Commercial real estate; Financing and lending Basis.
If you feel ready to enter the niche market of commercial real estate investing, now is the perfect time to develop an understanding of commercial real estate financing basics to determine if this unique industry is a good fit for you. Use the information below as your commercial real estate financing basics guide, and before you know it, you’ll have a better understanding of how commercial property loans differ from residential loans, the different types of loans and lenders that are available, and a broad overview of how commercial real estate financing works.
Project finance for the construction of a commercial property is also widely used and Commercial real estate is often built for a specific tenant, which affects the choice of financing instruments.
What Are Commercial Property Loans?
Commercial property loans are mortgages specifically delegated to purchasers of commercial properties.
Properties are considered commercial if they produce income and are used for business purposes only. A common example of a commercial property is a retail or an office space through which a business is operated. To acquire such a property, an investor can select from several commercial real estate financing options, but should be prepared to guarantee the mortgage via a lien, or more simply, collateral. If the investor fails to meet the commercial property loan’s repayment terms, the creditor reserves the right to seize the property. Experts at HostPapa suggest that “developers, trusts, funds, and corporations are the most common recipients of commercial real estate loans. The loan terms span from 5 to 20 years, with an amortization period that is longer than the loan duration”.
It is also important to note that commercial property loans are made out to business entities and not individuals. In other words, financing commercial real estate usually requires the formation of a business entity, such as an s-corporation or a limited liability company.
Companies undertaking the construction of a commercial building must select a reliable general contractor capable of delivering the project efficiently and on schedule.
Havelet Finance Limited is ready to help you with the selection of a responsible company for the construction of facilities of any complexity under an EPC contract. It is important to understand that the early years of
SPV operations are usually unprofitable. The company incurs huge costs associated with the purchase of land, construction and loan servicing. Positive cash flow comes at least in the second or third year of operation, when rental income is stable, debt service costs are decreasing, and profitability is increasing.
Research and statistics show that rental prices for commercial real estate in the developed countries of Europe and North America are growing. This can be explained by open borders and significant capital inflows, an attractive legal framework for business, political stability and favorable conditions for free market activity. Shopping malls, restaurants, hotels, industrial buildings and innovative logistics centers can be great value propositions even in the post-covid era, when much of the business goes online. Our financial team is ready to develop a suitable financial model for your project, providing comprehensive support and advice on any issues
Havelet Finance Limited offers financing of commercial property projects in any country of the world, including long-term bank loans from 10 million euros with a repayment period of up to 20 years. We offer low interest rates and flexible repayment schedules. Thanks to close cooperation with the world’s leading banks, we are ready to provide you with financing for investment projects with initiator’s own contribution of up to 10
Commercial property construction loan
Bank financing of commercial construction is most often carried out according to the project finance formula (PF). Most of these projects in Europe are implemented with the participation of banks in one form or another. The PF model is based on the future cash flows of the construction project (commercial property for rent) and not on the assets of the borrowing company provided as collateral.
Project finance can be used both for the construction of new commercial real estate and for refinancing existing projects. This type of transaction is almost entirely based on cash flows from lessees who have already entered into agreements or will enter into the future.
The borrower is usually a Special Purpose Vehicle / Special Purpose Entity, which is created only for the construction and management of a specific project. This model excludes the use of the assets of the initiator company as collateral, and banks rely entirely on the future income and assets of the project company as a source of debt repayment.
Choosing a bank to finance commercial construction.
Before an investor goes to the bank to obtain a loan, he must answer whether the construction project meets the basic requirements of the bank:
1}Legal requirements. Orderly legal status of real estate and land. Availability or readiness to establish a special purpose vehicle. Availability of permits or compliance with formal requirements for obtaining a building permit.
2}Technical requirements. Experts must provide a positive opinion on the technical feasibility of the project. A detailed architectural design is important in this context. In addition, the bank takes into account the company’s experience in construction projects.
3}Financial requirements. Lending institutions usually require a potential borrower to pay an appropriate share (usually 10–30% of the total investment costs), as well as guarantees of compliance with debt service standards (DSCR not lower than 120%).
4} Marketing requirements. An additional argument for the allocation of borrowed funds is the positive result of market research, confirming the possibility of renting retail space, warehouses or office space within the framework of the project. The choice of a bank for financing commercial construction must be comprehensively thought out and justified.
When deciding to cooperate with a bank, an investor should be aware that over the next few years he will be doomed to cooperate with a lender. The wrong choice can negatively affect the implementation of the project and even lead to its failure with corresponding financial and reputational losses for the initiating company and its partners.
Given the time frame for the construction of large commercial facilities, an investor may face various market, macroeconomic, political, and legislative obstacles that can affect the project. The investor’s task is not only to analyze the conditions offered by the bank, but also to assess its reliability.
What to look for when choosing a bank to finance commercial construction:
- Stability and predictability of the bank. For large projects, it is recommended to choose a fairly large bank from the top ten, with a good financial condition and a strong department for working with corporate clients.
- Market experience in financing investment projects, the number and size of completed projects. This information will allow assessing whether the bank has developed project appraisal standards, effective lending and management procedures. This reduces to zero the risk of not understanding the specifics of project financing by the bank’s employees.
- Competence and professional experience of the person who will lead the project. The importance of this point in the long-term financing process cannot be overemphasized. The quality of cooperation with the bank as a whole will depend on cooperation with this person.
- Loan documentation. The scope of this documentation, regardless of the size of the project, is quite extensive and is usually outsourced to specialized law firms. The cost of such a service can reach tens of thousands of euros.
• Restrictions on decision-making by the board of the company. Understanding these boundaries allows for an assessment of management discretion (for example, dividend payments, changes in shareholder structure, scope of disclosure obligations, and so on).
As mentioned earlier, the cost of an investment project is directly related to the size and financial resources of the banks that must participate in its financing. In other words, a large project requires contacting a bank with a sufficiently strong capital base. In general, project finance is a specialized area that requires not only capital, but also a strong expert base in the form of special departments for financing investment projects. For small banks, the allocation of such human and financial resources under the PF is unprofitable.
On the other hand, small projects often do not fit into the strategy of large financial institutions, which usually conclude deals worth tens and hundreds of millions of euros. Therefore, large players are reluctant to lend to small construction projects, forcing the investor to wander in a circle. Do you need a large bank loan for the construction of commercial properties in Europe, USA, UAE or other regions?
Havelet Finance Limited will provide you with financing, professional assistance and advice
Alternative ways to finance commercial property projects
The most popular methods of financing commercial property projects are still traditional banking instruments. They account for more than half of all commercial construction debt financing in developed countries, according to a Cushman & Wakefield report. Almost all large banks offer loans for the construction and acquisition of such objects, however, in order to approve the application, a potential borrower needs serious preparation. A good business plan is the key to success because banks analyze their clients’ projects and strategies in detail. Most often, banks finance construction projects with relatively high traffic or attractively located warehouse centers, for example, office buildings in the city centers and promising shopping malls
Loans are usually provided in several currencies to choose from (euros or dollars) for up to 15–20 years. Commercial banks are flexible enough to adapt repayment schedules and other terms of the loan agreement to the needs of the borrowing company and the current situation in the sector. In the case of obtaining a loan for the construction of a commercial property, payment can be made in accordance with the progress of work controlled by the inspector. This can be done monthly and quarterly, and usually loan agreements allow for early repayment. The loan can be repaid by selling the property or refinancing with an investment loan.
Despite the broad opportunities for bank lending, companies today are more likely to use alternative sources to finance large projects. Private investor groups are looking for reliable investment opportunities and offering their services. Acting on their own, these players do not have the opportunity to deal with issues that require wider financial participation, so the closed-end fund formula is a profitable and safe solution. Recently, many American and Chinese funds have appeared on European markets, which aggressively begin to buy and finance local companies, mainly industrial companies. This is an interesting alternative for companies requiring costly loan restructuring. In this case, the bank usually does not become a participant in the investment project, but these are necessary and profitable mechanisms in the long term.
If you need financing for commercial real estate projects, contact Havelet Finance Limited, We will be happy to contribute to your project.