Commercial real estate financing is very different from home financing.
In the latter, the transaction is based on the value of the home at the
time of the sale. When taking financing for your commercial property
purchase, however, financial institutions will base it, in part, on the
value of the business in the future. In addition, commercial real
estate financing can take on very different terms. The way the deals
are structured is based on a number of factors such as:
- Anticipated use of the property:
- Anticipated returns from the property;
- Type of real estate;
- Size of real estate;
- Perceived risk to lender;
- Market conditions.
Prior to taking up a loan, investors need to do their due diligence by
examining each of these areas carefully. Investors then need to examine
the type of loans offered by lenders in accordance with their needs and
There are many ways to finance your property purchase, be it from
mortgage banking firms, savings and loan institutions, regional banks,
insurance companies, and private investors. It is not advisable to pay
100 percent for your commercial real estate purchase. In the current
economic climate, you can get up to 75 percent financing.
Different banks provide different packages to suit your needs. Banks
like HSBC, for instance, has an Investment Property Loan programme
which provides a comprehensive and attractively priced
property-financing package for individuals buying commercial properties
for investment purposes. Their loan programme includes attractive
interest rates, flexible terms to tailor your loan to suit your
individual needs, high upfront legal fee subsidy, free fire insurance
for one year and free valuation. Not all banks, however, readily post
this information online. Therefore, investors will need to do their own
market research by enquiring personally with the banks on whether their
financing packages are viable for the long-term.
Most banks have a list of requirements when it comes to financing
income-producing properties such as a shopping mall, office building or
commercial warehouses. In general, here are the requirements:
1) Banks will usually not finance more than 75 percent of the appraised value of the property.
2) Properties must show sufficient debt-repayment ability by way of a
ratio of 1:20X or higher. Debt Repayment Ratio is calculated as Net
Operating Income / Total Annual Debt Burden.
3) In the case that a sole tenant occupies the property financed,
investors might want to take a look at the financial strength of the
Although there are many types of financing available, investors should
assess their level of risk. Ask yourself, can you afford the property?
What is your cash position like? Are you looking to just pay 25 percent
first and take a bank loan for the remaining 75 percent? Will you have
sufficient cash to buffer yourself during an economic downturn? Can you
afford the fluctuating bank interest rates? Going through all the
possible commercial factors will help you eliminate your risks and
anticipate any shocks in the market. The following documentation must
be ready prior to taking up a loan:
* Income and expense statement for the property demonstrating a solid income stream;
* Financial statements on all principals involved as owners of the property;
* Profiles of the management team;
* Property appraisal;
* Financial statements on the borrowing entity;
* Plans, including construction blueprints (if available) for the use of the property.