"Can I get a loan if I buy an office space?" heard this many times from borrowers who had taken not less than three home loans, but calls me to enquire on this. Getting a loan against residential property is a piece of cake these days, but raising funds for purchasing a commercial space isn't so. Most importantly, the public know-how on this matter is really poor. So this how it works.
Commercial purchase can be broad-based into two types- (A) An office space & (B) Retail outlet. And again these two can have subsections like (i) Ready to occupy & (ii) Under-construction.
Lenders are more skeptical on funding in commercial property, and more so for under-construction ones. Most commercial property purchasers are 'investors' and that may be the reason. Though a few buy for running their own business and if that's the case, a lender feels more comfortable too. A lot of top lenders do not fund commercial properties and a few of those who do, fund only the ready ones and avoid under-construction types. So, before locking yourself on any project, please check with your loan adviser to weigh the funding option.
Differences between funding a residential and commercial property:
Though the financial documents required by the lender to ascertain the loan eligibility of the borrower is same, following are the differentiators-
1. Lesser Loan to Value (LTV) ratio- For residential funding, it ranges between 75-90%, however, the funding percentage is restricted to 55% for commercial purchases. This means more self-contribution by the borrowers.
2. Higher fee- Processing fee for residential purchases are standard fixed fee of 10,000/-. During some schemes, even lesser fee as low as 'Nil' are offered to borrowers. However, for commercial purchase, it is standard 1% of the loan amount and with certain lenders, if they like the profile of the borrower as well as the property, they reduce it to aminimum of 0.5%.
3. Higher ROI- Rate of interest (ROI) is a pivotal factor while borrowing and in commercial type, it is at least 1-2% higher than the residential ones and it can go to even 4-5% if the financial documents have lesser strength and some surrogate product is offered. 'Surrogate' could be like, some other loan track or healthy bank balance etc.
4. Builder category- Lenders are very specific about the builder's profile if the property is under-construction. Whether the commercial property will be ready on time is of utmost importance. Generally a commercial property will take much lesser time to be constructed and the number of occupants in one building will be lesser than that of a residential. For example, there could be one buyer for one complete floor plate, or, say, the number of toilets to be constructed in a commercial setup is much lesser with no bath-area etc, which makes the construction easy and lesser time-consuming. Lenders will look at the previous delivery-schedule maintained by the builder to decide whether to lend in this builder's property or not.
5. Technical evaluation- The building needs to have all proper technical specifications complied with. Be it shafts, lifts, escalators, fire-extinguishing arrangements, emergency exit, double staircase etc. The authorised technical evaluation team of the lender will verify every detail. It isn't so that residential property is not verified well,
but commercial properties do have more aspects to inspect.
6. Obtaining all statutory approvals- The builder will have to have all clearances such as approved plans, clearance from different departments like fire, forest etc. to be in place. There should be no demolition risk on the property due to any pending approval. It is the same in case of residential property too, but as mentioned in the previous point, it is stricter and more in numbers in commercial buildings.
7. Loan tenure- Loan tenure offered in residentialproperty could be as high as 30 years, but in commercial purchase it is mostly restricted to 10 years. This means higher EMI outflow for the borrower again.
8. Capping exposure- If someone is buying a commercial property worth 10 crores, the lender may decide not to lend more than 3 crores on the transaction, even if he is eligible income-wise and there are no issues on the property front either. This comes from the fear of the loan going bad and the hit the lender will have to take in case of any eventuality like building demolition (fire, earthquake etc.) or demise of the borrower. Since insurance is a matter of solicitation and the borrower in India may choose not to opt for it, the risk remains.
9. Valuation- Purchase cost if inflated by the builder/seller to enable the borrower to take more funding from the lender, it is shot down by the expert evaluation team outsourced by the lender. Almost all of them have multiple experienced valuation-agents who submit report independently and the lender considers lower or the lowest of all, to hedge risk.
10. Residual age of the property- Very old properties do not get funded not only due to the risk related to the age of the building, but also due to not having proper sanction plan or fire-exits or many other things which have been made mandatory in new policy of the lender. So, have a quick check with your adviser. Even if it is a famous commercial building which houses large corporates, it may not get funded by some or all lenders. On another hand, retail spaces are more expensive in terms of rate per square foot than office spaces in same commercial building. Lenders do recognise that fact. So, the same building a office space may be valued at 20,000/- per sft. but retail at 30,000/-. One shouldn't assume that since retail is 30, then so will be the office.
11. Minimum area- Lender will want to fund a minimum area square foot. In retail outlets, there are small spaces called 'vanilla' wheregenerally bank ATM-s etc. are made. These can be even smaller than 100 sq. ft. The lender may refuse to fund any space if it is lesser than 250 sq. ft. or so. Different lenders will have different policies on this matter, so better to check with your loan adviser again.
At the end of it, though acquiring a commercial property works out to be more expensive for you in terms of monthly outflow, since the tenure is less and rate of interest is higher along with more self-contribution to be paid; nonetheless, the 'return' on the investment in commercial property has always been on the higher side. So, if your property is 'eligible' for a funding, then why not?