Own your commercial building with a mortgage

Owning a commercial building with a mortgage is a strategic investment that can benefit a franchise in the long term. Instead of leasing a property, buying the building will allow the business to build equity, gain control over business space, and potentially reduce operating costs. Commercial property mortgages work similarly to residential mortgages but with a few key differences tailored to the needs of a franchise.

Here’s an overview of how it works, the benefits, and important considerations to keep in mind.

A commercial mortgage is a loan used to purchase or refinance commercial property. This can include office buildings, warehouses, retail spaces and industrial properties. There are 4 key steps in the process:

1. Application – detailed financial information will need to be prepared which includes business statements, tax returns and a business plan. Then an application will need to be made with a suitable commercial mortgage lender.
2. Deposit – a commercial mortgage will require a down payment that will typically be in the region of 10% to 30% of the properties purchase price. Offering a substantial deposit will reduce the risk to the lender and demonstrate a financial commitment to the property.
3. Rates and terms – Commercial mortgage rates will vary based on the franchise financial profile. Repayment terms are generally shorter in comparison to a residential mortgage and will range from 5 to 20 years.
4. Repayment – The majority of commercial mortgages will have a fixed monthly payment with a fixed interest rate, others will have a fixed monthly payment with a variable interest rate and some will be monthly payment but on an interest only provision. At the end of the term the loan will either be repaid or any outstanding debt can be refinanced over a new deal.

There are several benefits for a franchise owning a commercial building:

• Equity – as a commercial mortgage is paid, equity in the property is being increased. The building will be an asset which can help to secure the financial future of the franchise and great leverage if the business is put up for sale.
• Budgeting – a franchise will have better control over its budgeting, they know what monthly outgoings they are committed to with a commercial mortgage and this allows for better financial planning.
• Tax – owning commercial property brings tax advantages. Mortgage interest rates, property taxes and depreciation can all be tax deductible. These savings can in turn make monthly payments even more affordable.
• Ownership – being the sole owner of the commercial property means a franchise can manage the space however they would like. Renovations, expansions and changes can be made to suit the growing need of the business.
• Rental – Over time if the franchise does not need all the building space, they can lease out sections to other companies. This rental income can be offset with the mortgage payment helping to pay off the loan quicker than anticipated.
• Asset – Owning the commercial property provides a valuable asset that can be used as collateral for future business finance. The likelihood is also that the property value will increase over time so significant profit can be made if it is ever sold.

Before exploring options for a commercial mortgage there are some items that need to be considered:

• There will be some significant upfront costs which include property inspections, legal fees and lender fees.
• A franchise must demonstrate good financial health and have a strong good credit score if an application is to be successful.
• The responsibility for all property maintenance, repairs and upgrades is the sole responsibility of the franchise owner.
• Value of a commercial property will fluctuate in accordance with market conditions and at times this could depreciate.
• Buying property in a set location means that the franchise has set roots, it could prove difficult to relocate if needed in the future. 

To conclude owning a commercial business with a mortgage can be a very smart investment for a franchise. It allows the building of equity, enables better controlling of operating space and brings good tax advantages.

The NGI team were delighted to help a leading franchise group operating in the estate agency sector to secure a sizeable commercial mortgage. This enabled them to purchase an existing site whilst also adding residential flats and completing a major refurbishment.

Choosing the right mortgage option for a commercial property is essential and this is where the team at NGI Franchise Funding can help. To find out more please call us on 01993 706403 or e-mail hello@ngifranchisefunding.co.uk.