|
Commercial Mortgages FAQs
Frequently asked questions
Here are some of the common questions that are asked about
commercial mortgages:
Why should I purchase property instead of letting?
Purchasing
property is a large decision for any business. There are several
advantages and disadvantages that should be considered before
making your decision.
Advantages include:
- Fixing your overhead costs. When you finance your purchase
with a mortgage you have a repayment schedule that sets
your fixed expense each month.
- Potential asset appreciation.
- Potential to sublet. If you purchase more space than your
company currently needs, you could sublet a portion of it
until you need the space.
- Mortgage payments may be cheaper then rent. When you set
your repayment schedule you know what your payments will
be in advance. When you rent your property, you are exposed
to market conditions that may increase your rent to above
what your mortgage payments would have been.
Disadvantage include:
- Harder to relocate. If you have a lease and decide to
change locations the process is relatively simple. When
you own the property, you need to determine if you should
sell the land or find a new tenant.
- Drain on cash. A mortgage will not provide 100% of the
financing needed to acquire the property. You will need
to use your current cash to finance a down payment and pay
for any related expenses.
- More management responsibilities. When you let the property,
the landlord is responsible for the upkeep and security
of the property.
What is the usual length of a mortgage?
Mortgages
are typically available for any time period between 5 to 25
years. For commercial mortgages the maximum length of the
mortgage is usually 20 years for newer properties and 15 years
for older properties.
How much cash do I need to provide for a down payment?
Typically lenders often view mortgages with larger down payments
as more secure. Most lenders typically like to receive 20%
to 30% of the purchase price as a down payment. Depending
on your company's financial history, as little as 5% of the
purchase price may be required for a down payment. (You will
most likely have to pay a higher interest rate to compensate
for the smaller down payment). You should remember, that the
larger your down payment is, the less you have to borrow.
How should the mortgage be structured?
If possible, you should form a separate business entity to
lease the building to your operating company. This separate
entity should then arrange for a non-recourse mortgage for
the purchase of the property. This should protect your operating
business if you default on the mortgage. You may wish to consult
your accountant or tax advisor.
How can I improve my chances of getting a mortgage?
Be prepared to demonstrate why you have a solid chance of
repaying the mortgage. The lien on your property adds security
but the lender will still base their decision on your ability
to repay the mortgage. It will be extremely beneficial to
be able to show the lender a history of your earnings and
a projection of future earnings. Also expect the lender to
arrange for a property appraiser to estimate the market value
of the property; this will help the lender feel that the property
is sufficient collateral for the mortgage.
Who is responsible for the repayment of the mortgage?
The legal structure of your company will determine who is
responsible for the repayment of the mortgage and who will
be liable if it is not repaid. If you are a sole trader, you
bear all the responsibility and potential liability. If your
have formed a partnership, all of the partners involved are
jointly and individually responsible. If you a legal company,
the Directors may be liable if the mortgage is not repaid.
|
