Finance for commercial real estate

[Inphinity]

I'm hoping to get some insight or guidance form those who've been there and done that, as to the differences between finance for residental and commercial real estate. I'm reasonably familiar with how a typical mortgage for your own home works, in terms of local interest rates, fees, durations, LVRs etc. But from what I've been able to find, and I don't know if this holds true elsewhere as I am in New Zealand, it is much more difficult to get funding for a commercial property. I've spoken to several banks, and all are willing to lend 90 - 100% of the value for residential, but only 60 - 70% for commercial, even with a 5x5x5 year lease signed for the property for a rental amount that owuld cover repayments. They also are giving higher interest rates and shorter durations for commercial loans. E.g. a mortgage might be @ 8.9% with a 20 year period, yet the same bank for a commercial property is asking 10.2% and only a 10 year period. Is this normal? Are there ways around it? Maybe it's just a NZ thing? I really don't know, but it's making it more difficult than I had hoped for us to get our foot in the door so to speak with property. I would really prefer to go commercial, but atm finance wise may be forcing us to go residential unless there is some way around this. Sorry for the lack of paragraphs etc, just typing as I think atm Really appreciate the feedback.

 

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[ProInvestor]

It's very normal. it can be difficult to get more than a 70% LVR lend on commercial, even with a 10x10x10 lease.

Interest rates are also higher on commercial (this is standard). Usually one pays 1.5% differential (meaning commercial rates are 1.5% higher than residential).

It's pretty much the same everywhere: US, Australia, UK, NZ, Canada. The US market could get higher LVRs (or LTV for our American friends) but with subprime disaster apparently it's a lot harder than before.

The reason banks demand higher equity/down payment and interest rate is that commercial property can be very difficult to sell (and to value even), where as residential can be very easy (one just has to discount the price until it sells).

Usually loans are between 3-15 years renewable, which basically means after the 3 year term comes up it get 'renewed' for another 3 year term (this happens usually automatically).