Finding a source of finance for commercial properties is not always a straightforward exercise.
There are so many types of funding with various criteria and guidelines that must be considered in sourcing finance. Sometimes, interest rates are set on the risk depending on the lease terms and quality of the asset.
Obtaining finance for commercial property is harder compared to financing residential property. You are required to produce more information, which would be checked annually in terms of leases and insurance records.
In some instances, you may be required to produce a tenancy schedule every six months, depending on your covenants. In the commercial property sector, the numbers are bigger and hence it pays to keep updated financial information for your lender at all times.
Funding is an ever-increasing part of every property portfolio.
The ability to obtain finance is a key area to grow in this sector.
Hopes crashed
Over the past three years, the finance market has gone through turmoil, making property owners and investors nervous. The global financial crisis has adversely affected the cash flow of many companies. Many have lost their lives savings with the collapse of financial institutions.
You have to find the best deal and put all the puzzles together. All your efforts would be wasted if you cannot obtain funding, which is one of the most important elements in a property. You must convince the lender of the soundness of the property, its resale value and your ability to service the debt.
You have to select a funder who not only understands you but also the property.
During the financial crisis, commercial banks tightened credit and were shy of lending compounding the problems of property investors and developers.
In some cases, certain institutions stopped lending altogether.
I remember two instances wherein a financier stopped lending and when the loans were due, demanded full repayment.
This could create a huge problem, if you are unable to refinance the loan elsewhere. It may force you into financial ruin or default on your loan obligations, regardless of your payment history.
I have been involved with many horror stories with lenders.
You should always be prepared for the worst and have two or more lending intuitions at the same time if you have a portfolio of properties. This will eliminate the risk exposure you have with one bank. It is far easier to refinance with a bank if you have a prior history of lending than to approach another financial institution.
There is also a limit beyond which a bank will not lend to restrict its exposure.
Banks change their lending criteria and covenants from time to time.
For example, they may have changed their Loan-to-Value Ratio (LVR), requiring you to reduce your loan to a certain level.
Multiple Options
Trading banks often offer funds at lower cost. There are also solicitors and private lenders, who belong to the ‘second -tier funding’ option.
Vendor finance is also an option and can become a good way of purchasing a property without going through the whole banking system for funding.
This is a faster option and sometimes easier to obtain without going through the lender. This would be the only option available for those with insufficient equity.
Building societies and nominee companies which usually charge a higher rate than banks are another source of funding. Brokers are active in these areas, since they have connections to different lending institutions.
They would also take care of the paper work and stress, shop around and get you the best possible deal. Depending on the transaction, everything is open for negotiations, especially in challenging times.
Honesty pays
Loan criteria are usually 50-65% of the value of the property. Lenders will consider the rental income, lease terms, debt levels, cash flow and your ability to service the loan. They would also consider your ability to service the loan if the property becomes vacant for a length of time.
Lenders will also look at the tenant profile, your experience and expertise in the property sector. If the property is considered ‘difficult,’ your knowledge and expertise will play an important part in the decision-making process.
Honesty is the best policy. It also pays to be upfront with your lender at all times as you build your long-term relationship, which is crucial to building your property portfolio. After all, lenders have to protect their money.
If you run into difficulty with your loan repayments or a tenant is lost, it would useful to communicate with your lender early to find a solution.
Some people leave it too late and are afraid to approach the banks, which are happy to find a solution.
Mahesh Ranchhod is Director and Property Consult at the Ranchhod Group, which owns and manages properties in New Zealand and Australia. The Group is the Sponsor of the ‘Business Excellence in Retail Trade’ Category of the Indian Newslink Indian Business Awards 2012.
