Real Estate Investor Magazine South Africa August/September 2019 | Page 37

W
hen buying commercial property, one must
approach the bank for financing. Commercial
property loans are, however, significantly more
involved than residential bonds and may prove confusing if
one has not had previous experience with it.
In order to prevent unnecessary delays and ensure the
best chance a loan application is approved, it helps to have
prior knowledge of what information and documents will
be required by the bank. Be cognisant of their minimum
requirements and try to ensure that your company exceeds
these. The bank will assess the sustainability of the investment
from the financial history and standing of both the client and
the prospective property.
Leon Breytenbach, National Manager of the Rawson
Property Group’s commercial division, offers some useful
information for commercial property buyers.
COMMERCIAL VERSUS RESIDENTIAL
Commercial property differs from residential property in that
the outlay for commercial property is inevitably far greater.
Larger deposits are required, higher interest is charged and
the term is shorter – usually between five and 10 years. The
amount of information required for the loan application can be
more than for a residential property.
INFORMATION REGARDING THE BUYER
Banks require the following:
Your current assets and liabilities statement.
Background information of your existing commercial
property portfolio of holdings, including rental
schedules. This will be used to evaluate the
sustainability of your cash flow.
A statement explaining how your wealth was amassed
(e.g. inheritance or business profits over a period of
time). A short curriculum vitae would be helpful.
Amount of debt owed to any other banks.
Proof that you are in a position to repay the debt and
that you could service the debt if there is a rise in the
interest rate.
Financial statements of all your other holdings. The
bank will need to assess the security of your cash flow
and whether there are any latent problems.
A business plan for the intended acquisition.
“They will want to know if you are building a commercial
property portfolio, intending to improve the property for your
own use or buying to sell again,” said Breytenbach
The stronger your business plan, the greater confidence it
will inspire in the bank. Include current and projected financials,
while demonstrating that there will be sufficient cash flow to
cope with the new loan payments and the ongoing business.
Banks will require assurance that the loan will be repaid.
THE PROSPECTIVE PROPERTY
A banker will want to know the history of the commercial
property, whether it is being properly managed, as well as
its present state of repair. Any major concerns relating to
structure or maintenance are relevant. This is inclusive of the
running costs of the property and should be within acceptable
parameters.
“A statement of current tenants will be required to show that
there is a core of long standing tenants with stable financial
backgrounds, as short-term tenant turnover offers cause for
concern,” said Breytenbach . The financial health of the anchor
tenants in the property will come under scrutiny. Negative
press such as the liquidation of any of the tenants would
impact negatively on the loan application.
Banks will assess whether the prospective property rentals
“A statement of current tenants will
be required to show that there is a
core of long standing tenants with
stable financial backgrounds, as
short-term tenant turnover offers
cause for concern,”
are market-related. If they are too high and it becomes
necessary to reduce them, the rental income could be
insufficient to service the bond. The income realised from the
property should be sufficient to meet the bond repayments.
LEASE EXPIRIES
Another point of concern will be imminent lease expires.
These could initiate vacancies which would impact on the
rental income of the property. “Adequate provision should be
factored into the business plan to ensure adequate cash flow in
the event of vacancies occurring,” said Breytenbach.
OTHER CONSIDERATIONS
A property in a good location should be a positive for the
buyer’s loan application but the state or unconventional use
of adjacent buildings or new developments in close proximity
which might offer competition could reduce the positive
aspect. Single-use premises which limit the type of tenant may
prove to be a negative to the granting of the loan.
GEARING
Cash buyers may choose to employ gearing or leveraging in
order to enhance their returns. Gearing should preferably be
no higher than 55% -65% of the property's value. “This allows
‘deeper pockets’ in order to ride out a storm, in the event of an
extended vacancy or unexpected interest rate hike,” suggests
Breytenbach.
SOURCES Rawson Property Group
SA Real Estate Investor Magazine AUGUST/SEPTEMBER 2019
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