Overview

This is an area that gets a little confusing when it comes to business owners who have their commercial property in a separate entity, that rents to their own trading business.  For clarity, Commercial Investment is widely considered as being a commercial property that is let to a trading business that is not connected to the landlord.  ie at "arms length".

Perhaps you have a commercial unit that you let out to a third party and you are looking to refinance, or perhaps you are looking to buy one.

The assessment for this is variable as it depends if this is an isolated property, or part of a wider portfolio within the owning entity (eg Limited Company).  Some lenders will simply take the rental income, and ensure that it covers the mortgage payments by a certain ratio (for example, for every £100 of mortgage payment you need at least £125 of rental income - depending on the lender as to what this ratio is).  Some lenders may also discount the rental income by c10-20% to cover costs of letting.

For larger portfolios, the lender may wish to look at full financial accounts and take into account the various other costs of operating the wider letting business.  This is done by undertaking the EBITDA calculation (discussed separately) and comparing this against the mortgage payments against a similar ratio as mentioned before.  The challenge here can be where the business owners are driving down their profits to reduce their tax or taking sizeable dividends, as this in turn reduces the affordability of finance.

Trip Up's

The biggest thing that trips up clients is around the lease with the tenants.  A lender is ultimately looking for any leases that are used towards the affordability calculation will cover the commitment period (usually a minimum of 5 years).  The other element that usually catches landlord out on commercial properties is also the break clause, as this is also taken into account by the lender.

So for example, if you have a new commercial lease in place for 5 years, then we should be okay (although it can make lenders nervous about the end of the commitment period).  However if you have a 5 year lease with a break clause at 3 years, then this will likely remove the majority of lenders as they will consider the term as being 3 years (which is less than their likely commitment term of 5 years).

Therefore when looking at leases on a property that you are financing, it is helpful to bring these considerations into your discussions.  Whilst the above does not necessarily meant that the finance can not be obtained, it does significantly reduce our lender choices, which in turn will likely result in higher rates.