Commercial property finance different to residential

Commercial property finance is one of those aspects probably the least understood — and therefore, can lead to some are rather poor decisions by investors.

The most important thing you need to grasp is that there are basically no hard and fast rules about the various factors like the leverage that is available, costs associated with commercial loans or the actual lending criteria most financiers and adopt.

When it comes to commercial finance, everything has to be viewed in relation to the strength and size of each particular deal.

Most people are used to residential mortgages — where a lender will offer a set rate and charges, plus different amounts of leverage, depending on the location of the property.

Servicing is calculated by taking into account all of the debts and all sources of income attributable to the borrower(s) or the guarantor(s).

There are some commercial lenders that operate in a similar manner. But generally, these lenders only deal with smaller transactions, in restricted geographical locations.

The main point here is that residential lenders tend to price most deals the same way, with some possibly discounting for larger loans. While perceived risk is the factor dictating whether they will fund a loan or not, it has little or no bearing on the actual price for the loan.

On the other hand, commercial lenders place much greater emphasis on quantifying risk and will apply different lending ratios, depending on the risk they perceive for a particular security. However, they could also adjust pricing according to these same factors.

Therefore, two loans of the same size may be significantly different in terms of pricing.

Lenders look at a wide range of characteristics when determining the risk level of a transaction. These will include:

• The financial strength of the borrower.
• The experience of the borrower with the type of property & location.
• The term of the lease itself.
• The financial strength of the tenant.
• Guarantees attached to the lease.
• Relevant clauses in the lease (such as market reviews).
• The current strength of the local market.
• Overall economic conditions at the time.
• The lenders view of the geographic location & type of property.
• Possible alternate uses for the property.
• Whether you plan to hedge against interest rate movements.
• The lending ratio you are seeking.

These details have been provided by courtesy of Perry Finance, which is one of my trusted consultants, when it comes to acquiring commercial property.

Chris Lang is a commercial property investor and gives keynote speeches and regular seminars on the best way to invest in commercial property. He maintains a blog, his-best.biz, which he updates regularly about the best way to get the most out of your commercial property investment.