The Small Differences in Commercial Mortgages
From a technical perspective it all comes down to capital adequacy and spread of loan book. For this reason many companies fail to obtain commercial borrowing because they have fallen into the wrong category of borrower.
It all comes down to this;
Mean anything to you? It shouldn’t but it will impact on you, here’s why.
CAR is Capital Adequacy Ratio. It is how much cash a lender has to set aside versus how much they can lend. For a lender the less capital they have to set aside the more they can lend and the better their income is on the deal. Every asset a lender uses as security is risk weighted, the riskier or less secure the asset is the worse it is rated and vice-versa. In simple terms your home is the best weighted asset, followed by commercial premises occupied by the borrower then investment property, equipment and other more ambigous items.
This is why residential mortgages are normally the cheapest borrowing, followed by commercial mortgages, investment property, buy to lets and then unsecured borrowing. The higher the ‘risk’ the higher the cost. Risk is not just about the client, it is about the structure of the lend and security also.
OpCo or PropCo
An Operating Company (OpCo) is a company that borrows to purchase commercial property which it intends to use for itself with repayment coming from it’s own trading income. A Property Company (PropCo) is a company that purchases property for commercial gain, repayment of the mortgage coming from income derived out of the property.
Simple? No it isn’t. This is where many commercial mortgage applications fall over, becuase the approach to the mortgage was too black and white, too simplistic and nobody stopped to think about the best way to structure things.
Let me explain.
A limited company is set up or purchased by the directors of a trading business. That property is then let to the actual owners own company. Legally the property owner and tenant are different people but in practice they are one or the same. So is this an OpCo or a PropCo?
Realistically it is neither and both. Wow. The confusion comes from different lenders taking a different view on things. If you know which lender looks at it from the perspective that benefits you then that is where to go.
Things then get a little more ambiguos. Many companies will purchase a commercial property with a mortgage, use some of the premises themselves and let the rest. For a business it makes good sense, it reduces their costs and alows them space to grow into. The challenge for a lender is where does this sit? It fits none of the options in isolation.
For the borrower it is key for them to show that they can afford the mortgage repayments from trading receipts without adding in the rental income. If they can then it becomes possible to raise fiannce as a standard OpCo mortgage meaning a better rate, terms and costs.
We commonly see lenders looking at a deal as they first see it. It is key for the borrower to apply in the best way for them. That takes consideration and an ability to justify what you are doing, this is where professional expertise comes in and where we can earn our money and add real value.
Confusing? Yes it is, so don’t try and do it all yourself. Taking professional input can pay serious dividends.
By Dave Farmer
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