There are a lot of commercial properties coming onto the market in NZ at the moment with competitive prices that seem too good to be true. So what are the pitfalls when it comes to lending on Commercial properties in NZ from a lending perspective? When applying for a commercial property there are alot more scrutiny/checks nowadays. Most banks will want you to find out if a seismic risk evaluation has been done. If it hasn’t been done they will require this as a condition. The preferred target with most banks on commercial properties in NZ is an evaluation of more than 67%. Anything below 67% will require a whole lot of investigation into the buyers strategy to update and get the building compliant to New Building Standards (NBS) such as:
- Will the buyer appeal the initial Evaluation Process score on the building if it is below 67%?
- Will they be doing repairs to improve the score?
- Is there a costed strengthening plan?
- What sort of time frame will the client be working with to improve the score?
- Then there is the problem of insurance. If the building does not reach 67% is the building insurable?
- There’s also the issue of future tenants and whether they will be happy with a score of less than 67%. They could demand improvements or walk away.
So before you even start getting finance approved there is a possible minefield to go through. Once you have had an engineer’s report proving that the property is compliant to New Building Standards you will need to go through all the normal procedures that go with lending. The bank will want to see that Income will support the application and that the applicant has enough security. Most banks in NZ require a 35% deposit and will charge commercial rates of 7%+. You won’t get the banking contributions etc that you get with residential lending and you will be charged a fee for getting the finance which can amount to Thousands.
So basically what I’m saying is that before even putting an offer on a property know your facts and do your research. You may be barking up the wrong tree. The last thing you want to do is buy a property that you can’t move on and may cost thousands to upgrade. We only have a couple of commercial/industrial zones on the island so this won’t widely affect us but we probably have a lot of people that own commericial/industrial properties off island and this will effect them.
If you own a commercial property please be aware that banks will not lend unless that property is up to standard. So unless you have a cash buyer expect to take a while to sell it or upgrade it to retain its value. My opinion is that commercial property will become like the leaky building debacle. A lot of owners will have to make costly upgrades in the hundreds of thousands to retain the value in the property.