Commercial Mortgages in Auckland
Buying commercial premises seems to be overlooked by many people or business owners. Although at first it may seem more advantageous to rent your business premises and obtain a short-term lease for a property, in many cases, the reality is that you will obtain more benefits from buying the building you occupy. In case you have an interest in buying a property, read this guide to learn what is the best way to obtain a commercial mortgage in Auckland.
What are the advantages of a commercial mortgage in Auckland?
The advantages are numerous. First of all, it is important to recognise that the payments on a mortgage may be similar to the rent you are already paying for your premises. The difference is that there is a big benefit by taking out a mortgage and that is that, in the end, you will own the property. That will mean you do not have any rent to pay to a landlord once you become the outright owner. Further you will have another asset in your wealth portfolio.
Another downside to renting offices or a commercial building is that you are always subject to constant rent increases. While you can negotiate these, that takes time and cost plus you know that the rent is going to go up over the years however good your negotiation skills maybe. So choosing a commercial mortgage will offer you cash-flow stability.
Another benefit is that the interest on your mortgage payments is tax deductible. This gives an attractive option helping you to reduce the yearly tax burden. In case you are the owner of many commercial properties, you will have the option of sub-letting your properties, although you might need the permission of your lender.
What are the disadvantages?
The first and biggest disadvantage is that you will have to make a significant down payment for the property. This is considerably more than a residential deposit which is currently 20 per cent. In the case of commercial mortgages, the deposit is usually 40 percent of the value of the building or premises you want to buy. This may be money that you may not be able to call upon or it is set aside for other initiatives on your company.
If you are not a stable business or your business is growing rapidly, a commercial mortgage is not the best solution for you. It is not easy to sell a commercial building, the process can take many months. This can hinder your move to a new location. It will also tie up your capital preventing you from buying a bigger office or whatever type of building you are looking for.
Another important disadvantage is without a doubt related to the responsibility involved, as you are the only person involved in up keeping and maintaining the building according to standards. If you rent a part of the building or offices you work in, then you will be sharing the costs of the upkeep and repairs. If you own the building out-right then you will be liable for all of the maintenance expenses.
What are the costs?
In general a commercial property will have a higher interest rate than a residential mortgage, mainly because the overall value is higher and the risks are far greater for the lender. No one can guarantee that a business will succeed, and this is why the lender is obliged to ask for higher rates. Other than that, all other payment methods and terms are similar to those of a residential mortgage. Although almost all banks and lenders do offer these commercial mortgages, it is important to do a little bit of market research before making a decision.
Who should benefit from a commercial mortgage?
This depends on your future business plans. If you are confident in your business and its chances of success, then this type of finance is perfect for you. Another advantage is that, in the end, you will be able to own the property and maybe have enjoyed an increase in property prices. A further scenario for benefiting from a commercial mortgage is deciding who will actually own the premises. For example, it is common for people to set up a new company that owns the building and then rents it to the actual trading company and in so doing, gives you a separate income stream. Or you can establish a family trust which raises a commercial mortgage in Auckland to own the building. In this case the beneficiaries will have a rental income.
Where can you find a commercial mortgage?
The main banks have commercial lending departments but they tend to be quite rigid and inflexible in their lending criteria. They are also reluctant to lend on specific types of commercial property so you may need to look at different options.
The good news is that there are also more smaller finance houses operating that can provide commercial mortgages than in the residential field. These can provide funding for a range of different projects and they are certainly more amenable than the regular banks.
These lenders will also have a big range of costs, interest rates, down-payments and other factors some of which will be more attractive to you than others. For example, would you prefer a lower interest rate or a smaller deposit? You can negotiate these options for a commercial mortgage in Auckland with specialist commercial mortgage lenders far easier than with a bank.
Global Pacific Finance http://www.globalpacific.co.nz/
Is Mezzanine Financing in New Zealand Right for Your Project?
There used to be just two forms of lending to enable new projects and strategies get off the ground – banks loans and equity funding – but all that has changed over recent years with a growing number of mezzanine financing in New Zealand.
Mezzanine financing will cost you more than a conventional type of bank loan but could still be the perfect answer for businesses which foresee rapid growth or those involved in some sort of leveraged buy-out situation.
Essentially mezzanine finance is a hybrid between traditional type bank loans and equity funding. The provider in a mezzanine finance agreement will hand over the money (just like in a bank loan situation) but the repayments will not be made in interest only, some element of the equity of your project will also be included in the deal. The lender will therefore have their initial investment paid back (with interest of course) as well as benefit from shares in the profits when the business has achieved its projected growth.
Mezzanine financing video
Mezzanine finance is only available for larger projects; these investors are interested in handing over large chunks of cash in return for hefty profits. This means that many SMEs with lower investment needs may not be in a position to take advantage of the hybrid form of lending known as mezzanine finance.
Banks do not like to lend on high risk projects – there is an old saying that banks only like to lend money to the people or businesses which don’t really need it – they like to feel that they are in a “win-win” situation. Alternatively choosing to use equity funding can prove to be expensive in terms of handing over large chunks and even control of your business.
Mezzanine loans do fall somewhere in the middle. The loan will generally be granted in a similar way to a traditional bank loan but the lender will of course need to be confident of high returns in such a potentially high risk situation. This does not mean that the business owner or shareholder must hand over valuable shares but the investor will look forward to making handsome profits on the amount they have invested within the company or project.
Unlike a traditional bank loan with monthly repayment schedules which can affect the cash flow of a growing business, mezzanine loans will be typically repaid in a lump sum towards the end of the agreed term. Mezzanine loans are naturally more expensive than most traditional bank loans but that really is only to be expected when you consider the added risks involved and the other benefits.
One of the most common occasions when this type of finance is used is during leveraged buy-outs as it provides flexibility while retaining the maximum share holding for the current owners. It may also be employed during the early stages of a business which has a high, rapid rate of growth potential. The mezzanine loan can become part of a larger investment program along with conventional term bank loans and other forms of equity finance.
This type of financing arrangement can be the perfect solution for a newly established business as a method of bridging the gap between the amount of financing available from conventional bank loan arrangements against the assets of the company and the perceived value of the new business project. It can be used as a means of financing acquisitions, corporate expansions projects, management buy-outs, leveraged buy-outs, recapitalizations and more.
Some real estate developers will also rely on mezzanine finance to secure the finances they need for project development – it can be a handy source of income when the primary mortgage lender or the construction loan is in excess of 10%. Collateral may be required in these circumstances which allows the financier to take control of some of the assets in the event that the borrower defaults on the loan agreement or that a foreclosure takes place. These can be executed more rapidly than the standard foreclosure timeframe for the traditional mortgage which can take as much as 12 months. Stocks which are the personal assets of the borrower may be seized legally in just a few months.
The mezzanine finance format has been used very successfully for a large number of businesses and corporations over the years.
While the idea of mezzanine financing sounds a potentially costly it is in fact a handy and speedy form of finance. If you would like some more information about mezzanine financing in New Zealand, talk to the Global Pacific Finance.
They are commercial financiers in Auckland but provide funding to businesses all over NZ.
Their website has more details about the types of commercial finance they offer including mezzanine financing.
Making Equipment Financing Decisions for Business
Businesses grow and as they do so they need more resources. This can frequently include the need for more plant, machinery and equipment. The problem is that often these items are very expensive and it is not possible to finance them out of cash-flow. So the business will aim to raise equipment financing at a cost and level of risk that the management can willingly live with. The costs are of course the repayments and the biggest risk here being that the business may not be able to service the debt consequently being forced into insolvency.
Generally speaking, there are about 5 main channels through which a company may get the funding it requires to raise sufficient capital. These are:
- Acquiring credit from suppliers
- Obtaining a loan from a bank
- Issue stock
- Issue bonds
- Obtaining a financing lease
Approaching a supplier for credit is one of the easiest ways through which a company can obtain funding. With this option, a company may acquire services and goods and are given a specified period of time to pay for them. If the company requires more credit from the said supplier, their financial controllers can negotiate for longer credit terms. Payment terms may also be stretched. This option works well as the creditors are keen on ensuring that their customer is still operational because if the customer becomes insolvent, they would lose their money.
Another reliable channel for getting funds is through approaching a bank. If the company has a revolving credit line with a bank, it can draw down, within its credit limit, as money is required and pay back when the business makes more money. This credit is usually guaranteed by the firm’s assets. However, if the business runs into trouble, paying back the money may become a problem leading to bankruptcy.
Bonds usually have a principal maturity and fixed interest rates on the contractual payments. Here, the risk lies on the company’s owners if they are not serviced. In this case, principle bond owners could easily exchange them, attaining ownership of the firm and eventually ousting the rightful owners. They tend to be an option only available to larger companies.
These have a non-contractual, non-tax deductible payment system. Stocks represent some form of ownership of the business and all its assets. At the same time, stock shares can be offered to raise capital at the existing shareholder’s expense. Here, new shareholders get to share ownership interest on an equal per-share basis with the existing shareholders. This dilutes the interests of the existing shareholders. However, the cost of going to market is extremely high both before and after the event so it is not a possibility for most companies.
Instead of opting to buy equipment, most companies will opt to get equipment lease financing for it. Things like heavy equipment, computers and cars can be financed for long or short periods.
A short period lease is referred to as the operating lease. The equipment is owned by the leasing company rather than the business itself. At the end of the lease, the properties or equipment is returned to the financier.
Long term leases on the other hand are a way of funding the purchase as opposed to the procurement of temporary services. They are commonly known as capital leases. Here, leased assets and financing liability are charged on the leaser’s books as though they were the ones acquiring the equipment.
The After-Tax Borrowing Cost
One of the main factors that will affect the ultimate financing decision is the issue of tax. All interest payments incurred from borrowing from bankers, bondholders and vendors are tax-deductible. However, shareholder dividends are not. The after tax borrowing cost is calculated as interest cost minus tax benefit. However, you should talk to your accountant before making any major financing decision.
Decisions about equipment financing will depend on various factors. The company accountant will be able to advise on some options to consider. However you will also want to talk to potential finance sources to get their input both in terms of their level of interest in the project and also what will the costs involved with their suggested approach.
Global Pacific Finance is a major player in equipment financing in NZ and they have plenty of experience to give you some ways forward.