Whether you're a business owner, investor, or developer, it's well worth knowing your finance options when it comes to buying, refinancing, renovating, or developing property.
In this blog, we explain the options available and in what scenarios they're most useful.
What is commercial property finance?
Commercial property finance is an important tool for businesses and investors to acquire and manage commercial properties.
Commercial property finance is a type of finance solution, or ‘loan’, which is used to purchase or refinance commercial property, such as:
Office building
Retail premises
Shopping centres
Warehouses
Industrial units
Rental properties
Property developments
These forms of business finance are facilitated by high street banks and specialist lenders.
Commercial property finance can take the form of a secured loan, commercial mortgage, bridging loan, or development finance. Each of which have their pros and cons. And the exact form of commercial finance required depends on your situation.
The loan that is best for the project can be hard to decipher, so it’s always best to enlist the support of a commercial property finance expert.
When to use commercial property finance
There are four typical scenarios in which commercial property finance is used:
Buying commercial property
Refinancing an existing commercial mortgage
Renovation or refurbishment
Funding a development
For example, if you already own a commercial property with a mortgage, you might consider refinancing to release equity, or extend the term of the loan.
And in the case of renovation, refurbishing or developing, there are several phases which may require an injection of capital to get the project over the line.
The main types of commercial property finance
There are three types of commercial property finance:
Commercial mortgage
Bridging loan
Development finance
Read on to explore these types of finance solutions in more detail.
With any commercial finance solution, it is beneficial to seek the help of an experienced expert, to help you negotiate the best interest rates and terms.
Commercial Mortgages
What is a commercial mortgage?
It is a type of long-term loan that is secured against a commercial property, just like a personal mortgage is secured against your home.
The pros of a commercial mortgage
Ownership: when the mortgage has been taken out, you are the owner of the property and can make as many changes to it as you please.
Longer terms: long repayment terms are a better option for some than short term loans
Lower interest rates: because of the long-term nature and low risk to the lender, interest rates are often better than other funding options
Tax efficient: the interest payments on the mortgage are often tax deductible, and over a long period of time.
Investment: Owning your business premises can also form part of your retirement planning. For example once you sell the business you can keep the commercial property to lease back to the new owner of the business.
The cons of a commercial mortgage
Risk of default: As with any mortgage, being unable to make the agreed payments may lead to defaulting and the property being repossessed by the lender.
Upfront costs: deposits can be large depending on the finance required.
Future capacity: If you buy a property with a commercial mortgage but choose to scale quickly, you may outgrow the property that you have the commercial mortgage for. To then move earlier than expected on may incur unforeseen costs.
Bridging Loans
What is a bridging loan?
A bridging loan (or 'bridge loan' or 'bridging finance') is a short-term loan taken out to fund the sale, purchase, refurb or renovation of a property.
It ‘bridges’ the gap between purchase and selling of the same property, or between a property that isn’t suitable to move into (such as an old barn that is to be converted to offices) and getting the mortgage.
Additionally, bridging loans are perfect for funding auction purchases when funds are needed quickly and there isn’t enough time to finalise a mortgage.
Repayment tends to be soon after the property has been sold/mortgaged.
The pros of bridging loans
Quick funds: often approved quickly as time is of the essence for most projects
Flexibility: the amount borrowed, repayment terms, and ways in which you can use the funds are less strict than, for example, commercial mortgages
No early repayment penalties, in some cases
The cons of a bridging loan
Higher interest rates than traditional loans, they are not a long term solution!
Short repayment period: this type of loan is designed to be short term, usually for up to 12 months, which means that borrowers must be able to repay it quickly
Risk of losing collateral: as the loan is usually secured against property or assets (so if the borrower defaults these may be at risk)
Property Development Finance
What is development finance?
As the name suggests, this type of loan is specifically designed to fund development costs of commercial or industrial buildings.
Property development finance or a 'commercial development loan' is mostly used by those wondering how to fund a commercial property development.
This could be first-time developers or experienced investors who need capital to purchase land or buildings. Finance can be used to fund the construction from ground up projects, full refurbishments, or to finish a near-completed project.
Development finance is a reliable way to fund commercial property development plans and tends to be a medium-term loan taken over 3-24 months, though other repayment options are available.
The pros of development finance
Access to large amounts of capital: developers can access significant amounts of capital that are unavailable through other forms of financing
Flexibility: property development finance can be structured in a variety of ways to suit the needs of the developer and the project
Speed: loans can be arranged quickly, as time is usually of the essence
The cons of development finance
Higher interest rates: considered a higher risk form of lending, property development finance typically comes with higher interest rates than other solutions
Shorter loan terms: developers may need to refinance the loan at the end of the term, which can be a challenge if the project has not been completed
Strict lending criteria: as with commercial properties, the lenders can have strict criteria which may not always be suitable for the project
Increased risk: developers who fail to complete a project on time or to a high standard may be at risk of losing their investment.
Building to sell: development stages that benefit from finance
Property development typically involves several stages that require funding.These include:
Land acquisition: Buying the land to be developed is the first step in any property development project.
Planning and design: Architects and engineers are needed early on to ensure the property, or land, has planning permission and other approvals.
Site preparation: Such as demolition, excavation, and site utilities, or simply clearing the land, grading, and preparing the site for construction.
Construction: Forecasts of building costs such as materials, labour, and equipment. At every stage of the project. Employ approved contactors that the lender is confident can finish the project within the time specified and to the specifications set out.
Marketing and sales: If the exit strategy is to sell or lease, this can’t be done without marketing and sales which may require adverts, brochures, sales commissions and temporary staff.
Operations and maintenance: Finance can even cover the ongoing management of a completed project e.g. property management, repairs, and maintenance.
Developers must carefully manage their funding needs and ensure they have sufficient capital to complete each stage of the project successfully.
Consulting a commercial finance professional on your finance options before a big project is paramount, in order to see it through to completion in the most profitable manner.
How to apply for commercial property development finance
We hope this article has given you a good idea of how to fund your next commercial property development, or purchase!
At Coria Commercial Finance, we guide you to success by taking away limiting factors, wherever possible. Property is just one of the areas we can support you in acquiring finance.
Talk to us about your commercial property requirements today: Contact us here.