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Commercial Mortgages FAQs

• Why should I purchase property instead of letting?
• What is the usual length of a mortgage?
• How much cash do I need to provide for a down payment?
• How should the mortgage be structured?
• How can I improve my chances of getting a mortgage?
• Who is responsible for the repayment of the mortgage?

Why should I purchase property instead of letting?

Purchasing property is a large decision for any business. There are several advantages and disadvantages that should be considered before making your decision.

Advantages:

Fixing your overhead costs. When you finance your purchase with a mortgage, have a repayment schedule that sets your fixed expense each month. Potential asset appreciation. Potential to sublet. If you purchase more space than your company currently needs, you could sublet a portion of it until you need the space. Mortgage payments may be cheaper then rent. When you set your repayment schedule you know what your payments will be in advance. If you rent your property, you are exposed to market conditions that may increase your rent to above what your mortgage payments would have been.

Disadvantages:

Harder to relocate. If you have a lease and decide to change locations the process is relatively simple. When you own the property, you need to determine if you should sell the land or find a new tenant. Drain on cash. A mortgage will not provide 100% of the financing needed to acquire the property. You will need to use your current cash to finance a down payment and pay for any related expenses. More management responsibilities. When you let the property, the landlord is responsible for the upkeep and security of the property.

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What is the usual length of a mortgage?

Mortgages are typically available for any time period between 5 to 25 years. For commercial mortgages the maximum length of the mortgage is usually 20 years for newer properties and 15 years for older properties.  

How much cash do I need to provide for a down payment?

Typically lenders often view mortgages with larger down payments as more secure. Most lenders typically like to receive 20% to 30% of the purchase price as a down payment. Depending on your company's financial history, as little as 5% of the purchase price may be required for a down payment. (You will most likely have to pay a higher interest rate to compensate for the smaller down payment). Remember the larger your down payment is, the less you have to borrow.  

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How should the mortgage be structured?

If possible, you should form a separate business entity to lease the building to your operating company. This separate entity should then arrange for a non-recourse mortgage for the purchase of the property. This should protect your operating business if you default on the mortgage. You may wish to consult your accountant or tax advisor.   

How can I improve my chances of getting a mortgage?

Be prepared to demonstrate why you have a solid chance of repaying the mortgage. The lien on your property adds security but the lender will still base their decision on your ability to repay the mortgage. It will be extremely beneficial to be able to show the lender a history of your earnings and a projection of future earnings. Also expect the lender to arrange for a property appraiser to estimate the market value of the property; this will help the lender feel that the property is sufficient collateral for the mortgage.

Who is responsible for the repayment of the mortgage?

The legal structure of your company will determine who is responsible for the repayment of the mortgage and who will be liable if it is not repaid. If you are a sole trader, you bear all the responsibility and potential liability. If your have formed a partnership, all of the partners involved are jointly and individually responsible. If you a legal company, the Directors may be liable if the mortgage is not repaid.

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