Org Geldenhuys, MD of Abacus DIVISIONS, a property marketing and development company, gives some advice on the how and what of commercial property finance. He also explains the whole Commercial Property Finance Process in detail.
Herewith some info on the commercial property finance process. A commercial property purchase is a complex process and has many variables at play to get the property registered in your name. Having a broker that understands the process and someone who can guide you through the steps is a valuable partner when making an offer to purchase on a commercial property.
Herewith some guidelines on the financial aspects of purchasing a commercial property:
Before deciding to purchase a commercial property, you need to decide the following – are you going to pay cash for the property or will there be 3rd party funding sought to fund the purchase.
See below the details and funding requirements of the purchase.
The basic components for paying for a commercial property using 3rd party funding is as follows:
First of all you are going to need a DEPOSIT.
The deposit is typically payable on signature of the purchase agreement and is usually 10% off the purchase price. The Deposit is payable into the trust account of the transferring attorney and will attract interest for the duration of the period until transfer happens. The interest will be for your account. A deposit shows commitment to the SELLER and secures the deal for you.
Secondly you would need to APPLY FOR FUNDING:
Once the sale agreement is signed and a deposit is paid, you would need to approach the commercial banks to obtain a BOND for the balance of the purchase price.
A commercial bond is typically for 10 years (maximum) agreement and will be based on a prime linked interest rate. Banks would typically send out a valuer to do a valuation of the property based on a whole host of factors, including market rentals and operating costs, tenancy, contract rentals and vacancies, CAP rates for the area etc. Once the valuation is received (which can take anything up to 2 – 3 weeks), your application for finance will need to go to a credit committee within the bank who will look at your application based on your ability to pay for the bond (based on your financials or rental income from tenants). The bank will come back with an “in principle” offer for finance which you would need to accept to proceed to the next level.
To get to this point can take anything from 30 to 45 working days.
Commercial banks finance up to a maximum of 70% of the VALUATION of a commercial property and not the PURCHASE PRICE of the property and you would need to provide cash or alternate funding for the shortfall. Once you have accepted the offer for finance from the bank and signed the necessary documents with the Bond Attorney, they will provide guarantees for the bond amount to the transferring attorney. The guarantees for the BOND amount usually takes about another 45 working days from bond approval as there are a number of legal processes in the background to complete.
Thirdly you need to provide guarantees for the shortfall between the bond received and the deposit paid:
If you have received a 70% bond and paid a 10% deposit, you would need to provide for the additional 20% shortfall with a cash payment or guarantees to the transferring attorney. The guarantees must also include any shortfall between the valuation value and purchase price of the property.
Finally you need to make provision for the extra costs associated with the purchase:
Extra over and above the purchase price you will either pay VAT or Transfer Duty (depending on the VAT status of the SELLER).
VAT could be at 0% or 15% depending on whether the property is sold as a going concern or not. If you have to pay transfer duty it will be according to a sliding scale.
Ask your broker to explain the difference and what will most likely be the case in this transaction.
Bond Raising Fee:
Additional costs associated with the bond will be a bond raising fee which the bank might want in cash or added to your bond amount approved. You should budget around 1% of the bond amount applied for as raising fee.
Bond Registration fee:
Further costs associated with the bond will be bond registration fee which is charged by the bank’s attorney to register the bond in your name.
This is based on the value of the bond and is typically on a sliding scale.
You must also provide for the transferring attorney’s costs to do the transfer in your name. This is payable to the transferring attorney and is based on the value of the property being registered.
All of the above costs are due payable before the transfer will be registered.
Example of a property transaction to clarify the above:
Let’s assume for this example and ease of reference that the property PURCHASE PRICE is R 4m + vat and the VALUATION of the property comes out at R 3.5m.
The BOND is approved for 70% of the VALUATION.
The transaction will then be as follows:
Purchase Price: R 4M Excluding VAT;
Deposit: R 400 000.00 which is 10% of the purchase price payable on signature;
Bond: R 2 450 000.00 which is 70% of the Valuation of R 3.5m;
Shortfall to be paid in cash: R 4M – R 400 000.00 (Deposit) – R 2 450 000.00 (Bond) = R 1 150 000.00
Total Cash Required: Deposit R 400 000.00 + R 1 150 000.00 = R 1 550 000.00 (Excl VAT and costs);
VAT: R 600 000.00. This must be paid before transfer and can be claimed back in the next VAT cycle if the PURCHASER is VAT registered or can be done at a 0% rate under certain conditions. Ask your broker to explain.
Finance Approval & Pre-Approval:
Abacus DIVISIONS have relationships with all the Property Finance Divisions within all of the Major Commercial banks in SA, and we can put you in touch with the right people to assist you with the finance of any commercial property purchase. These are specialist in property finance professionals and they can assist you with the intricacies involved in property finance where your personal banker usually only deal with business or personal finance. We suggest that you start talking to these bankers even before you decide to buy - to get an understanding of what is needed to get the required funding and to get an in principle approval of what type of funding you will be able to raise for your purchase.