Help understanding commercial loan

Hi all

I was hoping someone with commercial lending knowledge could help me understand the risks and impact of the following commercial loan.

I am looking, as an option, of taking out a commercial loan to fund a 6 unit development and pay out current resi loan. The loan suggested by my broker is based on a 90 day bank bill commercial funding. Total rate is equivalent 4.99% p.a, which is quite comparable to resi lending.

What are the risks and pitfalls of this type of loan?


Loan details:

Commercial property LVR 70% based on an in one line value

Commercial Advance

Limit $1,750,000

Interest rate 2.70% (90 day BBSY)

Repayments Interest only

Term 3 years then to be renegotiated

Client margin 2.29% subject to confirmation of the clients credit risk rating.

Unused Limit Fee 0.50%

Rollover fee $150 per quarterly rollover



Security

Will comprise as follows

Mortgage over block of 6 residential units Est value $2.7m excl GST

GSI over borrowing entity

Directors guarantees

Additional security may be required once the application has been received and fully assessed



Non Bank Fees

Government fees to be met by the client

Valuation Fees to be met by client

Quantity Surveyor initial report and progress inspections to be met by client

Bank Fees

Establishment fee 0.5%

Document Handling $500
 
Can't make a recommendation without knowing your financial etc and deposit ability and holding ability...BUT general comment.

1. If building than a BBSY is fine, cheapest way to fund short term commercial ( sometimes even long term comm) BUT for 6 units development there is a cheaper funding source that's suitable for loans under 2 years ( see below later)

2. 0.50% line fee and $150 roll fee...sounds like one of the Big 4 banks...more common for NAB....if you want the cheapest BBSY "build" loan you may want to consider the med size Banks like bankwest and suncorp who will waive these fee...small savings but it adds up.

3. The 0.50% app fee i would negotiate....should be able to get it down to 0.30- 0.40% depending on the deal.

4. 70% for in line valuation is pretty good to be honest....so you may stay with this bank for this higher lVR.

5. Pitt fall of a BBYS comm loan is rate can be 5% one day and 7% the next...it changes everyday but your rate will def change every 90 days depending on the international market

Also the loans you outline requires you to give them an additional security...so your crossing and risking one extra security.

----cheaper funding source for 6 units development---
- Non bank resi loan.
- better cash flow as it's 30 years loan but rate is 9.65% current as of today...but if you look at 24 month its lower repayments + only short term the rate is not a huge factor.
- App fee is more than half
- Lower fees in general and set up
- 65% Hard cost LVR ( This may be the killer)
- No additional security required ( this may be the winner lol)
 
CBA have a special on commercial Loans at the moment. I was offered 3 year fixed for 4.67% this week.



Chris

^ excludes construction esp the fixed :)

P.s ING is pushing 4.44% fixed for 3 years on comm as well :eek:
Everyone's happy- client/broker and bank....it's good to be a commercial buyers these days with the lock in rental return.
 
1. If building than a BBSY is fine, cheapest way to fund short term commercial ( sometimes even long term comm) BUT for 6 units development there is a cheaper funding source that's suitable for loans under 2 years ( see below later)/QUOTE]

Thanks. What happens to the loan after each 90 day? Does it just roll over to the new rate?

What happens after the build is completed? I'm planning to keep all units. Can it be rolled over to a resi loan, or would I be stuck with that BBSY loan?
 
^ excludes construction esp the fixed :)

P.s ING is pushing 4.44% fixed for 3 years on comm as well :eek:
Everyone's happy- client/broker and bank....it's good to be a commercial buyers these days with the lock in rental return.

Is the ING product available/suitable for commercial construction?
 
Loan details:

Commercial property LVR 70% based on an in one line value

Commercial Advance

Limit $1,750,000

Interest rate 2.70% (90 day BBSY)

Repayments Interest only

Term 3 years then to be renegotiated

Client margin 2.29% subject to confirmation of the clients credit risk rating.

Unused Limit Fee 0.50%

Rollover fee $150 per quarterly rollover



Security

Will comprise as follows

Mortgage over block of 6 residential units Est value $2.7m excl GST

GSI over borrowing entity

Directors guarantees

Additional security may be required once the application has been received and fully assessed



Non Bank Fees

Government fees to be met by the client

Valuation Fees to be met by client

Quantity Surveyor initial report and progress inspections to be met by client

Bank Fees

Establishment fee 0.5%

Document Handling $500

Rate seems reasonable for a construction loan. Negotiate the establishment fee down, and try and get them to pay for the val as well.

Also don't compare Bank Bills to resi product. The interest is paid in advance (don't let them convince you otherwise - its a classic sales technique)

As others said the BBSY rate changes daily. At the end of 90days it will be 'rolled' into a new bill. If you want to reduce the loan limit you can at this time only. The break fees if you break earlier than 90days are more excessive than a fixed rate resi loan.

You will need to check the terms of the loan to ensure you can re-fi prior to the 3years term without penalty (you should be able to - but check).

At the end of the construction period you could re-negotiate the fee too - it is cheaper for the bank holding resi-security than commercial security. So you might be able to trim that down also.

Blacky
 
Thanks. What happens to the loan after each 90 day? Does it just roll over to the new rate?

What happens after the build is completed? I'm planning to keep all units. Can it be rolled over to a resi loan, or would I be stuck with that BBSY loan?

- rolls over every 90 days and new rate issued.
- After build is done the bank would want you to continue your agreement as this BBSY comm loan BUT i would def re-negotiate.
- You can get a resi loan for 6 units on one or separate title FYI...sub 4.50



Is the ING product available/suitable for commercial construction?

No.

Also don't compare Bank Bills to resi product. The interest is paid in advance (don't let them convince you otherwise - its a classic sales technique)

Spot on.
The only exception is Bankwest's BBSY it's in arrears.
 
Gday
A couple of points here:
1. All banks fund on BBSW + credit risk margin on a development of that size. I would renegotiate with your lender as you are holding the properties. Most banks will be pretty flexible on this ? the rate is generally higher when it is just a straight develop and sell. Just say that another funder has given you an indicative with this as they are taking a ?long term view?.
2. The line fee is low, generally line fees are 1% -1.5% on a commercial loan like this.
3. 70% on comp is pretty standard for a well-built sale able item with a decent yield;
4. BBSW does not fluctuate that much here is a sample of the 90 day mid-rate
29/01/2015 2.66%
23/01/2015 2.77%
11/12/2014 2.80%
05/12/2014 2.76%
30/01/2014 2.68%
5. Stick with a commercial lender/broker who knows what they are doing, stay away from home loan lenders
 
make sure you have options to take the finished product elsewhere, thats the best leverage and our standard methodology.

There is no need for 15 year PI terms when you have single strata security.

Subject to a bit of refinance capacity one can often move out of comm altogether.


If you are stuck with comm on completion for some reason, Annual reviews may also be not much fun and comm products like ING and ABL et al tend to have resi type loan periods with no annual reviews


ta

rlf
 
If you are stuck with comm on completion for some reason, Annual reviews may also be not much fun and comm products like ING and ABL et al tend to have resi type loan periods with no annual reviews


ta

rlf

Thanks Rolf. I'm just super conscious that at completion, I might be stuck in a position where the commercial loan gets called in and I have no refinance options. It's a very low likelihood, but a risk nonetheless...
 
4. BBSW does not fluctuate that much here is a sample of the 90 day mid-rate
29/01/2015 2.66%
23/01/2015 2.77%
11/12/2014 2.80%
05/12/2014 2.76%
30/01/2014 2.68%

Any chance you know what happened to this BBSW rate during the GFC (2008-2009). This is on a remote chance something happens to the world economy and contagion occurs (e.g. Grexit).
 
Thanks Rolf. I'm just super conscious that at completion, I might be stuck in a position where the commercial loan gets called in and I have no refinance options. It's a very low likelihood, but a risk nonetheless...

I like the surviveability attitude

For stuff like this
I have a philosopy............... assume that 30 seconds after you have agreed to something the deal turns to custard, do I have a demonstrated exit strategy.

In your case, get your broker to run the various take out finance options and see what comes out.

Typically, if u can do a development without presales at the lvr mentioned, AND be approved for comm finance, id be surprised if you wont qualify for a bunch of resi stuff.

Its a relatively simple but not obvious process to check it out, and to actually implement

ta
rolf
 
Prior to the global financial crisis (GFC), the cost to banks for their short-term funds was only a small amount (i.e. spread) above the cash rate. Note that prior to the GFC, this spread remained relatively steady, even after the RBA changed the cash rate. That is, as the cash rate changed, so did the BBSW and by about the same amount. After August 2007, this relationship between the cash rate and the BBSW became far less predictable as spreads widened to record high levels to 100bps over the cash rate.
The similar could happen if Greece was to leave the Euro, some think it would be Lehman brother squared.
 
Not construction but st george I discovered are doing 100% lvr low doc for business purposes on resi security and 80% on commercial. $1 mil max loan. 1 bas statement and self certify income. 6% odd.

Yes I know crazy.
 
Not construction but st george I discovered are doing 100% lvr low doc for business purposes on resi security and 80% on commercial. $1 mil max loan. 1 bas statement and self certify income. 6% odd.

Yes I know crazy.

Same as ANZ.

it's pretty much a lowdoc cash out under the comm loans ( so No nccp), most of our self employed flipping client uses this product as it's quick and easy.
 
Regardless of the product I wouldn't use St George again.

They used to be great prior to the Wakbank taking them over. Since then they have gone steadily down hill to their current 'bottom of the barrel' status.

I still have one loan with them, which I can't wait to exit.

Blacky
 
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