Thinking of a commercial mortgage? Here’s what you need to know

What is a commercial mortgage and why do I need one?

Commercial mortgages are often used as a tool to enable businesses and investors to acquire, upgrade, or develop commercial properties. Businesses looking to expand their operations or upgrade their facilities may seek to take out a commercial mortgage to provide the necessary funds to support these endeavours.

Is there increased scrutiny compared to a residential mortgage?

There can be. During commercial mortgage transactions, the lender’s solicitor will usually be required to perform a more extensive due diligence exercise than with a residential mortgage due to the higher risks commercial mortgages can pose to lenders.

Residential mortgages often depend on the borrower’s income and the property valuation, whereas commercial loans are often heavily influenced by the property’s condition and its income-generating potential, or prospective yield.

Commercial property can be difficult to value, the value often depending on its specific use, and generally commercial mortgages are far less standardised than their residential counterparts.

The lender’s internal processes may involve:

• a complex (and possibly lengthy) underwriting evaluation to assess the risk and eligibility of a potential borrower;
• a thorough commercial market analysis including property valuation, tenant stability and economic trends; and
• planning and building regulatory considerations and negotiations, for example, a lack of proper planning permission for the intended commercial use may lead to delays.

Will I need to give a personal guarantee (PG) and seek independent legal advice?

Corporate borrowing may need to be backed by a PG from a director if the lender needs additional comfort. This occurs when lenders want to mitigate the risk associated with lending to companies, particularly small or new enterprises. If a personal guarantee is given, the guarantor’s personal assets will be at risk, as, if the loan is not repaid by the borrowing company, the lender may be able to come after the guarantor for repayment. That is why it is a requirement that any person giving a PG receives independent legal advice. It protects lender, borrower and guarantor.

If you have any commercial property queries, including commercial mortgages and personal guarantees, please do get in touch: we’d be delighted to help.