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Commercial Real Estate Finance
The world of commercial real estate has finance at its very core. It is through mutually advantageous funding products that businesses can grow through property development opportunities, leveraging existing equity to grow a strong portfolio that provides important investment as well as an ongoing revenue stream.
Understanding the many different types of commercial real estate finance can be complex, though, and having an expert on your side is essential if your business is going to make the most of the possibilities.
At Clifton Private Finance, we have the specialist knowledge you need to build and expand your property portfolio, whether you’re a seasoned developer, dipping your toes into commercial property for the first time, or looking for a solid investment in a new arena, Clifton PF can help.
What is Commercial Real Estate Finance?
Commercial real estate finance is an umbrella term for a range of funding products that can be used to buy and develop land and property for businesses in the UK. It also includes finance solutions that leverage equity in existing property to provide funding for other purposes, either for expansion or to cover short-term cash flow needs.
Commercial property finance can be used to obtain large levels of capital, providing businesses with the backing they need to make significant investments.
Some examples of commercial properties that can benefit from financing include:
- Offices - Office space is a primary consideration for providing workspace for your business, but also provides a strong investment opportunity for property businesses to lease out.
- Retail Units - Commercial real estate finance can be used for anything, from buying a small shop, through to developing an entire new retail park.
- Warehouses - Storage space is essential to many businesses in logistics.
- Industrial Facilities - Owning your own factory can significantly cut leasing overheads as well as being a good investment for manufacturing businesses.
- Hospitality Venues - From restaurants and hotels, through to larger scale leisure facilities and even theme parks, commercial finance provides the funds needed to grow.
- Land for Development - For construction projects at the dawn of their journey, purchasing the land for use remains a key part of commercial real estate finance.
- Farms - Farms and agricultural land is a cornerstone of the economy; for agricultural businesses looking to own the land they work, commercial property finance has the answer.
- Mixed-Use Developments - Combining residential and commercial space, mixed-use property finance can be tailored to your specific needs when buying properties such as pubs, or shops beneath flats.
6 Types of Commercial Real Estate Finance Products
Commercial Mortgages
At the centre of commercial property finance sits the commercial mortgage. These are long-term loans that offer low rates of interest, making them ideal for most property and land purchases.
Commercial mortgages share much in common with a standard residential mortgage, though the criteria for lending is based on the business finances rather than your personal income, and the loan-to-value (LTV) rates are typically lower to mitigate the greater risk to the lender.
Commercial mortgages can be used both to buy property and to release equity tied up in your real estate assets in terms of a remortgage.
For businesses, commercial remortgaging can provide large injections of capital needed for significant expansion or short-term cash flow use. It is this flexibility regarding the release of equity that makes property and land investment such a powerful strategic tool for UK businesses.
Bridging Loans
So-called because they ‘bridge’ the gap between an initial need for funds and a more cost-effective long-term plan, commercial bridging loans provide businesses with the purchasing power they need at very short notice, allowing them to seize property opportunities and not let potentially business-changing moments slip by for lack of capital.
Bridging loans are especially useful for:
Purchasing property at auction - Auction properties have a strict 28-day payment schedule, which is typically too fast for a standard commercial mortgage to be put in place.
A bridging loan can provide the funds rapidly, allowing you to take advantage of a low-priced property under the hammer with a confident plan to pay off the bridging loan and replace it with long-term financing (a commercial mortgage) at a later date. Bridging loans can also be used in this way to allow businesses to ‘flip’ properties - buying them at auction, potentially renovating or redeveloping them, and then selling them on for a profit.
Run-down properties - Lenders provide mortgages based on a thorough risk assessment, a key component of which is the property’s viability for a future sale to cover the full balance of the mortgage should repossession occur.
Properties that are in a poor state of repair often fail this risk assessment, as they are difficult to move on should a problem occur and for this reason, obtaining a commercial mortgage on a run-down property may be impossible. Bridging loans have a different risk assessment and can be obtained based on your business plan and exit strategy, giving you the time needed to renovate or redevelop the property before it becomes mortgage-viable or is resold.
Clifton Private Finance are here to help you understand bridging loans and to obtain auction finance that gives you the backing to obtain commercial property when opportunity arises. Contact our specialist bridging loans team today.
Development Finance
For businesses and developers looking to fund major construction or renovation projects, development finance provides a staged medium-term solution that covers the project with multi-phase funding.
Like a bridging loan, development finance is designed to be replaced with either the sale of the development or through replacement to a mortgage based long-term finance solution. It can provide scaled funding that offers both capital and support for on-going project running costs, leveraged by a solid exit strategy and business plan in addition to the physical asset of the real estate itself.
Most development finance features an interest-only repayment structure, with final repayment of the principal at the end of the term, allowing developers to keep their funding costs as low as possible while undertaking significant projects.
Mezzanine Finance
Mezzanine finance provides additional funding support for larger construction and development projects. As a hybrid form of financing which combines subordinate loans with equity options, mezzanine finance provides lenders and investors with a higher return to risk ratio and offers property development businesses the substantial funding needed to undertake large-scale developments.
Equity Finance
Bringing in external investors shares both the risks inherent in a construction project and the ownership of the development itself. Equity finance is especially useful when considering significant commercial and industrial builds, providing investment opportunities for both independent third-party investors and parties with a vested interest in the development; for example, providing retail giants the opportunity to invest in the building of a new out-of-town retail park.
Structured Finance
For government contracts and significant infrastructure-building projects, structured finance provides a way to raise extremely large sums of capital to enable corporations to mitigate risk and undertake major developments.
5 Commercial Property Finance Considerations
When thinking about commercial real estate finance and which product works best for your needs, it’s important to keep these key considerations in mind:
Loan-to-Value (LTV)
Because of the increased risk involved when lenders provide mortgages to businesses compared to personal residential mortgages, the available LTV sizes are different. A business looking to take out a commercial mortgage will need to have a much larger deposit than would be expected in the residential market.
In these situations, a comprehensive package of funding may be required to finance the entire purchase or development. At Clifton Private Finance, our debt advisory team and mortgage specialists can work with you to put forward a comprehensive funding plan that makes the project viable.
Interest Rates and Terms
Longer-term loans tend to have lower interest rates. This is why the commercial mortgage is preferable as a long-term solution than most other options. However, all loans rates are subject to market conditions and borrowers should plan for changes in the rate, especially when the mortgage term covers many years.
It is essential that a proper plan is in place to deal with the burden of interest, both now and in the future should rates change.
Repayment Structures
Your financial strategy will be impacted by the repayment structure of the loan. These can come in many forms, with flexible arrangements possible that lead to very customised real estate loans. Important structures to understand include:
Interest-only - An interest-only commercial mortgage has a low monthly repayment cost, paying only the interest accrued, but the principal of the loan remains constant throughout. Interest-only loans are excellent for allowing businesses to invest in property without significantly impacting monthly cash flow, or for those companies setting up as landlords, leasing out their properties. However, at the end of the term, the principal must be repaid in full, typically requiring the sale of the property or a new refinancing deal.
Repayment - Repayment loans involve paying off the principal over time as well as the interest, and are the most recognised form of loan for many business owners. Repayment loans put a larger strain on your monthly cash flow, and can be harder to obtain due to the diligent stress testing by the lender, however, once the term is finished the loan is repaid in full and there are no further obligations.
Exit strategies - Many development and commercial real estate loans are short-term products structured based on an exit strategy. These loans are often easier to obtain, as long as the business plan details a clear exit strategy, and are either repaid in full or refinanced at the end of the term as required. Exit strategy-based loans may be repayment or interest-only, and may be structured both with and without a monthly repayment schedule.
Lender’s Requirements
For the lender, the biggest factor is risk. All commercial real estate finance is a balance of risk vs. reward, with the lender keen to mitigate the risk as much as possible. All requirements and expectations the lender has will be based on this balance including:
The property’s income potential - If you are looking to lease out the property as a landlord investment, then the lender will be basing many of their calculations on the property’s rental yield rather than your business's other finances. The property will be expected to pay for itself and generate profit, otherwise it is unlikely to be a good investment.
Your business creditworthiness - Your creditworthiness is made up of three factors: your financial history, your financial present, and your financial future. In real terms, this means an assessment of your business credit report (your history), a stress test based on your business cash flow (your present), and a thorough understanding of your financial forecast (your future). All three should be confident and strong to secure funding.
Your business plan - Your business plan doesn’t just contain your financial forecasts (though that is important), it also presents your business ideals, your vision, and your strengths and weaknesses to the lender. All of these factors form part of their risk assessment and a strong business plan is essential to securing any commercial real estate finance.
Your exit strategy (where relevant) - Loans that rely on an exit strategy will need that clearly defined. You will need to show realistic research and understanding of the market if you plan to sell on the property; and documentation that shows a commercial mortgage is viable if refinancing is the preferred route.
Structural warranty insurance - Lenders need to know that everything has been done to limit the possibility of loss. For construction projects, this means comprehensive structural warranty insurance. This niche insurance provides protection for the first decade of a building’s life against any unforeseen issues that are due to the construction process, whether that’s from the unintentional use of substandard materials, unknown poor quality workmanship, or mistakes in the design.
Regulation
Commercial property finance follows different rules and tax regulation to residential finance, and it’s important to be aware of the difference. Some include:
- Different SDLT (Stamp Duty Land Tax) rates for commercial properties
- Lower CGT (Capital Gains Tax) than residential properties
- Potential for VAT on property sales and letting
- Capital allowances on some commercial property expenses (such as lighting, air condition, solar panels and more)
- Business rates are paid rather than council tax
- Mortgage interest is a deductible business expense
- Properties must follow the appropriate use class (for example, shops cannot be used as a residential let; warehouses cannot be used as entertainment venues etc.)
- Lending regulations and affordability checks fall under different criteria
Speak to a specialist commercial property finance advisor at Clifton Private Finance to discuss any regulatory concerns you may have - we have the know-how you need to optimise your finance opportunities.
Using Debt Advisory Services for Large-Scale Developments
Expert guidance and support is essential when trying to obtain debt financing for large-scale projects. A specialist debt advisory service works in partnership with you to explore the project’s needs holistically, developing a package of funding options that combine to provide the finance needed for even the most demanding and ambitious projects.
Debt advisory in commercial real estate finance is especially relevant, given the wide range of options available to businesses and investors in the sector. Without the larger understanding that specialist support provides, it is all too easy to select unsuitable finance products that both cost more and have more stringent, potentially unworkable, terms and limitations. By partnering with a debt advisory service, mistakes are avoided.
The benefits of debt advisory include:
- Solutions tailored to your specific business needs
- Access to a wider range of lenders, allowing the choice of the most finance products
- The time and anxiety saved by having a specialist alongside, working on the funding while you work on the project
At Clifton Private Finance, our debt advisory service exits to support clients seeking comprehensive funding solutions for their development or renovation projects. Contact us today to learn more.
Understanding the Commercial Property Finance Landscape
The finance landscape is a changeable environment. By keeping up with current attitudes, it is possible to make the most out of your commercial real estate finance. Some relevant market trends include:
- A drive to sustainability - Sustainability in the UK is a high priority at both business and government level. New buildings are expected to be energy efficient and put environmental responsibility at the forefront. ‘Green’ loans, with improved rates and terms for those who promote sustainability, are growing in popularity and availability.
- The shift away from WFH - Work-from-home saw an incredible boon post COVID, but many companies are now looking to push back against the trend, with a call to come back into the office gaining momentum. This means both that traditional office spaces have fallen in popularity over the past few years, and also that they have the potential to be positive investments for the future.
- Increased logistics - The move towards global delivery has put increased demand on warehousing and industrial units, making this another area worth investigating thoroughly if medium- to long-term investment is a prime concern.
- Interest rates - Interest rates have been on the rise, making traditional property finance more expensive than it once was. This has led to a boost in alternative finance options, such as bridging loans, as well as careful consideration regarding fixed terms and refinancing.
Obtaining the Best Commercial Real Estate Finance with Clifton Private Finance
At Clifton Private Finance, we understand the need for expert advice and a specialist’s eye at every level of commercial real estate finance.
Partnering with Clifton Private Finance ensure that you obtain the best specialist finance that properly suits your business needs. Contact us today.
