Commercial real estate finance / loans

If you’re looking to purchase commercial real estate or develop property — there are a range of loans and other financial products on offer.

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What is commercial property finance?

Commercial property finance relates to a variety of different financial products, business owners and property developers have access to — when they want to renovate, buy or invest in commercial real estate.

Depending on your business’s situation — some finance products may be more suitable than others.

Commercial property finance — considerations

Commercial property finance is designed to quickly provide you with the funding needed — to buy and develop real estate.

This real estate may be any building or plot of land — used primarily for business purposes.

The three main categories of commercial real estate are retail, office and industrial. So things like supermarkets, shopping centers, high street shops, showrooms, restaurants, corporate buildings, warehouses and factories.

There are many forms of commercial real estate finance, and various factors that influence the type of lending required.

The potential types of funding range from commercial mortgages, to buy business premises — to small-scale finance, for small refurbishment projects — to more complex finance, for large mixed-use developments.

Almost anyone can apply for commercial property finance. This includes startups, SMEs or large established companies.

There are numerous lenders on the market, with some lenders only focusing on specific industries. For example, a lender may prefer to work with hotels, and not lend to factories. In contrast, other lenders may only be interested in agricultural land.

How does commercial property finance work?

Businesses seeking property finance, will first need to determine exactly what they need the financing for. Once a business figures this out, it can then seek the right lender.

Depending on your requirements, some forms of property finance are more appropriate. For example, you might use a bridging loan, for quick “light works” — before going on to sell or flip a property. Accordingly, you wouldn’t waste time looking for a development loan provider — with their relatively longer application processes.

In accordance with the type of financing required, applications may be made online or in-person. In all cases, lenders will require details of your business — its trading history, assets, cash flow and more.

Based on this information and their risk appetite — lenders may approve financing. Monies advanced to you — will usually be repaid with interest, and there may be other charges e.g. legal and valuation fees.

Types of commercial property finance

Development loans

Property developers seeking cash for new build projects, re-development and refurbishments — should consider development finance. These are loans that help you fund a good chunk of the costs — of a project. Lenders are paid back in installments — as per the terms of your agreement.

A joint venture (JV) is a partnership of builders, finance houses and developers. They partner with each other, for a particular development project. For example, a JV may be formed where one party has the land — but needs another party to come in and develop it.

Commercial mortgages, are forms of secured loans, perfect for businesses looking to buy commercial real estate. A commercial mortgage allows you to spread the cost of buying a property — over a number of years. You simply put down a deposit, on the property, and the bank pays the balance — you’ll then pay back over time (with interest).

Commercial bridging loans, provide the funds that property developers need — to complete short-term projects. As the name suggests, this form of finance is designed to “bridge” the funding gaps — between the different stages of a project. The main difference between a bridging loan and a property development loan — is that with the former, as long as you qualify, funds can be released into your account much more quickly.

If a developer already has existing financing in place, but there’s a shortfall of cash — a mezzanine loan can fill in the funding gap. This lets you continue developing your project — with the minimum of delays. Mezzanine sits together with the prime lender, and acts as a second charge for the development. This minimizes the amount of capital, a developer invests in any one project — enabling the cash to be used elsewhere.

Portfolio finance

Portfolio finance refers to funding packages, that consist of several properties (a portfolio) — all owned by the same person or company. Any borrowing is secured against more than one property. This can help reduce costs, as well as spread the risks, maximizing the portfolio’s performance — in the process.

Benefits of commercial real estate finance

  • Take on larger projects
  • Releases funds for use elsewhere
  • Increases return on investment
  • Keep ownership of your company and business premises
  • More stability — commercial mortgages are not subject to rental fluctuations
  • Usually lower interest rates — than unsecured loans
  • Able to finance a bigger property, and sublet parts of your business premises

Limitations of commercial real estate finance

  • Significant deposit required — which represents money that can be used elsewhere
  • Depending on the type of finance — interest rates can be high
  • Failure to keep up with repayments can result in repossession
  • Harder to sell and move business locations
  • Need to maintain the property
  • Property can go down in value

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