the loan.

“Are you servicing it [the commercial loan] purely on the rent? If it is an investment, some banks don’t like to take on loans with servicing coming purely from the rent. Some lenders like liquidity,” he said.

Mr Soff said some lenders, for example, would fund 80 per cent of the purchase price but charge a higher interest rate, so what would the loan-to-value ratio be and what would be the rate that applied?

“The most important question is, ‘What is the term that you allow?’” Mr Soff said.

“Depending on the property, some banks allow 10 years standard. Some are 15 years across … [and] there are some who will even do 30 years.

“It is not like a [residential] mortgage where you are given a 30-year loan as a starting point.”

Mr Soff also warned there were costs in setting up a commercial property loan.

“Unlike mortgages you don’t get packages and your set-up fee is not waived,” he said.

“You have to pay for valuations, and commercial property valuations run into thousands. They can be anywhere from $900 plus GST to $1500 plus GST depending on the valuer you use and type pf property etc.”

Disclaimer: The information provided in this article is intended to be of a general nature only and does not take into account any person’s particular objectives, financial situation or needs. You should always seek professional advice or assistance before making any financial decisions.

Valiant is in collaboration with Commercial Real Estate.