Banks are cracking down on borrowing against commercial property, what can you do as an investor to prepare for these new requirements?
Traditionally it has been relatively easy to borrow against commercial property provided you had good equity and a solid rental stream from the building, however times appear to be changing as the banks look to strengthen their balance sheets by increasing deposits and pulling back on lending on commercial property as they meet or near the limits of their lending in this sector. A number of the banks are either no longer taking on new commercial property business or are becoming extremely selective about the quality of the new business they take on. In some instances, it may even be difficult for existing clients of a bank to obtain further funding.
It seems to us that, in order to obtain finance for commercial property investment or development, you are going to need to provide a compelling and legally tidy product to the bank to consider. Banks will most likely not be interested in deals which have any fish hooks or some of the risks associated with lending that they have previously been prepared to accept. This will mean that you will need to ensure the end proposal to the banks is thorough, complete, meets the banks criteria and is provided to the bank in sufficient time to enable them to make a decision.
- When looking at entering into a purchase agreement or commencing a development, we would suggest that you engage with your bank very early in the process to: understand whether they actually want to look at the proposal; and
- if so, clearly understand the bank's requirements or conditions of lending, and their pricing for providing the funding as this may have changed since you last dealt with them.
This will then give you an idea of what you need, and how long it will take, to satisfy their requirements. For example:
- if the bank requires an engineering report and/or a valuation before committing to providing finance, then you will need to request an appropriate due diligence period in the purchase agreement to allow enough time to get those reports. You should also be liaising with the engineer and valuers early to ascertain their current turn-around times for such reports;
- if you are contemplating a new development, you will need to ensure that you have all the required consents in place, and that the level and quality of your pre-sales or pre-leases meet all the banks criteria.
If the bank's advice is that it isn't able to lend as much as you had hoped, then finding out this bad news early will at least give you a chance to re-scope your proposed development or make alternative funding arrangements.
We would also be suggesting that you liaise directly with us early to review all the legal documents associated with the property and (hopefully) fix issues that might be found. We will also be able to liaise with your bank to discuss any concerns or requirements that require resolving.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.