Commercial Real Estate Financing
Investing in commercial real estate is very different to investing in residential real estate. These differences are reflected in the financing for commercial properties. Commercial property loans tend to be for larger amounts and shorter loan durations, and these loans can vary in type and terms.
Property types
Commercial properties can be commercial offices, industrial complexes or warehouses, retail centres or shopping malls, residential houses, residential units, or other types of commercial properties. Financing can be obtained for purchases or for development and renovation projects. The borrower might be planning to use the site for business as an owner occupier or might be planning to lease it out as an investment property. If the borrower is a developer, he or she will be using the loan to fund a development or extension project.
Equity
Commercial property is generally viewed as being more risky than residential properties. The maximum loan-to-valuation ratios (LVR) for commercial properties may vary depending on the lender, but most lenders will lend only up to 75% and prefer 65% or less. As such, a larger deposit will be required by the lender for the loan.
Loan durations
Loan terms for commercial real estate tend to be shorter than for residential properties. While a home loan can last 25 or 30 years, the duration of commercial loans rarely extend beyond 15 years. Most commercial real estate loan terms are for five years, as investors tend to be active and often refinance to expand or develop their commercial properties after a relatively short period of time.
LVR
Interest rates and LVR are critical issues for commercial property investors. The LVR of a property will usually depend on the cash flow. Commercial properties tend to yield higher returns. The investor might borrow around 70-75% of the property value to ensure that they have sufficient cash flow returns.
Interest rates
As with a home loan, it is possible to obtain interest-only commercial loans. The interest-only period may be the first five years of a 15-year loan, or the borrower might choose to vary the interest-only period to suit his or her cash flow requirements.
Loan types
Different lenders will offer different types of commercial loans. Some examples include fixed commercial rate loans, interest prepaid commercial rate loans, or variable commercial rate loans. The investor can choose the type of loan to optimise cash flow and to take advantage of low-interest rate periods, where applicable.
Application and approval
The lender will want to know about the borrower’s assets, liabilities, and property information. The borrower will need to provide information about his or her current assets, liabilities (including credit limits), information about the commercial property to be purchase, and how much of the deposit the borrower has saved up.