Can you sell your commercial property and help finance part of the deal?

“We’re a small building developer and have invested quite a bit in building some high-end commercial properties. The problem is many of our interested buyers cannot get a 100% loan from the bank and this usually sinks the deal. Can we as developer help finance the loan shortfall for a potential buyer?”

As with a normal home loan, financing a commercial property, or commercial property finance as is referred to in the property industry, is also via a mortgage bond registered over the commercial property in favour of the financial institution providing the loan. 

The processes and documentation required for commercial property finance however differs quite substantially from that of a normal home loan. Usually, the financing institution will require items like business plans, cashflow projections, property valuations, financial statements etc. as part of their due diligence and assessment as to whether they wish to finance the property. 

Such assessment by financiers is often referred to as the loan-to-value ratio or LTV, which is the difference between the loan amount and the market value of the property, taking into account all relevant factors. The lower the LTV, the less risky the loan, whereas the higher the LTV the greater the risk, which in turn may impact on the willingness to finance, the loan amount and the interest rate.

Given that the process, documentation and risk can differ quite dramatically from a normal home loan, one tends to find that the cost involved in buying commercial properties is higher than with typical home mortgages. Also, financiers often require a larger deposit from the buyer in commercial property finance requiring deeper pockets from potential buyers. As you say, this can then become an inhibitive factor as not all buyers have cash on hand to fund the shortfall. 

A new trend developing among commercial property sellers is the offering of vendor loans to potential property buyers, usually at low interest rates, to supplement the commercial mortgage loan and so ensure that the buyer can meet the purchase price and encourage the buyer to make use of the option.

Such vendor finance often takes the form of a deferred loan from the seller or even the acquisition of shares by the seller in the borrowing company. While it may not be ideal to provide a loan or receive dividends later, the seller is placed in a position where a purchaser can meet the purchase price and a deal can be made, which is better than no sale at all. 

As always, the devil is in the detail and both buyer and seller should tread carefully when offering or considering such vendor finance options. Remember that it is important that the financial institution providing the primary property finance be informed of the vendor finance as it could also affect their security. It is further advisable that you obtain the assistance of a commercial or property specialist to help with preparing the necessary agreements for such finance.

May 20, 2021
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