10 tips to getting the best commercial property loan

Posted Thursday, March 26, 2015 Comments (0)

Michael Holm is the Executive Chairman of Balmain Corporation. Michael shares his top 10 tips to getting the best commercial property loan. 

Getting a commercial property loan should be easy right? After all isn’t that what lenders want to do – lend you money? In fact getting a commercial property loan can be a frustratingly difficult process. However there are a number of steps you can take that will not only make the whole process less painful but will also help you get the best deal available. Here are my top 10 tips on getting the best commercial property loan. 

1. Get your house in order first

Before you even consider applying for a commercial property loan make sure that you have everything a lender would need at hand and up-to-date. Lenders want your most recent financials, tax returns, rental schedules, copies of leases, copies of sales contracts, property outgoings statements, bank statements and asset and liability statements. Lenders want it all and they want it in good quality and they want it when they ask for it. Having everything prepared first and at your fingertips means you present like a professional which is the first step to getting the best commercial property loan. 

2. Know the value of your property

Borrowers who think their property is worth much more than it’s true market value are considered extremely unprofessional by lenders. Commercial property is generally valued in one of two ways: (1) On a Comparison Basis (i.e. the rate per m2 of your property compared to the rate per m2 of recent sales of similar property); or (2) on a Capitalisation Basis (i.e. the true net rental income from your property multiplied by a Capitalisation (or Cap Rate). The Cap Rate for your property can generally be assessed through considering recent sales of similar property and dividing the sale price by the net income. For example, if the property next door sells for $900,000 and it generated $75,000 p.a. net income, the cap rate is: 75,000/900,000 = 8.33%. 

3. Have a property strategy

Lenders want to understand a borrower’s property or business strategy: why does the borrower want the money and specifically how will the loan either improve the value of the property or increase the borrowers income? This strategy should be clearly presented and you should keep this strategy in mind at all times when discussing your loan with the loan officer. Don’t waffle but keep on point about your strategy. 

4. Prepare a corporate structure diagram

Many commercial borrowers have multiple and often complex corporate structures. These may range from associated businesses, self managed superannuation funds, family trusts, special purpose property vehicles etc. Having a clear, accurate and well-presented corporate structure diagram allows a lender to understand your business structure at one glance and can save you many weeks in reduced loan approval time as the lender can understand your business structure clearly right at the outset. 

5. Have a detailed and up-to-date tenancy schedule

It always surprises me how many commercial property borrowers do not have an up to date and accurate tenancy schedule for their property. After all these are major assets which produce significant income, surely an owner would have a detailed schedule of which tenant pays what rent? You would be surprised how many don’t! A rental schedule should detail the following: section of property occupied; tenant’s name; nature of business; rental amount; rate per m2; lease commencement date; lease expiry date; per cent of outgoings paid; lease option terms. Rental schedules vary for different types of property i.e gross rents, net rents, turnover rents. 

6. Study comparable property sales

Before you seek a loan spend some time studying comparable property assets in nearby locations. Today substantial information can be obtained from the net from sites such as www.realcommercial.com.au or www.rpdata.com.au. Having comparable property asset information at hand will establish in the lender’s mind your specialist knowledge of both your commercial property and the competitive environment in which it operates. Lenders greatly respect this type of knowledge in a borrower. 

7. Prepare a property cash flow

You would be surprised what preparing a 1,2 or 3 year cash flow will tell you about your property. A property cash flow can also be extremely helpful in assisting a lender to understand your future view of the asset and your view on issues such as capital expenditure and tenancy vacancies. 

8. Complete a detailed asset and liability statement

Together with a corporate structure diagram, a detailed asset and liability statement will greatly assist a lender in understanding your financial position and hence your suitability for the loan you are seeking. Asset and liability statements should detail the following; the asset, name of owner, estimate of value of asset, net income from said asset, loan secured against the asset, name of lender, term of loan, interest rate, loan expiry date. 

9. Determine your loan servicing capacity

Ability to service commercial property loans will be assessed by lenders in two ways. Stand Alone Servicing and All Sources Servicing. Stand Alone is an assessment of the security property’s net sustainable income after outgoings and capital expenditure, divided by interest payments. All Sources is an assessment of total borrower income (property, business, investment income) divided by total borrower commitments (including this loan). While loan servicing requirements differ from lender to lender and are affected by factors such as capitalised or pre-paid interest, as a general rule of thumb Stand Alone should not be below 1.25:1 and all sources 1.50:1. As with all credit rules the stronger the loan servicing the quicker the approval and the better the deal. 

10. Tell lenders what you'll pay 

Never let the lender set the terms first. They always set terms high and it can be a struggle to fight quotes down. Be on the front foot. Tell the lender early what interest rate you expect (or what margin over base cost of funds) and what establishment fee you will pay. Let the lender try to push you up. You will be surprised at how many don’t. 

A final tip….. use a professional commercial mortgage broker. 

My final hint (in this article at least) is to consider using a professional commercial mortgage broker to advise you. You use a broker for insurance and a broker to sell or buy a commercial property, however many borrowers insist on negotiating loan terms themselves. As a rule of thumb a good commercial loan broker should be able to reduce your interest rate, should be able to get your loan establishment fee significantly reduced and most importantly can assist in ensuring loan terms (conditions precedent and conditions subsequent) are negotiated in detail. A lender will know that a broker has other options, a commercial mortgage broker will help you to keep the lender honest.

Michael Holm is the Executive Chairman of the diversified commercial property finance company Balmain Corporation and has 35 years of commercial property finance experience.

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