Expat Commercial Mortgages

What is a Commerical Mortgage?

A commercial mortgage is probably the best way to finance the purchase of buildings and land for business purposes, it provides the most flexible and affordable finance solution.

Commercial mortgages are a specialist mortgage as the lender will typically have legal claim over the property until the whole loan has been repaid.

This type of mortgage loan is usually bespoke arrangement used to purchase any commercial property used for business purposes such as shops, factories, offices and warehouses. Commercial mortgages can also be used when taking over an existing business, buying land or purchasing a brand new building.

They often come with higher interest rates than residential mortgages however, commercial mortgages tend to more flexible and can usually provide extra incentives for borrowers.

Commercial Mortgage Types

For the sake of clarity on this subject, we will define a commercial mortgage in two distinct ways as described below.

• Expat commercial mortgage for business – in this case and as considered throughout this section, we define the types of businesses included as follows.
• Retail businesses – this could be any public facing business found on any high street from clothing shops and large retail outlets to supermarkets and car sales outlets.
• Manufacturing businesses – workshop premises from small car maintenance businesses to large manufacturing businesses.
• Farms and land – farming businesses from smallholdings and crofts to large dairy and agricultural farms and fish farms.
• Service businesses – these will range from small to large financial services companies, IT companies and internet retailing.
• Expat semi commercial mortgages – these would apply to the purchase of property for the UK rental market and would typically be what landlords would want to build their portfolios of BTL property. This type of semi commercial lending is covered elsewhere on this site and can be accessed by clicking in the link.

Commercial mortgages looked at in simple terms are not that different from any other mortgage in the sense that payments are made monthly bases on interest rates, the business value provides the security and there is a term over which the mortgage will run.

What makes them different from normal property based mortgages which can be fully secured on the mortgaged property is that no business can ever be guaranteed to provide sufficient profits to repay the loan or even be able to guarantee that it will survive. This means that any lender considering lending on a business will need to accept risk to its capital and therefore will need to study the business proposal in detail and satisfy itself that risk is minimised.

UK Lender requirements for Commercial Mortgages

• Business plan – any lender will first and foremost look for a properly researched business plan for the proposed business. This business plan should clearly set out what the business is intended to do, how it will do it and how it will develop over the period of the loan. Some of the areas required will be as follows.
• The market for the business – the lender will want to understand the available market that will be open to the business, consider your plan to attract that market to your business and be satisfied that you have understood the market correctly.
• Business management – who will manage the business is important and the lender will look for proof that the people that will manage the business have the skills to manage that type of business and preferably be able to show previous experience.
• Business accounts – if the loan is for an existing business the lender will look for at least the last three years accounts for the business to show if the current trading position of the business can support the loan. If it is a new business, the lender will want to see cash flow projections for the coming years.
• Mortgage lender security – the lender will assess the level of security provided by the business. This may take the following form.
  • Business bricks and mortar – the value of any business premises will be assessed by survey.
  • Business land – This will be part of the survey mentioned above.
  • Stock – if it is a trading business holding stock then a value will be placed on that stock but as a traded asset it will not form part of the fixed assets which will be the basis for security.
  • Other business liquid assets – this could be plant and machinery vital to the business. As these would be needed for the business, part of their value may be used as security.
  • Business credits – If the business has completed a contract and is awaiting payment the lender will assess the security of those payments and if found secure may consider them as a cash asset.
• Other lender security – where the lender cannot reconcile the value of the business as providing sufficient security, other forms of security could be provided, such as:
  • Other property – residential property, portfolios of rented property or land if sufficient equity is held, can be used as security.
  • Shares – ownership or part ownership of other businesses or portfolios of stocks and shares may be considered but these will need to be assigned to the lender.
• Business insurance – The lender will expect the business to be properly insured against all normal business hazards.

As can be seen from the limited descriptions above, the process can be complicated even for small simple businesses, Where larger businesses are involved then the whole process can become very complicated, time consuming and very expensive.

Expat commercial mortgages Fees

Commercial mortgages cost more than ordinary mortgages for a number of reasons such as.

• Mortgage arrangement fees – due to the often extensive work that the lender will have to do to consider the application, the lender will charge higher arrangement fees.
• Mortgage interest rates – lenders will set their interest rates to suit their assessment of risk. The higher the perceived risk the higher will be the interest rate. As interest charges will affect the monthly payments on the loan, the higher the interest rate the higher will be the repayments.
• Business survey fees – depending on the type of business being surveyed, survey fees will vary greatly but will always be higher than would be expected for normal property. With large complex businesses there could be a number of surveys required which could have a high cost.
• Business due diligence – if the business is fairly complicated it may require professional expertise to carry out any due diligence on the business prior to purchase. These professionals do not come cheap.
• Commercial broker fees – although it is possible to talk directly with a bank, you will not be benefitting from competition if you do. As commercial lending is so specialised, it is always sensible to engage a suitably qualified and very experienced broker to help you arrange your commercial mortgage. Such a broker will have access and knowledge of the whole market and although they will likely charge a substantial fee for teir services, it is likely that in the long term you will save money through having the right commercial mortgage terms for your business.

Benefits and dangers of a commercial mortgage

A commercial mortgage can help you create a business or develop an existing business in a way that could provide you and your family with a good standard of living for the foreseeable future. Some of these benefits could be:

Commercial mortgage advantages

• Business finance consolidation – expensive short-term finance arrangements can be consolidated reducing costs and simplifying arrangements.
• Cash flow – raising working capital can allow the business to reach its goals or embark on a new opportunity.
• Business growth – improve the rate of growth of the business through expansion.
• Business opportunity – allow you to start in business and achieve your life ambition.
• Business buy out – provide funds to buy out a business partner.

Commercial mortgage disadvantages

• Business commitment – a commercial mortgage is a long-term commitment and will constitute a cost to the business over many years.
• Business credit concerns – failure to make mortgage payments on time could cause the lender to call in the loan.
• Commercial mortgage regulation – commercial mortgages are not regulated as normal residential mortgages and therefore don’t have the same protection for the borrower.
• Business downturn – if the business hits a difficult period the lender may exercise some control over how the business is run.

Procedure for obtaining an expat commercial mortgage

1. First considerations for obtaining an expat commercial mortgage

Applying for an expat commercial mortgage can be a very complicated process which will depend a lot on the specific purpose of the loan. Commercial mortgages can range from purchasing fairly straightforward investment property such as buy to let (BTL) properties and homes of multiple occupancy (HMO) property to a large and varied range of small businesses right through to major companies.

Because of the variety of possible options, expat commercial mortgage lenders will generally treat each case as a unique study rather than as variations on a standard theme. It is not so much that the process is different from other mortgage arrangements as it is not, but what is different is the range of things an expat commercial lender will have to study and take account of when deciding whether or not to lend.

Should you be buying a commercial property and a business together, you may need to provide additional information, such as:

• Audited accounts – The lender will expect to at least two years of audited accounts for the business being considered.
• Profit and loss forecast – This should outline the expectations for the business for the coming two years.
• Current business performance – this is to show how the business has been performing recently in case there has been a change since the last accounts were published.
• Personal stakeholder details – The personal details of the key stakeholders in the business will be required for credit checking.
• Asset and liability statements – these will be required for each applicant to the mortgage.
• Business plan – The lender will expect to be furnished with a detailed business plan for the business going forward which should contain a cash flow showing how the business will contribute to repaying the loan.
• Credit status – documentation to show the credit status of the business will be required.

These are only a few of the areas that a lender will study prior to making a decision on the loan.

Commercial mortgages in the UK are currently unregulated which means that should things not turn out as you would expect, you may not be able to have your grievance considered by the ombudsman service in the same way as you would with a regulated mortgage.

As already explained, expat commercial mortgages are very complicated and extremely time consuming to organise and this makes it essential to engage an experienced expat commercial mortgage broker to handle things rather than attempt to deal directly with a specific lender. A good expat commercial mortgage broker with proven experience will understand the market and will have contact with key lenders who specialise in your type of transaction.

The procedure steps shown assume that you will be using an experienced commercial mortgage broker to handle the process on your behalf.

2.First contact with your expat commercial mortgage broker

Whether you are communicating with your commercial mortgage broker by telephone or email or meeting face to face your commercial mortgage broker should provide you with certain information about themselves and how they operate:

• Identity – Who they are and how to contact them
• Regulation – Explain how they are regulated to carry out mortgage business. All mortgage advisers in the UK are required to hold permissions to do so from the financial conduct authority (FCA) which they obtain through being either directly authorised by the FCA or by being an appointed representative of a network who is authorised by the FCA.
• Terms of business – Provide you with their terms of business. This will include information on how they will charge you for their time and explain your rights in the event something goes wrong.

Having got that out of the way your expat commercial mortgage broker will gather comprehensive financial information on your company and that of its directors and stakeholders. This process is called fact finding and it is absolutely essential that it is carried out thoroughly as the information gathered will form the basis for deciding on the mortgage product most suited to your company.

3. Obtaining an agreement in principle for your expat commercial mortgage

With the fact find information to hand your commercial mortgage broker will research the market and identify a lender and product that he or she believes would be most suitable. Many people think this is simply a question of finding a commercial lender offering the lowest rates of interest or low arrangement fees but in fact many other factors can come into play. Some such situations could be:

• Time constraints – if a lender is known to be slow to consider a case or is known to complicate the process and you need a decision quickly then you may be prepared to accept a slightly higher interest rate if it lets you complete the mortgage within your fixed timeframe.
• Lender criteria – lenders all have different criteria under which they will lend and it may be that the lender with the best rates may place you just outside their accepted criteria. You would then have to make the best deal possible with a lender who is prepared to accept you.
• Accounts – the best rates and terms are usually only available to companies that can provide strong accounts year on year. Where this is not the case lenders may take account of directors personal finances in the terms they offer and may even refuse to accept your application.

Having found one or two suitable products your commercial mortgage adviser will discuss them with you and when you agree on the most suitable one for your circumstances, your commercial mortgage broker will obtain a decision in principle from the lender. This is not a binding agreement but is only an indication that if the supporting mortgage information you provide with the formal application confirms what has been indicated for the decision in principle then there is a strong possibility that the lender will accept an application from you.

4. Submit the expat commercial mortgage application

With a decision in principle acceptance you will be clear to make your formal application for your expat commercial mortgage. Your commercial mortgage broker will do this in conjunction with you as the application form needs to be accurate and will require a number of supporting documents as

• Reason for sale – The lender will be interested in knowing why the proposed business is for sale as it may influence the decision if it were because the business was failing.
• Growth projections – information on how the business is expected to grow in the future.
• Skills – The lender will be interested in the levels of skill and experience the stakeholders have in relation to the needs of the business..

Where the lender is to take account of directors and stakeholders finances, the following will be required from each.

• Proof of identity – documents such as passports and driving licences are normal.
• Permanent address – Normally utility bills and bank statement type documents will be accepted.
• Salaries and dividends – Proof of income from the business and other sources will be required. Payslips and business accounts are usually used for this.
• Affordability – Bank statements let the lender see your income going through but they also allow the lender to see how you spend that income. Today lenders look at a borrowers lifestyle to ensure that they can afford any commitment made.

 5. Lender reviews your expat commercial mortgage application

On receipt of the formal commercial mortgage application the lender will review the information provided. In all likelihood the lender will ask for further information or documents to be provided and this process may be repeated several times until the lenders application processing team becomes satisfied that the case is sufficiently compliant to go to underwriting.

As part of this process the lender will instruct a valuation on the property if there is property included and you will be expected to pay for this but will have no rights to see the valuation report. The lender will use that valuation report as part of the decision making process in deciding how much they would be prepared to lend against that property.

At this point and if the valuation given in the report meets the lenders requirement the commercial mortgage application review team will take a final review of the case and decide whether to send the case for underwriting or reject the application.

6. Lender conducts final review of your expat commercial mortgage application

The underwriter is the lenders final decision maker and will review the whole case and check it carefully against the lenders lending criteria. If the underwriter is satisfied an offer for a commercial mortgage will be issued. Copies are usually sent to your solicitor and to your commercial mortgage adviser who will check the offer and alert you to anything that is not as agreed.

Note that by this time your commercial mortgage broker should have issued you with a letter outlining his or her reasons for advising you to accept that particular offer.

7. Lender issues your expat commercial mortgage offer

If the lender issues a commercial mortgage offer it will be sent to your solicitor with a copy to your commercial mortgage broker who will check the offer and alert you to anything that is not as agreed.  This is a formal document and it will show the amount of loan that is available and the monthly repayments. It will also provide the term of the mortgage and the terms and conditions under which the offer is made.

8. Solicitor receives your expat commercial mortgage offer

Once the solicitor has received the offer they should complete any checks and searches on the business, exchange contracts and move to finalise the purchase. Your solicitor will be the person that will draw down on the loan and arrange to pay the sellers solicitors for the property and pay any taxes and fees that may be required.

This whole process from first contact with your commercial mortgage broker to your solicitor concluding the purchase can take a long time and anything between 6 weeks for very simple cases to a year or more for very complicated cases would be considered as fairly normal.