Getting commercial property finance is a completely different process from a residential mortgage. Lenders will apply strict risk criteria to these applications and will be concerned with the commercial viability of the asset, your experience as a developer and the cash flow of the property. Here are tips to navigate this landscape with preparation and a clear understanding of what lenders are looking for.
1. Conduct a complete feasibility study
Before you go to a lender, you must have a feasibility study in meticulous detail. This document should not only be math but also be effective communication of the costs of the project, the expected income from the project, the timeline and the risks involved. A well-executed study demonstrates that you have done your homework on the local market and have a realistic plan for construction and leasing.
2. Show your track record
In commercial lending, always remember that the deal is only as good as the developer. Lenders will look for experience successfully delivering projects of similar size and complexity. If you’re a newer developer, highlight the experience of your team, builders and project managers. Photographs and financial summaries of past project results add credibility to the ability to raise funds for ambitious developments.
3. Explore the loan-to-value proportion
Commercial loans are based on strict LTV requirements, which dictate the amount of project cost the lender is willing to finance. Most commercial lenders will want to see a significant amount of equity committed by the borrower, typically 20% to 40% of the project value. Knowing your LTV requirements early in the planning process will help you to ensure that your capital structure is realistic.
4. Organize your financial paperwork early
Business applications involve lots of paperwork, such as tax returns, personal financial statements, detailed site plans and council development approvals. Waiting until the last minute to collect these documents causes delays and missed opportunities. Organize a digital repository for all your project information so you can respond to property development finance lender requests for information.
5. Focus on the asset’s exit strategy
If you are planning on renting the property for income over the long term or selling it when it is complete, you must have an exit strategy. However, if you’re planning to sell, provide market data to support your projected sales prices and have a realistic leasing strategy. The most important thing in getting approval is proving your asset will have enough value to cover the loan at the end of the term.
6. Be honest about possible risks
Savvy commercial lenders will find out these risks during their due diligence process, and not disclosing them will immediately destroy your credibility. Instead, take the initiative to identify these risks and propose a mitigation plan for each one. You should have another plan for what could go wrong; it demonstrates your maturity and gives the lender more confidence in your ability to manage.
7. Establish relationships with multiple lenders
The commercial lending market is a broad church, from big banks to private equity houses and specialist development lenders. Don’t just go to one source; develop relationships with multiple lenders to compare terms and find the best fit for your project. It could be that a specialist lender is more flexible on a complex development, whereas a traditional bank could be competitive on a stable asset.
Laying the groundwork for your financial future
Mastering commercial property loans is an art, and it will directly affect the profitability of your development portfolio. By preparing well, by establishing high professional standards, and by communicating your vision and risks clearly, you make yourself a preferred borrower. Moreover, you see the loan application process as a formal presentation of your development expertise.
This content is provided for informational purposes only and is not a substitute for professional advice. AFP editorial staff were not involved in the creation of this content.
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