How to Finance a Commercial Property Purchase in the UK

Commercial property finance is funding used to acquire, refinance or develop property used for business or investment purposes.

Examples of commercial property can include:

• offices;
• shops;
• warehouses;
• factories;
• workshops;
• hospitality premises;
• healthcare premises;
• mixed-use buildings;
• land; and
• other specialist business premises.

This guide focuses on financing a purchase. Tera’s Commercial Property Finance page provides the transactional overview for businesses ready to explore a particular requirement.

A property transaction normally involves two connected assessments:

• 1. whether the property is acceptable security; and
• 2. whether the proposed borrowing can be repaid.

The balance between those considerations depends on the funding route and intended property use.

Potential routes include:

• a commercial mortgage;
• bridging finance;
• development finance;
• a business loan in an appropriate supporting role;
• a combination of equity and borrowing; or
• another property-finance structure suited to the transaction.

No route is automatically appropriate because of the property type alone.

The final structure may combine more than one source of funds. Each commitment should be assessed as part of the complete transaction.

A commercial mortgage is generally used to purchase or refinance commercial premises over a longer period than short-term property finance.

The property normally provides security for the borrowing. A lender will also consider the borrower, intended use and repayment case.

A commercial mortgage may be relevant for:

• a company buying premises from which it will trade;
• an investor purchasing a commercial property to let;
• a business refinancing an existing commercial property; or
• a buyer replacing short-term finance after works or another condition has been completed.

The borrower should examine:

• the interest basis;
• repayment profile;
• total term;
• fees;
• security;
• guarantees;
• valuation requirements;
• financial covenants;
• early-repayment provisions; and
• conditions that must be satisfied before completion.

Tera’s commercial mortgage calculator can help model illustrative payments and selected costs using the assumptions entered. It is not a valuation, credit decision or finance offer.

Bridging finance is short-term funding intended to bridge a defined gap.

It may be considered where:

• a purchase must complete before longer-term finance is ready;
• the property does not yet meet the conditions for a longer-term facility;
• refurbishment is required before refinancing or sale;
• the buyer is working to a short transaction deadline; or
• another property sale or capital event is expected to repay the facility.

The central question is the exit strategy: how will the bridge be repaid?

Potential exits might include refinancing onto a commercial mortgage, selling the property or receiving funds from another clearly identified event. An exit is not credible merely because the borrower expects property values or business performance to improve.

Bridging finance can involve interest and several transaction fees. Depending on the agreement, interest may be paid monthly, retained from the advance or added to the balance. These structures change the cash received and final repayment amount.

Use Tera’s bridging-loan cost calculator to model illustrative costs under different assumptions. It is not a quote or recommendation.

Development finance may be relevant where the property purchase forms part of a substantial construction, conversion or development project.

The funding assessment may extend beyond the current property value to include:

• planning status;
• professional team;
• development programme;
• build-cost schedule;
• contingency;
• borrower or developer experience;
• expected completed value;
• sales or letting strategy; and
• exit plan.

Development finance should not be used as a catch-all label for ordinary refurbishment.

A buyer carrying out light cosmetic work may require a different structure from one changing the building’s use, extending it or undertaking substantial structural works.

Where the project is genuinely development-led, Tera’s development finance profit-on-cost calculator may help model project assumptions. The result is illustrative and does not determine whether funding is available.

A business loan may sometimes support costs associated with a property transaction, but it should not automatically be treated as a substitute for property finance.

Possible uses could include eligible professional fees, fit-out, equipment, relocation or working capital, depending on the provider and purpose.

The business should avoid creating several separate repayments without testing their combined effect. The commercial mortgage may appear affordable in isolation while additional borrowing for tax, fees and refurbishment makes the overall transaction too demanding.

Any property purchase should therefore be assessed on a whole-transaction basis.

The intended use affects how the repayment case is presented.

A business considering its own premises should begin with the operational case.

Questions include:

• Why is ownership preferable to continuing to lease?
• Will the property still suit the business if it grows or contracts?
• Is the location important to customers, suppliers or employees?
• Does the building require immediate work?
• Could planning or use restrictions affect operations?
• How much cash will remain after the deposit and costs?
• Is the business taking on property debt at the same time as other expansion costs?
• What happens if revenue falls after completion?

The property may be a long-term asset, but the business must still meet repayments, maintenance and operating costs from cash flow.

A property needing refurbishment requires more planning than a straightforward acquisition.

The buyer should identify:

• the scope of work;
• professional fees;
• contractor quotations;
• contingency;
• permissions and planning requirements;
• the expected programme;
• whether the building can be occupied during works;
• how the works will be funded;
• when income or trading can begin; and
• the intended long-term finance or sale.

The cheapest purchase price does not necessarily produce the lowest total project cost.

If a commercial mortgage provider requires the property to meet particular conditions before offering long-term finance, short-term funding might be considered. That strategy depends on the works completing and the refinance remaining available. Neither should be assumed.

Commercial-property finance normally requires the buyer to contribute equity, but there is no single deposit percentage that applies to every transaction. For worked LTV examples and deposit tables, see how much deposit you need for a commercial mortgage.

The required contribution can depend on:

• property type;
• intended use;
• condition;
• valuation;
• borrower strength;
• income;
• proposed facility;
• transaction complexity; and
• lender appetite.

The purchase price and lender’s valuation may differ. If the valuation is lower than the agreed price, the buyer may need to contribute more cash, renegotiate or reconsider the transaction.

The deposit is also not the only cash requirement. Buyers should retain enough liquidity for transaction costs, planned works and business operations.

Affordability depends on the source of repayment.

For owner-occupied premises, the lender may focus on the trading business’s ability to service the proposed debt after existing commitments.

For an investment property, rental income and lease quality may form part of the assessment, alongside the borrower’s wider financial position.

For bridging or development finance, the exit strategy becomes particularly important.

A borrower should test:

• higher finance costs;
• reduced revenue or rent;
• vacant periods;
• delayed completion;
• refurbishment overspend;
• slower sales;
• delayed refinancing; and
• unexpected property costs.

A forecast that works only if every assumption goes to plan provides little protection.

A lender may require a professional valuation of the property.

The valuation may consider matters such as:

• current market value;
• rental value;
• condition;
• location;
• comparable evidence;
• marketability;
• intended use;
• remaining lease length where relevant; and
• specialist characteristics.

A valuation is prepared for its stated purpose and commissioning party. The borrower should not assume that it is a full building survey or guarantee of condition.

Separate due diligence may be needed to understand structural, environmental, planning or maintenance risks.

The lender may take legal security over the property. Depending on the transaction, it may also request guarantees or additional security. Requirements vary and should be understood before the borrower commits.

A commercial-property buyer should budget beyond the deposit.

Potential costs may include:

• valuation fees;
• lender arrangement or facility fees;
• legal fees;
• broker fees where applicable;
• survey costs;
• searches;
• insurance;
• Stamp Duty Land Tax in England and Northern Ireland, where applicable;
• the equivalent transaction taxes in Scotland or Wales;
• planning and professional fees;
• refurbishment;
• fit-out;
• utilities and security;
• interest during works or void periods; and
• contingency.

Tax depends on the property, location, buyer and transaction. Obtain appropriate legal and tax advice rather than relying on a general finance guide.

Requirements vary, but a commercial-property application may involve:

The precise process varies, but a purchase may involve the following stages.

A manufacturing company currently leases its premises and is considering buying a larger industrial unit.

The property can be occupied without structural work, but the business also needs cash for legal costs, relocation, fit-out and equipment.

The company compares:

• 1. a longer-term commercial mortgage for the property;
• 2. the cash contribution required at completion;
• 3. separate funding for eligible equipment or fit-out; and
• 4. the effect of all proposed repayments on operating cash flow.

It prepares recent accounts, management information, bank statements, details of existing borrowing and a forecast reflecting the move.

The directors also test what happens if the relocation disrupts production or sales fall temporarily.

No deposit, rate, term, facility size or approval outcome can be inferred from this example. Any available terms would depend on the business, property, valuation and lender criteria.

Before committing, ask:

• 1. What is the total cash contribution?
• 2. Which purchase and project costs are not included in the facility?
• 3. What is the total cost of borrowing?
• 4. Is the rate fixed, variable or a combination?
• 5. What fees are payable and when?
• 6. What property valuation is required?
• 7. What security and guarantees are requested?
• 8. What conditions must be met before funds are released?
• 9. What happens if the valuation is below the purchase price?
• 10. Are early-repayment charges or exit fees applicable?
• 11. Can the property be used or altered as intended?
• 12. Is planning or change-of-use consent required?
• 13. How will refurbishment or fit-out be funded?
• 14. Does the business retain adequate working capital after completion?
• 15. What is the exit strategy if the finance is short-term?
• 16. Has the borrower obtained legal, property and tax advice?

A commercial-property application is stronger when the buyer can explain the complete transaction rather than only the purchase price.

Prepare:

• the property details;
• intended use;
• purchase price;
• available equity;
• funding requirement;
• refurbishment or development scope;
• business financial information;
• rental information where relevant;
• timetable;
• repayment strategy; and
• exit plan for short-term finance.

Tera Business Finance arranges finance from a panel of lenders and is not a lender. Tera may be able to explore appropriate options after reviewing the property, business and transaction, but finance remains subject to status, valuation, lender criteria and approval.

Start the Tera assessment.

• Tera Business Finance: Commercial Property Finance
• Tera Business Finance: Commercial Mortgage Calculator
• Tera Business Finance: Bridging Finance
• Tera Business Finance: Bridging Loan Cost Calculator
• Tera Business Finance: Development Finance
• Tera Business Finance: Development Finance Profit-on-Cost Calculator
• GOV.UK: Stamp Duty Land Tax on Non-residential and Mixed Property
• GOV.UK: Buying or Selling Property in Scotland
• Welsh Revenue Authority: Land Transaction Tax