Total Property - Issue 2 2017
How to maximise your chances of getting credit for your commercial property purchase - and avoid the common mistakes that can hold up funding approval, writes Alistair Law.
Reports of credit constraints are a concern within the commercial property industry.
The major banks are responding with caution to current market conditions, preferring to adopt a stricter approach now, rather than continue to supply an already buoyant market with cheap finance and risk undermining financial stability in the wider economy.
There is a greater emphasis on minimising risk, and funding thresholds have lifted.
So how can commercial property developers and purchasers maximise their chances of raising finance?
Banks are prioritising lending to existing clients and existing projects over new clients. Therefore, maintaining a sound relationship with your bank is vitally important in the current environment. That is not to say that it is impossible to obtain funding if you don’t have a strong relationship with the bank or that you are guaranteed funding if you do, but being an existing client makes it easier to show that you are a trustworthy, prudent borrower with a proven track record.
All borrowers should ensure that their legal ownership structures are in order and very clear. Banks want borrowers to commit greater levels of equity to projects. Equity levels of around the 40 percent mark used to be acceptable, but now the sweet spot is currently somewhere between 50 percent and 55 percent.
For developers, the main area of concern is usually the certainty of development costs in their feasibility study. Commercial property developers will also need to show there is sufficient tenant leasing commitment.
Key agreements that support the project need to be in place before approaching the banks for finance. With leases, banks will want to verify that the commercial terms are not onerous (such as tenant early termination rights) and that they are satisfied with the covenant strength of the tenant and any guarantee or other security arrangements.
A major difficulty for developers is that development costs are not usually locked down until they have achieved a certain leasing and bank funding has been obtained. An option could be for developers to consider getting a contractor on board earlier so that the development costs in the feasibility study are more accurate.
For investors looking to acquire existing commercial properties, the main issue now is cash flow serviceability. Whilst the banks may have previously made assumptions based on the rental yield generated from the property, they now appear to be carrying out much more detailed investigations.
Presenting the bank with a detailed, long-term maintenance plan prepared by a building surveyor or similar expert is a great way to demonstrate how the customer intends to manage the risks associated with the investment. Similarly, banks are very focused on reports confirming that the building achieves an acceptable seismic rating as the costs of any such works are also likely to be significant and unable to be passed on to tenants.
It is unclear how long the current credit conditions will last, so taking steps that show the banks a project is as de-risked as possible should remain at the forefront of property developers’ and investors’ minds.
• · Alistair Law is a partner in the property team at Anthony Harper and specialises in commercial property. Anthony Harper has one of the largest specialist Commercial Property teams in New Zealand, with offices in Auckland and Christchurch.
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