Commercial Property finance

**Peter1952** · 30-Oct-12, 02:47 PM

As a small business owner I find it ridiculous that if I want to buy business premises I have to pay a 25 to 30% deposit and then pay the bond off over 10 years. This makes it well nigh impossible for a small business owner to own his own property.

Why is it possible to buy residential property and pay it over 20 years or more but not commercial property?

Is there another route one can use?

**ArcSine** · 30-Oct-12, 08:32 PM

The differences can be attributed to the risk perceptions in the eyes of the originators / banks. For example, conventional wisdom has it that if a business owner gets into financial difficulties, he'll redirect all his efforts and remaining resources toward saving his residence, and allow his commercial property to be sacrificed to the repossession gremlins, if it comes to that.

Similarly, a residential mortgage is often supported primarily by the owner's "every Friday" paycheck (and frequently a spouse's, to boot), whereas a commercial loan's first line of support is the net cash flow of a business. The latter is, of course, usually significantly more unpredictable than the former. Businesses go bust on a regular basis, but families tend to be around for the long haul.

Also there's a much more robust secondary market for residential paper. This means a bank will frequently only have its money tied up in a 30-year mortgage for a very short time, whereas for a 15-year commercial note, the bank's at risk the full 15 years (albeit on a declining absolute amount of exposure, of course).

None of which makes your frustration any less annoying, I'm sure. Hopefully someone familiar with funding and financing programs in your particular area will weigh in with some attractive alternatives.

**Blurock** · 30-Oct-12, 09:51 PM

Good answer ArcSine. Welcome to The Forum SA. How about an introduction?

**Peter1952** · 01-Nov-12, 12:55 PM

Originally Posted by ArcSine

The differences can be attributed to the risk perceptions in the eyes of the originators / banks. For example, conventional wisdom has it that if a business owner gets into financial difficulties, he'll redirect all his efforts and remaining resources toward saving his residence, and allow his commercial property to be sacrificed to the repossession gremlins, if it comes to that.

Similarly, a residential mortgage is often supported primarily by the owner's "every Friday" paycheck (and frequently a spouse's, to boot), whereas a commercial loan's first line of support is the net cash flow of a business. The latter is, of course, usually significantly more unpredictable than the former. Businesses go bust on a regular basis, but families tend to be around for the long haul.

Also there's a much more robust secondary market for residential paper. This means a bank will frequently only have its money tied up in a 30-year mortgage for a very short time, whereas for a 15-year commercial note, the bank's at risk the full 15 years (albeit on a declining absolute amount of exposure, of course).

None of which makes your frustration any less annoying, I'm sure. Hopefully someone familiar with funding and financing programs in your particular area will weigh in with some attractive alternatives.

Thank you for the feed-back. You mention a 15 year repayment. I was under the impression that it is 10 years?

**Blurock** · 03-Nov-12, 09:13 AM

Originally Posted by Peter1952

Thank you for the feed-back. You mention a 15 year repayment. I was under the impression that it is 10 years?

Different rules apply in different countries. As ArcSine is in the US, he is commenting on what applies there.

Currently in South Africa the banks will only consider 10 years and they are getting very sticky with property finance due to the high risk of business default (as explained by ArcSine). Banks will not even consider 100% bonds on commercial property unless you can cover the 20% with a fixed deposit or other tangible security. Business Partners will still consider 100% bonds, but with very onerous conditions and at a higher interest rate.

**ArcSine** · 31-Oct-12, 12:29 AM

'Preciate that, Blurock. The intro's on the books.

**Blurock** · 31-Oct-12, 08:22 AM

Thanks for the profile Arcsine. Hope you were spared Sandy's devastation.

**ArcSine** · 31-Oct-12, 01:57 PM

Yes, thanks, I'm significantly south of where Sandy made landfall. But 'devastation' is indeed an accurate term for those in Sandy's path. Thoughts and prayers to 'em all.

**ArcSine** · 01-Nov-12, 03:06 PM

I just used 15 as an arbitrary example. Sorry for not clarifying that. Actually, commercial notes come in various maturities, as do all types and classes of loans. I've seen 7-year terms, 10s, 15s, and everything in between. The maturity (and other terms) an institution is willing to offer is somewhat idiosyncratic, depending on the bank's own experience and focus, the nature of the underlying collateral, and so on.

I was just pointing out some of the rationale for why commercial paper tends to have shorter maturities than residential paper, on average.

**Peter1952** · 02-Nov-12, 07:09 AM

Originally Posted by ArcSine

I just used 15 as an arbitrary example. Sorry for not clarifying that. Actually, commercial notes come in various maturities, as do all types and classes of loans. I've seen 7-year terms, 10s, 15s, and everything in between. The maturity (and other terms) an institution is willing to offer is somewhat idiosyncratic, depending on the bank's own experience and focus, the nature of the underlying collateral, and so on.

I was just pointing out some of the rationale for why commercial paper tends to have shorter maturities than residential paper, on average.

Oh, I see. Do you think the same terms will apply if I buy the business premises in my own name?