How to get the best financing for your commercial investment

Last week we looked at the reasons why lenders view commercial property in a different league to residential property when it comes to finance.

And then we moved to the various aspects of a project commercial lenders look at as far as risk is concerned.

However, what you really want to know is: How do these considerations affect the price for your loan?

Unfortunately, the answer is significantly.

The precise way in which different lenders price in risk is proprietary knowledge they tend to guard the closely. Therefore, it can vary markedly between lenders.

As a result, larger loans with low perceived risks can be priced at very close to residential mortgage rates, whereas smaller deals (but with higher risk factors) will often attract far higher interest rates.

Basically, you need to follow the same steps as you would in choosing a property intended to provide you with a good long-term return. And help you, these are:

• Purchase high-quality properties that would easily be re-leased if they become vacant.
• Buy properties with sufficient time left on the lease, to allow a reasonable loan term (preferably at least three years).
• If it is a long lease, make sure there are regular market reviews – so you aren't left with an asset that is under-let for a long period.
• Make sure there is good tenant security. This can be achieved by way of personal and corporate guarantees (which is most appropriate depends on the nature of the tenant – a corporate guarantee from Coles is sufficient, but is not from a small business). Bank guarantees or significant funds bonded in trust also provide good security against default by the tenant.
• Financially strong tenants are attractive to lenders. For this reason, publicly listed? (or otherwise well-known) companies always appeal to lenders.
• Properties with several alternate uses are generally perceived as being lower risk than more specialised assets (e.g.: There are more alternative uses for an office than for a motel).
• Where the asset has a specialised use, it is important there is very strong demand for that style of property. The quality of the tenant and lease are also more important in such circumstances.
• A strong rental return providing for a significant coverage of the interest cost.

Again, many thanks to Perry Finance for these valuable insights into the financier's world of commercial loans.