How to get a loan for commercial real estate?
When is 10% enough, and when 50% of down payment is required? What lease agreements will be our asset? What is the role of the private income structure? Step by step, we show what is important from a bank’s point of view and directly affects the final loan decision.
Let’s start with the dilemma what to invest in: a residential or commercial property? The first one is supported by the fact that we need less capital, at least in the sector of the most popular flats. However, regularity and level of income is here uncertain. In the case of investments in commercial real estate, the investor can expect stable income in the long term – current data and long-term statistics show that the prices of the commercial real estate lease continue to increase.
Or maybe it is more profitable to buy several apartments? You must bear in mind that the average rate of return on residential real estate is currently approx. 4-5% per annum, and on commercial real estate it is 7-8% (which is still a few percent more than on the mature western markets). There is another aspect of the investment, more pragmatic than accounting: ongoing commercial real estate services are much easier than in the case of residential real estate.
What capital should be available in the case of an investment in commercial real estate?
- Commercial premises with a small area – from PLN 500 thousand.
- Premises for one of the popular retail chains – from PLN 2.5 million.
- mini rental park – from PLN 4 million.
To the bank for a loan
The above comparison shows that the market of commercial premises is now fully accessible to investors who have so far concentrated on rental apartments. There are also no obstacles to supplement capital resources through a loan, and then pay it off from lease profits.
We advise on how you can assess your chances of getting a loan for a commercial property. Please bear in mind that these are general frameworks that can guide you through this matter. However, each case is treated individually by the bank.
What do lease agreements contain?
The bank will analyse this issue in great detail, although the attractiveness of the investment in terms of the rate of return is of greatest importance. – It is represented by a simple equation: the amount of rent multiplied by the length of the lease agreement. The principle here is that the longer the agreement, preferably without open periods and the economic clause, the better because the income will be regular and stable – says sales network director Adam Dubiella from Higasa Properties. And if we are applying for a loan for a property that is still at the construction stage, it may be necessary to have preliminary lease agreements. – In the starting point, from the point of view of the bank, two aspects are of primary importance: from what funds we intend to pay off the future liability and what can be our collateral – adds Adam Dubiella.
How will the bank assess the loan collateral? Short case study
Let us assume that a client who wants to buy shares in a given investment reports to a bank and intends to pay off the loan from his private income structure, adding his private mortgage security to it. It is these issues that the bank checks first and the investment itself becomes of secondary importance. – If the private income of the client, e.g. from a contract of employment, a seafarer’s contract or running a company, is stable and at the right level, and there is adequate collateral, such as a mortgage on his house, the Rental Park rating is just the icing on the cake – explains Adam Dubiella.
To what extent does the tenants’ brand count?
It is certainly better to have a contract with one of the leaders in a given industry, especially those operating on the market of several countries, than only with a local company or start-up. It does not matter, however, which of this type of chains is a tenant. It is also of little significance whether it is, for example, a mini rental or a “solo” facility. On the other hand, the close trading environment is important.
What down payment should you consider?
In the majority of banks, you will hear at the beginning that the down payment should be at the level of 20%. – Experience shows, however, that ultimately a down payment of 30% will be necessary. I believe that we should accept this value as a standard and assume it to be a minimum. It is better to have a pleasant surprise – says Adam Dubiella.
This is the case for individual customers. However, for professional entities, the down payment is in principle 25%. These are currently framework conditions, but there are exceptions under certain conditions. – I’ll give an example. Some banks treat small premises operating in housing estates, in a community, the same way as residential premises. In this case, 10-20% of the down payment will suffice and even for 20 years – explains Dubiella.
Example on the other hand: if we have a contract that makes the length of the lease dependent on the turnover of the tenant, then the bank automatically requires a higher down payment. In this situation, most banks will expect a high down payment, e.g. 50% LTV (Loan to Value ratio).
To sum up: the stronger assets we have (lease agreements, down payment, other sources of income), the better credit conditions we will obtain. And on the other hand, the weaker our arguments, the higher requirements for collateral the bank will have.back