Commercial bond market

Commercial property finance is a discipline in its own right. It can be very complicated, mainly due to the three key pillars of the deal that will need to be considered:

• The property and its ability to generate income:
  1. Income producing (Tenanted – Single or multi)
  2. Owner Serviced (Owner occupied)
  3. Development loan

• The applicant’s financial health (the company); and
• The director’s/member’s/shareholder’s financial record(s).

The appetite for commercial mortgage bonds for new clients with the South African banks is currently quite low. Commercial properties are considered higher risk due to factors like market fluctuations, tenant turnover, and complex business operations, making banks more cautious about lending large sums for them; they often require larger down payments, stricter credit qualifications, and shorter loan terms compared to home loans.

There is also a lack of resources in the banking and mortgage origination sector to assist new clients to present their application effectively to credit. Banks will tend to divert these resources to long-standing existing clients.

Alternatives to a commercial mortgage

Applicants must asked themselves why they want to enter the commercial property finance arena. If the want to buy the property they are operating from, it is one thing but if they want to enter the commercial property market for investing purposes, there are definitely “safer” options.

The first decision for an applicant to make is whether a commercial bond application is actually what they need. Often times, there are other options that could be more suitable with better terms.

Some of these other products could suit the applicant’s needs better:

• Residential bond application – if the property is or could be zoned as residential, and the applicant is not relying on multiple income from the property (excluding future rental from a single tenant);
• Business mortgage – for small businesses, where a property is or can be converted to residential, but will have rooms for commercial use (e.g. professional home offices, bed & breakfast, surgeries for doctors);
• Business loan or overdraft – for smaller short term financing needs where a business case for the return on investment can be made (finance of working capital);
• Development (or Mother) bond – where short-term finance is required for a period less than 36 months; or
• Equity / stock options purchase – where a large amount of capital is required for a business opportunity that will increase or diversify future revenue streams of the business.

As a premium finance broker, Phoenix Bonds can also assist with the above alternative options.

What to expect when applying for finance for a commercial property

Commercial bond applications are notoriously complex. It’s essential to know what to expect when applying for a commercial loan, as it’s not as straight-forward as other mortgage applications.

For commercial, an applicant should expect:

• extensive questions on the nature and intended use of the property;
• an extensive review of all the businesses – health and future prospects for stability and/or growth;
• comprehensive supporting documents to verify the health of the business;
• financial background checks on all members / directors / shareholders / trustees;
• questions on all the entities within the whole group and not only on the applicant;
• fewer interested lenders (more than one interested party is a good thing);
• possible deposit, 30 – 50% of the purchase price;
• upfront bank fee, 1% of loan amount;
• bank valuation of the property (at the buyer’s cost) that is potentially lower than the market value; and
• long approval and registration timelines.

In saying this, some commercial bond applications can be approved the same day! It completely depends on the property, customer, and the business. However, any new applicants will definitely need expert assistance to present their application.

Phoenix Bonds is a premium finance broker with over 35 years’ experience in the commercial finance sector in South Africa. For a free consultation around your commercial finance transaction, fill in your details HERE and our commercial bond expert will be in touch.