When buying commercial property, it is the norm to approach your bank for financing. Commercial property loans are, however, significantly more involved than residential bonds, and may prove confusing if you have not had previous experience with them. In order to prevent unnecessary delays and ensure the best chance of your loan application being approved, it helps to have prior knowledge of what information and documents will be required by the bank. Be cognisant of their minimum requirements and try to ensure that your company exceeds these. The bank will assess the sustainability of the investment from the financial history and standing of both the client and the prospective property. Leon Breytenbach, National Manager of the Rawson Property Group’s commercial division, offers some useful information for commercial property buyers
Commercial versus residential
Commercial property differs from residential property in that the outlay for commercial property is inevitably far greater. Larger deposits are required, higher interest is charged and the term is shorter – usually between five and 10 years. The amount of information required for the loan application is also somewhat more than for a residential property.
Information regarding the buyer
The bank will require the following:
Your current assets and liabilities statement.
Background information of your existing commercial property portfolio of holdings, including rental schedules, in order to evaluate the sustainability of your cash flow.
A statement explaining how your wealth was amassed (e.g. inheritance or business profits over a period of time). A short curriculum vitae would be helpful.
Your indebtedness to any other banks and the extent thereof.
Proof that you are in a position to repay the debt, and that you could service the debt if there is a rise in the interest rate.
Financial statements of all your other holdings. The bank will need to assess the security of your cash flow and whether there are any latent problems.
Your business plan for the intended acquisition. “They will want to know if you are building a commercial property portfolio, intending to improve the property for your own use or buying to sell again,” Breytenbach explains. The stronger your business plan, the greater confidence it will inspire in the bank. Include current as well as projected financials while demonstrating that there will be sufficient cash flow to cope with the new loan payments as well as the ongoing business. They need assurance that you will be able to repay the loan.
The prospective property
Your banker will want to know the history of the commercial property, whether it is being properly managed, as well as its present state of repair. Any major concerns pertaining to structure or maintenance are relevant, and the running costs of the property should be within acceptable parameters.
“A statement of current tenants will be required to show that there is a core of long standing tenants with stable financial backgrounds, as short-term tenant turnover offers cause for concern,” Breytenbach remarks. The financial health of the anchor tenants in the property will also come under scrutiny. Negative press such as the liquidation of any of the tenants would impact negatively on your loan application.
The bank will also assess whether the prospective property rentals are market-related. If they are too high and it becomes necessary to reduce them, the rental income could be insufficient to service the bond. The income realised from the property should be sufficient to meet the bond repayments.
Another point of concern will be imminent lease expiries. These could initiate vacancies which would impact on the rental income of the property. “Adequate provision should be factored into the business plan to ensure adequate cash flow in the event of vacancies occurring,” Breytenbach advises.
A property in a good location should be a positive for the buyer’s loan application, but the state or unconventional use of adjacent buildings or new developments in close proximity which might offer competition could reduce the positive aspect. Single-use premises which limit the type of tenant may also prove to be a negative to the granting of the loan. These are just some of the considerations which will be assessed by your bank.
Cash buyers may choose to employ gearing or leveraging in order to enhance their returns. Gearing should preferably be no higher than 55% -65% of the property's value. “This allows ‘deeper pockets’ in order to ride out a storm, in the event of an extended vacancy or unexpected interest rate hike,” suggests Breytenbach.