There are four basic types of commercial mortgage borrower:
- Property developers
- Commercial real estate investors
- Business owners
- Residential buy-to-let landlords
In this blog, we will concentrate on looking in more detail at business owners who want to own their premises and how they can use a commercial mortgage to efficiently finance their business. However, to get more information on BTL investment landlords please check out our other blog post, ‘who can get a commercial mortgage’, where we discuss commercial mortgages for investment.
Business owners who want to own the real estate on which their business operates can finance this with a commercial mortgage.
This may be advantageous to the business for several reasons.
- Firstly, the business may have intentions to develop or extend the property, either immediately or in due course. This is made far easier if modifications to the building do not have to be approved by a landlord.
- Counterintuitively, a commercial mortgage may provide more flexibility than a tenancy. If the business were to no longer require the space for any reason, it may in fact be easier to sell the building than to exit a lease as commercial tenants may be expected to sign long-term commitments with substantial notice periods.
- Ownership also provides the business with stability, as while normal commercial leases are long-term, they are not indefinite, and depending on the business a change of premises may be very costly and disruptive to operations. This factor is exacerbated by the final reason that property ownership could make good sense to a business owner.
- If the location itself is a factor in the success of the business, it could be a good idea to own the premises. This could be especially true for food and entertainment venues, and retail stores. For example, if you have identified a cheap but up-and-coming area to in which to open your hot new restaurant, it doesn’t profit you if a few years later the landlord is able to raise rents under threat of eviction once local footfall and spending has increased as you predicted.
For businesses that already own their premises outright, commercial mortgages are also an attractive low-cost financing mechanism with which to borrow funds for expanding their operations. For capital intensive mid-size businesses, this is often the only practical option with which to finance large investments, as lenders will require security for loans above £25,000. The only other viable option may be to secure the loan on company equipment, but this would generally only be possible with niche lenders and can be inconvenient as equipment may be difficult to value and subject to sale or depreciation.
Finally, in the UK, commercial property can be a very attractive pension investment for business owners. By buying their business premises using their pension, and then renting the premises to the business at market rate, it is possible to transfer money between the owner’s personal assets and the business in a highly tax-efficient manner. Income can be extracted from the business through rental payments (though not accessed immediately) without any Income Tax or National Insurance liability. The property is also not available to creditors in the event of a personal or business bankruptcy. There are also other advantages such as the absence of Capital Gains Tax if the property is sold for a profit.
An experienced commercial mortgage broker can suggest the ideal mortgage product to fit your specific needs and circumstances. Our commercial mortgage broker directory lists the top-rated commercial mortgage brokers in the UK.