Org Geldenhuys, Principal of Abacus DIVISIONS, unpacks the requirements for first-time buyers to get commercial property finance.

Geldenhuys says: "I get asked a lot of times what the process is to get finance for a commercial property – especially from clients buying their first commercial property through our offices. I’ve compiled a simple guideline of what you need to do to obtain funding from a commercial bank for your commercial property purchase.

These guidelines are based on a simple, straightforward purchase transaction, and the more complex transactions and funding models fall outside the scope of the points discussed here. For those more complex transactions, please discuss those with your broker or banker."

Deposit:

Firstly, you are going to need a deposit of some sort. Unlike with residential property, where you can buy without putting a deposit down, commercial property financiers require a deposit in the region of 30% of the valuation of the property. You are unlikely to get this waived or reduced, as this is the way the industry works.

Lease Agreement:

Secondly, you are going to need someone whose cash flow will be used by the bankers to evaluate your ability to make the monthly payments. This is typically your own operating company or a tenant that will occupy the building. The bankers need comfort in your ability to pay for the finance, which will be in the region of 70% of the valuation of the property. Commercial finance is also over a max of 10 years, and your payment will be calculated based on a prime-linked interest rate. I have developed a commercial bond calculator that’s available here that you can use to calculate your repayments. Work with prime + 1%, a 30% deposit, and a 10-year payback term.

Shortfall based on valuation:

Thirdly, you need to make a provision for any shortfall amount between the bank’s valuation of your property and the purchase price you offered on the property. That’s why you shouldn't overpay for your property, a good broker will help you to negotiate and pay the right price. You will only get finance for the market valuation of the property and not the purchase price. Here is a basic valuation tool I put together that you can use to see how banks will value your property. You can work with a 10% cap rate as a start.

Extra Costs:

Finally, you need to make provision for the extra costs associated with your purchase:

  • VAT – you will either pay 15% on top of the purchase price or get the transaction zero-rated or pay transfer duty – but this is a detailed discussion to have with your broker;
  • Bond Raising Fee – Typically 1% of the bond value and charged by the bank;
  • Bond Registration fee – This fee goes to the Bond Registration Attorney;
  • Transfer Costs – This goes to the attorney that will see to the property transfer process;

All of the above costs are due and payable by you before the transfer of the property and are not financed by the banks.

Buying and funding a commercial property has many intricacies and can be quite a daunting process for first-time buyers, but partnering with the right broking company can make this a smooth and painless process. Abacus DIVISIONS is one such company with years of experience – we are here to help you navigate through the purchase process.