Purchasing commercial property is more complicated than approaching the bank for a residential bond, and may be confusing if you lack experience in negotiating and executing these deals.
Leon Breytenbach, Rawsons Property Group commercial division national manager, says commercial property acquisitions are inevitably greater in value than residential ones, and thus require larger deposits and higher interest rates as the repayment period is five to 10 years against the 20-year home loan.
Buyers also have to furnish more information. To prevent delays and ensure the best chance for approval, potential buyers should know what information and documents the banks require.
“Be cognisant of their minimum requirements and ensure your company exceeds these levels. The bank will assess the sustainability of the investment from the financial history and standing of both the client and prospective property,” he says.
When applying for a commercial loan, the banks require your current assets and liabilities statement; any information relating to indebtedness to other banks; financial statements of other holdings; and a business plan for the intended property. This means providing background information about any existing commercial property portfolio holdings, including rental schedules, to evaluate cash flow sustainability, and a statement explaining how the wealth has been amassed.
Buyers must prove they are capable of repaying the debt and can service it should interest rates increase, while financial statements reflect the security of your cash flow and whether the company has any latent problems.
“The bank wants to know if you are building a commercial property portfolio, intending to improve the property for personal use or buying to resell. The stronger the business plan, the greater confidence it will inspire. Prospective buyers should include current and projected financials while demonstrating they have sufficient cash flow to cope with new loan payments and the ongoing business.”
In terms of the prospective property, Breytenbach says the bank wants to establish its history, including whether it has been adequately maintained and managed. Major concerns about structure or maintenance are relevant and the running costs “within acceptable parameters”.
“A statement of current tenants will be required to show there is a core of long-standing occupants with stable financial backgrounds, and the financial health of the anchor tenant will come under scrutiny. Short-term tenant turnover raises concern, while negative press, including liquidations of any tenants, will negatively impact on the loan application,” Breytenbach says.
The bank will also assess whether the prospective property rentals are market-related. If they are too steep and must be lowered, the rental income may be insufficient to service the bond. Also under consideration will be imminent lease expiry dates as this could trigger vacancies impacting on future rental income. The business plan should factor in adequate provision for cash flow interruptions in the event of vacancies.
Other considerations are the state of or unconventional use of adjacent buildings; new developments potentially operating in competition; and single-use premises limiting the type of tenant occupation.
He says cash buyers may employ gearing or leveraging to enhance their returns. However, gearing should not exceed 55%-65% of the property’s value as this allows “deeper pockets” to ride out storms triggered by extended vacancies or unexpected interest rate hikes.