Ravi Chandran
Commercial real estate financing is very different from home financing.
For home financing, the transaction is based on the value of the home at the time of the sale. And for commercial property purchase, the lender will base it, in part, on the value of the business in the future.
Beside this, commercial real estate financing can take on very different terms.
The way the deals are structured is based on a number of factors such as:
- Anticipated use of the property
- Anticipated returns from the property
- Geography
- Type of real estate
- Size of real estate
- Perceived risk to lender
- Market conditions
This means that before to taking up a loan, investors need to do their due diligence by examining each of these areas carefully. Buyers who need commercial real estate financing then need to examine the type of loans offered by lenders in accordance with their needs and anticipated growth.
There are many ways to finance your property purchase, be it from mortgage banking firms, savings and loan institutions, regional banks, insurance companies, and even private investors.
Even if you have all the money for the purchase, it is not advisable to pay 100 per cent upfront for your commercial real estate purchase. In the current economic climate, you can get up to 75 per cent financing.
But be mindful that different banks provide different packages to suit your needs. Knowing the commercial property loan rules is important for buyers who want to invest in this red hot real estate market in Singapore.
While there are restrictions for foreigners when it comes to buying residential properties (generally, foreigners can only buy non-landed private homes and landed properties in Sentosa Cove), there are no such restrictions for commercial properties. This is one reason why commercial properties have become hot with the introduction of property market cooling measures by the Government.
This is also the reason why prospective buyers and investors have to understand the commercial property loan rules. In Singapore, there are two ways to do a commercial property purchase:
- As an individual or;
- As a corporation [via private limited or limited liability partnership (LLP)]
When you are looking for commercial real estate financing, look for one which provides a comprehensive and attractively priced property-financing package for individuals buying commercial properties for investment purposes.
Such loan programme includes attractive interest rates, flexible terms to tailor your loan to suit your individual needs, high upfront legal fee subsidy, free fire insurance for one year and free valuation.
Not all banks, however, readily post this information online. So, prospective buyers will need to do their own market research by enquiring personally with the banks on whether their financing packages are viable for the long-term. If you do not have the time to do that, then engage the services of a mortgage broker.
Most banks have a list of requirements when it comes to financing income-producing properties such as a shopping mall, office building or commercial warehouses.
The conditions may include:
- Commercial real estate financing for not more than 75 per cent of the appraised value of the property.
- Properties must show sufficient debt-repayment ability by way of a ratio of 1:20X or higher. (Debt Repayment Ratio is calculated as Net Operating Income / Total Annual Debt Burden.)
- In the case that a sole tenant occupies the property financed, investors might want to take a look at the financial strength of the tenant.
- No utilisation of Central Provident Fund (CPF) – If you are making a commercial property purchase as an individual, commercial property loan rules say that you cannot dip into the savings in your Ordinary Account of the Central Provident Fund to settle the downpayment or monthly loan instalment for the commercial property. This means the downpayment for the commercial property purchase has to be wholly funded by cash. For the loan repayment, you will have to be prepared to incur cash outlay if the rental yields are inadequate (assuming that you are planning to lease out the property).
- Property tax – Same as for a second residential property, or an only residential property that is wholly rented out or left vacant, the tax is a flat 10% of the annual value of the property. But if you fail to lease out the commercial space, you may apply for a vacancy refund of the property tax. This vacancy refund also applies to a residential property.
- Goods and services tax (GST) – Unlike for residential properties, the buying of commercial spaces from a GST-registered company is subjected to a 7% GST (to go up to 8% from January next year and to 9% in 2024). An individual making the purchase will have to bear the GST himself. However, if you are a GST-registered company – all companies with a turnover exceeding S$1million have to register for GST – according to commercial property loan rules, you can make claims for the GST incurred on your purchases. Thus shrewd individual investors may set up companies expressly for a financial transaction, termed as Special Purpose Vehicles (SPVs), to circumvent the GST payment. For companies with turnovers below S$1million, GST-registration is on a voluntary basis, subjected to certain requirements. Do note that being GST-registered comes with responsibilities. Check out what these are at IRAS. Notably, the GST cannot be financed by the property loan. For commercial property purchase, buyers will have to stump up cash for this.
Although there are many types of commercial property financing available, investors should assess their level of risk. Ask yourself, if you can you afford the property. Important questions you can ask yourself includes:
- What is your cash position like?
- Are you looking to just pay 25 percent first and take a bank loan for the remaining 75 percent? Will you have sufficient cash to buffer yourself during an economic downturn?
- Can you afford the fluctuating bank interest rates? Going through all the possible commercial factors will help you eliminate your risks and anticipate any shocks in the market.
Finally, you will need to get the following documents ready before applying for commercial real estate financing:
- Income and expense statement for the property demonstrating a solid income stream
- Financial statements on all principals involved as owners of the property
- Profiles of the management team
- Property appraisal
- Financial statements on the borrowing entity
- Plans, including construction blueprints (if available) for the use of the property
