Commercial mortgage financing guide

Commercial mortgage financing is used when the developer wishes to purchase an existing property and simply rent the premises. Before offering the commercial mortgage, lenders will want to ensure that the property value meets the sale price (that it’s not “over” or “under” the sale price), and that the projected rental income would support the payment profile. If the property is currently tenanted, lenders may request copies of the current Tenancy Agreements. LTV’s vary, however, you can achieve 85% of the bricks and mortar value on a self-cert basis from some specialist commercial lenders. Banks tend to offer lower LTV’s and are more likely to attach conditions. Bank conditions will often involve securing the loan by attaching a 2nd or 3rd charge on other properties owned by the applicant. In most cases this involves their personal residence.

Speculative Development Loans

For commercial property developers who want to buy a site with planning permission, improve the planning application, and sell the site on, there are speculative loans. These loans are obtained from a small community of specialist lenders and have varying payment profiles:

Payment of Interest-Only over a pre-defined period, with a “facility charge” at the end of the term
Capital and Interest costs paid over the term of the loan costs paid at the end of the term.
Bespoke payment profile with ultimate costs based on the projected sale value of the property/development
LTV’s vary between lenders, but a developer with track record can feasibly expect to achieve between 70 and 100% of the required loan value.

Stage Payment Development Mortgages

Stage Payment mortgages are similar for both residential or commercial building projects. They typically work in one of two ways:

Pay for the stage of the build at the beginning of the build
Pay for the stage on completion of the stage

loan_mortgage (6)In both cases the mortgage is secured against the property. The property value is regularly assessed throughout the course of the building project, and prior to further monies being released. Interest payments are made throughout the term of the loan, with costs increasing with each release of cash. Stage-Payment Mortgages can be used for buying land, building works (including materials and labour) and marketing costs if the development is to be sold on.

Other commercial mortgage financing options are bridging loans and secured loans.

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