Refinancing commercial property (also known as remortgaging) can be a strategic financial move for property owners looking to replace their existing mortgage with better interest rates and terms. With the fluctuating property values and changing economic markets, it's important for commercial property owners to stay informed about their refinancing options to make the most of their investments. In this article, our commercial property solicitors will explore the benefits of refinancing commercial property, the process of refinancing, and key considerations to keep in mind. Whether you're a seasoned property investor or a first-time commercial property owner, understanding the ins and outs of refinancing can help you maximise the potential of your property portfolio.
Contents:
- Can you refinance a commercial property?
- What are the eligibility requirements for refinancing a commercial property?
- Why would a business consider refinancing?
- When is refinancing a commercial property a bad idea?
- What legal documents are needed?
- Do I need a solicitor to help me refinance a commercial property?
- What are the steps involved in refinancing a commercial property?
- How long does it take to refinance a commercial property?
- What are the common legal issues that arise during refinancing?
- What are the alternatives to refinancing a commercial property?
- Summary
Can you refinance a commercial property?
Yes, it is possible to refinance a commercial property, but as with all lending it will depend on your circumstances, the property’s value and the current market. Refinancing a commercial property involves replacing an existing mortgage with a new one, typically to access equity, lower interest rates, or extend the loan term. As with all mortgages, the loan is secured against the value of the property it is raised against. You can refinance your commercial property through various means, such as traditional lenders like banks or specialist commercial mortgage providers. The process of refinancing typically involves a thorough assessment of the property's value, your financial situation, and the terms of the new loan. Key factors to consider include loan-to-value ratios, interest rates, fees, and repayment terms when exploring refinancing options to ensure you make an informed decision that aligns with your financial goals.
What are the eligibility requirements for refinancing a commercial property?
The eligibility requirements can vary depending on the lender and the specific circumstances of the property owner. Some common eligibility criteria that lenders may consider when evaluating a commercial property refinancing application include:
Property value: lenders will typically require a professional valuation of the commercial property to determine its current market value. The loan amount and terms offered by the lender will often be based on the property's value.
Loan-to-value ratio: Lenders may have specific loan-to-value requirements, which determine the maximum amount they are willing to lend in relation to the property's value. Lenders prefer lower loan-to-value ratios, as they indicate lower risk for the lender.
Financial stability: Lenders will assess the financial stability and creditworthiness of the borrower. This will require evidence of income/trading figures, cash flow projections, personal bank statements, business financial statements, and credit history to determine your ability to repay the loan. Some lenders may request to see your business plan.
Rental income: for tenanted properties, lenders typically assess the property's rental income to ensure that it generates sufficient cash flow to cover the loan payments. A stable and predictable rental income stream is favourable to lenders.
Property’s condition and regulations: properties that are well-maintained will understandably be a safer security for lenders. Lenders will also want to ensure that it meets applicable regulatory requirements, including those relating to planning permissions, building regulations, and health and safety.
We would always recommend working with a trusted financial advisor or mortgage broker to help you navigate the refinancing process and identify the best options available to you based on your unique circumstances.
Why would a business consider refinancing?
Access equity: refinancing can allow a business to access equity built up in the commercial property. By refinancing, you can potentially borrow against the property's value, providing capital that can be used for business expansion, renovations, debt consolidation, or other investment opportunities.
Lower interest rates: refinancing can help a business take advantage of lower interest rates in the market. By refinancing at a lower rate, you can reduce your monthly mortgage payments and potentially save money over the life of the loan.
Improve cash-flow: refinancing can help improve business cash flow by extending the loan term, reducing monthly payments, or restructuring the debt. This can free up capital that you can reinvest in your business or use for other operational expenses.
Changing to better loan terms: refinancing provides an opportunity to change the terms of an existing loan, such as adjusting the repayment schedule, converting from a variable to a fixed-rate loan, or securing a longer loan term. This can help businesses better manage their debt and financial obligations.
Renovations or upgrades: Refinancing can provide funds to finance renovations, upgrades, or improvements to the commercial property, enhancing its value and increasing its appeal to tenants or visitors.
Strategic financial planning: Refinancing can be part of a business's strategic financial planning to optimise its assets, consolidate debt as a portfolio or manage debt effectively, and position itself for long-term growth and success.
Switching mortgage types: as your business grows and plans change, you may need to switch your mortgage type for example going from an owner occupied mortgage to a commercial investment.
When is refinancing a commercial property a bad idea?
Prepayment penalties: if your existing commercial mortgage has significant prepayment penalties, refinancing may not be cost-effective. These penalties can offset any potential savings from refinancing and make it financially disadvantageous to refinance.
Short-term ownership: if you have plans to sell your commercial property in the near future, refinancing may not be a good idea. The costs associated with refinancing may outweigh any potential benefits if the property is sold shortly after refinancing.
Unfavourable market conditions: refinancing during a period of rising interest rates or declining property values may not be a good idea. It may be more beneficial to wait for more favourable market conditions before considering refinancing.
Inability to meet eligibility: if your financial situation has deteriorated since obtaining the original mortgage, you may find it difficult to qualify for a new loan with more favourable terms.
Short remaining loan term: if the existing commercial mortgage is close to being paid off, refinancing may not provide significant benefits. The costs associated with refinancing may outweigh any potential savings from lower interest rates or extended loan terms, and it may just be better to wait until the original mortgage expires before searching for a new product.
What legal documents are needed?
The specific documents required may vary depending on the lender and the unique circumstances of the property owner, but common legal documents that are often requested for a commercial remortgage application include:
Title deeds: these are essential to verify the property's ownership and status.
Lease agreements: if the commercial property is leased to tenants, you will need to provide copies of lease agreements to demonstrate the rental income and terms of the leases. Lenders consider the stability of the rental income when evaluating the remortgage application.
Property valuations: lenders will typically require a professional valuation of the commercial property to determine its current market value. They may also commission environmental reports to assess any potential risks, such as contamination or pollution.
Planning permissions and building regulations: lenders will be keen to clarify that all permissions, licences and certificates relating to the property and building are in place. Gather evidence of planning permissions and compliance with building regulations for any modifications or developments on the commercial property.
Insurance documents: Lenders typically require copies of insurance policies and proof of payment to ensure that the property is adequately insured.
Financial statements: you will need to provide financial statements, such as business accounts, profit and loss statements, and cash flow projections, to demonstrate the financial stability of your business and the ability to repay the remortgage loan.
Health and safety: this includes the EPC and documents relating to the health and safety of the property such as gas and electrical certificates, fire risk assessments, asbestos surveys etc.
Identification documents: although it goes without saying, ensure you have basic documentation to hand - such as passports, driving licenses, or utility bills, to verify identity and address.
Do I need a solicitor to help me refinance a commercial property?
Solicitors play an important role in the refinancing transaction. Solicitors carefully review and advise you on the terms of the offer, highlight and negotiate any onerous clauses or obligations in the loan agreement/associated documents, and ultimately ensure you understand what you are getting yourself into. Loan agreements can be lengthy and technical, so it is our job to explain these to you in plain English.
We also carry out the legal work and due diligence to satisfy the lenders requirements which includes title investigations, property searches (of the local authority, water and drainage, highways and environmental checks), replies to standard commercial property enquiries and a review of leases/licences in place. This will form the basis of a report on the title submitted to the lender so they can be confident in the security they are taking for the lending.
What are the steps involved in refinancing a commercial property?
Instruct a solicitor: to ensure a smooth and successful transaction, it is important that you engage an expert legal advisor from the outset, as well as a trusted financial advisor/mortgage broker who can collaborate on the matter.
Property valuation: the first thing you will want to know is how much your commercial property is worth. This will help you get a better idea of what you could potentially borrow, loan-to-value ratios and in general whether refinancing appears like a feasible, viable or commercially sensible option from the start.
Checking title deeds: your solicitor will obtain copies of your title deeds held at the Land Registry and carefully review these to confirm your property ownership status, any onerous covenants or restrictions affecting the property and confirm what other charges are listed against the property (one of which will be your existing lender).
Examine existing mortgage: your solicitor will thoroughly review the terms of your existing mortgage with a particular focus on how to deal with ending the mortgage early, including any early repayment penalties. We will also request a copy of an up-to-date redemption statement.
Choose a lender: your financial advisor and/or mortgage broker will work with you to help you identify the most appropriate lender and product for your refinancing needs. There will of course be the process of submitting your application to the lender, undergoing their credit/approval checks and ultimately securing the remortgage offer.
Due diligence: once you have agreed a refinancing deal with the lender, your solicitor can get to work on the legal aspects of the transactions. A core component of this is due diligence – essentially carrying out checks to ensure the property satisfies the lenders requirements. This involves conducting searches on the property (eg local authority, environmental, highways, water and drainage searches), replying to standard enquiries about the commercial property and ultimately verifying that there are no outstanding legal issues or disputes that could affect the lender’s interests.
Mortgage deed, release of funds and Land Registry: once the lender is satisfied that the property meets its security requirements, your solicitor will arrange for the mortgage deed to be signed so funds can be released to pay off your existing mortgage, transfer the surplus to you and register the new lender’s charge at the Land Registry.
How long does it take to refinance a commercial property?
This will very much depend on your unique circumstances, the property and lender turnaround times. Commercial remortgage transactions can take as little as 6-8 weeks, but can take longer even months for more complicated transactions where issues crop up.
What are the common legal issues that arise during refinancing?
Title issues: the purpose of the due diligence is to uncover any potential areas of liability relating to the property that can impact the lender’s security interest. The process may bring to light issues that do not meet the lender’s requirements, such as defects in the title, outstanding building consents for works carried out at the property or breaches in relation to restrictive covenants identified. Don’t panic - all hope is not lost at this stage. There are potential solutions to rectify some of these issues whether that involves obtaining retrospective consents or arranging indemnity insurance.
Missing documentation: as identified above, refinancing requires extensive paperwork, and there may be delays in the process if important documentation is missing, difficult to locate or obtain. Again, the solution here may be obtaining indemnity policies to insure against such risk for example defective lease policy for missing leases.
Property devaluation: if the lender commissions an environmental and/or structural survey of the property that reveals underlying issues then this may significantly impact the property value and the amount they are willing to extend. You may need to address any issues and rectify these first, for example through implementing remediation plans which can delay or frustrate the whole process.
What are the alternatives to refinancing a commercial property?
Depending on what your reasons are behind looking to refinance, there may be other options available to you to access capital that do not involve remortgaging. For example:
Bridging loans: as the name might suggest, bridging finance is a type of short-term loan typically used to ‘bridge funding gaps’ before moving on to a long-term solution. A bridging loan can be taken out for upgrades and refurbishments to properties, or to simply get a quick cash injection for your business.
Asset-based lending: this is essentially a loan secured by an asset, which is put up as collateral to guarantee the loan’s repayment. Common company assets used include accounts receivable, existing inventory, and machinery. Asset-based lending can help you secure finance fast, such as to cover an unexpected short-term gap in revenue.
Sale and leaseback: if you need to release a significant sum of capital/equity built up in the property but need to continue to occupy it, sale and leaseback may be an option. It works by selling the commercial property you own and occupy to a buyer, then leasing it back from them. You will no longer own the property but you will still be able to continue using it for your business.
Equity financing: you can potentially look to bring in a joint venture partner or investor who injects capital into the property in exchange for an ownership stake.
Second mortgage: this involves obtaining a secondary loan that is secured by the equity in the property, allowing you to access additional capital without refinancing the first mortgage.
Development finance: if there is potential for development or improvement of the property, you could look for development finance while keeping the existing mortgage in place.
Summary
Overall, refinancing a commercial property can be a valuable financial tool for businesses looking to improve their financial position by making savings, access capital, and optimise their property investments. It's important for businesses to carefully evaluate their reasons for refinancing and consider the potential costs, benefits, and implications of refinancing before making a decision. Consulting with a trusted financial advisor or mortgage broker can help you assess whether refinancing is a suitable option based on your circumstances and identify the best product for you. Once you are good to go, an expert legal team such as Harper James can guide you through the legal aspects of the transaction and protect your interests.
