We present the top 10 points that lending institutions consider when granting commercial property loans.
Purchasing an office anywhere in India is an expensive proposition in today’s times. Spiraling real estate costs and the fact that commercial spaces are more expensive than residential ones can eschew the commercial property purchase idea. One way to surmount the problem of high costs is to take a commercial property loan.
However, this is easier said than done. Simply declaring one’s intent to purchase a property and presenting its documents to the lending institution is hardly likely to produce results. The lending institution (bank or NBFC) determines if the proposition is viable or not based on certain parameters. The following are 10 parameters that a lender will take into account while granting the loan for commercial property purchase:
Commercial properties can normally avail of about 55 to 60% of the space’s value by way of a loan. The lender will evaluate the property for location, age, size and other factors before deciding the Loan to Value (LTV) ratio. The lower the LTV ratio, the higher is the borrower’s self-funding component for the property.
Borrower profile and property characteristics
The borrower’s credit score and the commercial property’s overall profile will determine how much the processing fee will be. Normally, lenders fix the fee at 1% of the total loan amount. However, a good credit score and good quality property can help the lender slash the processing fee to half, i.e. 0.5%.
Rate of interest
The quality of the property and the borrower’s credit score will also have a bearing on the rate of interest charged by the lender. Normally, the rate of interest for commercial properties is about 1 or 2% higher than that of residential loans. The rate of interest can be higher if the property documents and the property itself are not up to desirable standards.
Whether the property is a resale or under-construction one
Most lenders refuse to fund the purchase of under-construction commercial properties. If they do agree to fund it, the rate of interest charged will be higher, and the scrutiny of the project will be more intense. Lending institutions normally prefer to finance commercial property purchase of resale properties or completed properties with a clear title.
Lenders are very cautious about checking the credentials of the real estate developer/firm of builders developing the project, especially if the property is an under-construction one. The lender will check the developer’s delivery record, the time given for project completion, whether all work-related documentation is procured and adequate permissions are taken, etc. Reputed developers pass this scrutiny quicker.
Older construction/property age
Lenders will normally refuse to finance the purchase of old commercial properties. It is normally seen that old properties do not comply with newer regulations for fire safety, entrance foyer space, lift shaft space, height to width ratios, etc. The loan process can be scuppered if the lender feels that the high age of the property makes it a risky proposition. Borrowers must assume that the lender will not grant the usual 60% of the property value by way of loan for such properties.
The lender will evaluate the commercial property for compliance on structural and safety parameters. The space must pass all checks for fire and emergency lifts, utilities space, wide entrance space for fire tenders and ambulances, emergency exits, etc. The loan process may be delayed if the property is found lacking in any of these departments, or if the developer has not included any of the mandatory safety clauses in the construction.
Developers sometimes inflate the selling price of the commercial units to make a greater margin of profit. This also enables the borrower to take more money from the lending institution. However, a market evaluation team will visit the site to find prevalent commercial property rates and compare them with the quoted rates. Any inflated quotes will be noted and the loan application may be rejected. Alternately, the lender may give a very low loan amount.
Risk to the property
Lenders are circumspect about granting large loans, to the tune of Rs 3 crore and above. The borrower may be in a sound financial position to repay the loan, but the lender may want to grant a much lower amount if the property is likely to go for redevelopment or demolition.
Size of the property
This is a crucial aspect that not many borrowers are aware of. Lenders can refuse to grant loans to commercial properties less than 250 square feet in size. Lending institutions calculate the loan amount basis the minimum area in square feet. However, if the space is being purchased for a retail outlet, the lender may reconsider this stipulation.