Commercial Mortgage experiences and advice

krmach

I'm currently considering getting a commercial mortgage for a commercial property investment. I have done some research and enquiries regarding this and have done the following so far:

-Contacted the estate agent selling the property and received legal pack
-Viewed the property with vendor
-Contacted a few lenders and mortgage brokers who seem to be positive about the loan since I'm only asking 60% LTV and can provide the 40% from savings
-Contacted a solicitor to inquire about services and fees
-Been in touch with accountant
-Done calculations and projections etc the current yield of the property is more than £35k

At this point I haven't made an offer. I've been advised by a MB to make an offer with a condition that the completion time be extended as the usual one month would limit the number of lenders that I can approach. I have then asked the agent if the vendor would agree to completing three times longer than this timeframe and only then I can proceed. I afterwards realised the flaw of this since I haven't made an offer that the vendor could think about, simply because I'm scared that if accepted I need to put down 10% straight away. I have the money but what if the mortgage didn't go through within the 28 days timeframe? What if the valuation is much lower than the asking price? What if the survey find something really nasty? (Although based on my initial inspection of the property it looks well maintained) Are these baseless concerns?

My financial situation: I work part-time and with my husband's salary we get around £38k per year. We have lots of expenses every month but mostly covered by our salary. We own our house outright and we don't have any debts, not even on credit cards. The thing is my contract will end in January so this could certainly have an impact on the mortgage application. But I'm hoping the lenders will see that the property's yield alone can pay the mortgage comfortably.

This could potentially be my first property investment.

Thoughts? Advice especially from resident MBs? Anyone else in the same situation? Thanks!

racing_blue

Why do you need to put 10% down straight away, or commit to buying before surveying? Whose terms are those? Is this an auction for example?

Commercial property = business and the rules are what both parties agree they will be

I own an office building and my accountant has helped draw it all together with the bank and the lawyers. The bank was concerned mainly with the value and yield of the property, was prepared to lend based on this & not my personal finances. Wanted evidence I was solvent but not of income or expenses.

krmach

Hi racing blue thanks for the quick reply. The property is listed in a 'rolling' auction, so falls under auction conditions. TBH I've never heard of that but I have limited knowledge on types of auctions.

This is my first foray into this kind of investment or even business so perhaps because of this the lender wants to see my finances? Can I ask how did you prove you're solvent to the lender without showing them your personal income and expenses? Have you been in property development for a while?

racing_blue

If I recall correctly they just asked for a statement of assets and liabilites. They have the property as security and like in your case the yield comfortably covers the mortgage interest. I'm sure they wanted proof of yield, my accountant was in a position to provide that.

I'm not in property development though. I provide services from this office which I now own.

Thrugelmir

How long does the current tenants lease have to run, is there a break clause?

What's the demand for similar property in the locality?

These are the things that will determine the value. Consult a commercial valuer to act on your behalf. Unfortunately you'll need to expend money with no guarantee of being successful.

krmach

The tenants' leases vary, some up to six years, a couple for just a year. The longer leases have a break clause after two years. So at least for the next two years there's guaranteed rent. It looks like small office spaces are in demand in the area. I've looked up the report of RICS to have some understanding of the property demand, it's not as high as in London but it's solid and steady.

Yes I'm thinking a commercial valuation would be helpful before making an offer to have peace of mind as to the value of property and general condition especially as it's an older building with asbestos roof. But yes you're right all these expenses without the guarantee of actually getting the property in the end. Plus the solicitor's costs as well to look into the current leases amongst other things, quoted between £1300 to £1600 plus VAT and disbursements.

krmach

Just a quick update: I have approached several lenders and brokers and so far have received the following 'offers':

Bank A 5.69% which is the highest, with 60% LTV and early repayment charges
Bank B 3.5-45% included BoE base rate, 15-20 yrs repayment, 60% LTV
Broker C 4.41% all in 15 yrs repayment, 65%LTV no early repayment charges.

Do these rates look realistic (bearing in mind we haven't really submitted documents, simply based on discussions over the phone) at the current climate? Or are there better rates out there?

Thanks!

waveneygnome

We recently took out a commercial mortgage and are paying 3.3%.........however we are part owner/occupiers - which I think the bank liked. We tried a couple of brokers and 2 banks, but in the end our existing business bank offered us the best deal by far.

Watch out/remember to budget for fees: SDLT, Solicitors, bank valuation, mortgage arrangement fee (between 1 and 2 % of loan....negotiable!)

If this has tenants, make sure you have some spare cash for: quick spruce up if/when tenant leaves.....or worse you're left to clean up after bad tenant goes pop........and you have spare cash to cover the mortgage during any void periods.

You should be looking at what yield the building will bring in if fully let, and if multi tenanted, what your break even point would be e.g. you need it 70% full to make it pay.

I'd have thought you should be aiming for around 10% yield, but this will depend on local area/type of tenant.

My old landlord was great, would phone before he visited, popped in for a quick coffee every 6 months, asked us if we had any issues/maintenance to do. Kept the lease/paperwork up-to-date, but DELIBERATELY kept his rents 20% lower than surrounding buildings..............why? Over 22 tenants all paying rent, hardly any voids, waiting list to get into his properties, no 'churn' from existing tenants looking for better deals = happier life for all.

If you are quick, you could consider adding solar panels to the roof (need to be quick as Feed in Tariffs changing early next year), which can/should produce good returns and offer tenants cheaper electric (if you wish to pass these savings on!)...which can also help you retain/attract new tenants.

Lastly......consider setting aside a sink fund for major works down the line....new roof in 10 yrs? Replace doors/windows? If you just set aside a few % of rent each month/quarter it will soon mount up and help reduce any 'shock' repair bills.

krmach

waveneygnome thanks very much for the detailed reply. It's very helpful for someone like me who's just starting out and I've noted all the things that you've mentioned.

Can I ask if the rate they gave you was fixed or variable rate?

waveneygnome

Our rate was variable = 2.8% above BoE base rate of 0.5% => 3.3%

They did offer us a fix and a part fix & part variable.

The fixed rates were 1% more i.e. we'd pay 4.3% for a 5yr fix.

We went for a 15yr term..............however we have been very very fortunate work wise and had a good few months.

We have been able to make large overpayments (another advantage of variable rate) as clients pay us....and if things keep going the way they are, we could be mortgage free in 3 or dare I tempt fate 2 yrs instead of the 15 as planned. Mind you, we're fed up of eating only stale bread & cheese.

krmach

Just a final update on this before it gets closed: after three months of back and forth we ended up terminating the transaction with the seller.

I wanted to be really thorough as this is a major transaction. So I got a solicitor from the start who helped me understand the pile of document contained in the legal pack. Included was a CPSE (Commercial Property Standard Enquiries), interestingly, most of the answers provided were 'to follow' or 'not that the vendor is aware of'. Obviously this doesn't cut it for me nor for my solicitor and no amount of asking would budge the seller in providing a proper reply. So this obviously raised a red flag, is the vendor trying to hide something?

But before we reached this stage, I've commissioned a full survey despite it not being asked for by the lender. I paid £900 including VAT. The surveyor pointed out the need to replace the asbestos roof which is nearing the end of its life. I've asked two quotations from roofers: between £40,000 and £84,000. Massive discrepancy but it helps put in perspective the amount of repair costs we will be facing. Actually this didn't deter me from going ahead with the process. The final straw was the reluctance of the vendor to reply to standard conveyancing questions. Their reply was basically: you are buying from an auction and what you see is what you get, make a decision based on the documents supplied. But for me, what the documents provide were incomplete and its prudent to ask lots of questions especially if you're risking a lot of personal money and the bank's money! In the end we pulled out and lost the surveyor's fee and the solicitor's abortive fee, nearly £2000. But that's better than losing £35k had we agreed to make an offer and find out down the line that the vendor won't cooperate.

Since then, we bought a property at auction and is now nearing completion. All the information were provided in the auction pack, with the necessary searches already done by the seller which cut down the conveyancing time considerably. And the CPSE was also answered more comprehensively and without ambiguity.

We've learned a lot from this, and I have to say having a solicitor on your side from the start really helps a lot especially if you're a newbie in the property business like ourselves. I know their fees are not cheap but it gives us peace of mind and for me it's worth it.

Good luck to everyone dabbling in properties!