22-08-2006
Obtaining a commercial premises
A commercial mortgage is an effective means for a business to obtain premises. As a business approaching a commercial mortgage lender, you will need to be able to provide the following items of information:
- Detailed trading history for the previous two years, as well as income projections; or a detailed business plan for fledgling companies.
- Your personal experience as manager in the specific field of business.
- Any environmental, contamination, access or planning permission issues with the premises in question.
Commercial mortgage deals differ from residential loans in a variety of ways. Though more flexible with commercial clients, providers will be more scrupulous in assessing the viability of the venture before providing the funds:
- Lenders will expect a deposit of between 20 and 30 per cent. As a rule, the higher the deposit, the more favourable the rate.
- Mortgage rates will range from between one and seven per cent above the base rate.
- Some providers offer from as little as £15,000, others as much as £2 million.
- The term of commercial mortgage will likely be shorter than a residential deal.
- Arrangement fees will range from between 0.5 and 1.5 per cent of the loan value.
- Legal and valuation fees will almost certainly apply. In addition, lenders will expect:
- To survey the land and premises before agreeing to the deal.
- To assess your credit history.
Certain commercial property ventures feature nuances when negotiating a mortgage:
- Guest house: The UK tourist industry is worth £76 billion per year and establishing a guest house to capitalise on this is popular. You will need liquid assets with which to make property improvements to meet fire and safety regulations, plus a liquor licence to vend alcohol. Bear in mind that Financial Services Authority regulations apply if you plan to live in 40 per cent or more of the property, unless you hire a manager. This will influence the terms of the loan.
- Public House: New licensing laws have given pub owners more flexibility, though some lenders will still not fund pub mortgages, since they are considered riskier than other commercial ventures. A pub tied to a brewery is often more expensive than an independent one, since the former is often restricted in what it can sell. Most lenders will request details of licences and permits before agreeing to a loan.
- Restaurants: Eating out is a growing fad in the UK, but providers will want to see evidence of experience in running a restaurant before funding such an investment. They will consider its location, the local demographic and whether the eatery is stand-alone or part of a franchise. Providers will also want to see contingency plans should the restaurant fail to draw in custom.
- Post Office: A rarely considered choice, but a shrewd investment nevertheless: part of a recognised franchise and instantly at the heart of a community. Bear in mind that rural sub postmaster agency post offices will need official agreement from Post Office Ltd before sale can go ahead.
- Nursing Home: Another oft-overlooked but shrewd investment in view of the fact that research predicts that the number of over-60s will rise by over a third by 2031. To run the business you will need at least an S/NVQ level 4 in management or care.
When starting a business, leasing office space is a good means of cutting corners, but is not financially viable in the long-run. To help fledgling firms, some providers offer 100 per cent mortgages:
- Commercial lenders are most likely to offer 100 per cent mortgages to accountants, solicitors, doctors or veterinary surgeries. Though this is not to say that other professions are ruled out.
- Providers will expect collateral as a substitute for a deposit. The premises in question will serve as a deposit of sorts, though additional personal or business assets will suffice in lieu of cash. Typically this will be residential or commercial property or land.
© Adfero Ltd 2006
