Financing commercial property: This is how construction financing works

A doctor’s office, a workshop, a retirement home or an office for your own startup – commercial property is not just commercial property. But how does commercial real estate financing differ from private real estate financing? And can you finance a commercial property without equity?

This article shows you what you have to consider as an entrepreneur, freelancer or start-up and explains how you can finance a commercial property.

Financing a commercial property: What must be considered?

First things first: What is a commercial property? This is a building or property that is not used exclusively privately – this is the case, for example, in shops or office buildings. In addition, a commercial property usually supports freelancers, start-ups and entrepreneurs in generating income: For example, a doctor needs a doctor’s office in order to be able to work.

In principle, the course of commercial and private real estate financing is very similar: After applying for and approving the financing, the applicant pays back a loan to the bank within an agreed period of time – but commercial real estate is usually about much higher loan amounts. The value assessment also differs from that of a private property. Instead of using the tangible value method, a commercial property is valued by the so-called income value method on the basis of the expected achievable net income. As a result, it is much more complex to finance a commercial property. This also means for you: The conditions of your loan are less predetermined and must be agreed individually with the respective bank.

What factors are important for financing a commercial property?

Not only the use of the property, but also the type of commercial property, special regulations at the location or specific legislation play a role in commercial financing and influence your credit conditions. Is the object specifically designed for the company, has the type of use been determined or is it a new building? Is it used pro rata as living space? And what about the value? Find out all the details about commercial property refinance so that you can approach your financing well planned and not experience a nasty surprise over the years.

The commercial property is evaluated on the basis of current legislation, which incorporates structural knowledge as well as legal and business factors. The so-called Earnings value method evaluates the commercial property by considering the expected net income. Specific legislation and – depending on the location – local regulations apply for the construction and use and also for the sale of commercial real estate.

What forms of financing are common for commercial real estate?

Common types of loans are annuity and installment loans:

  • Annuity loan

An annuity loan is characterized by its constant, monthly constant rate during the term. Although the interest pay is getting smaller and smaller, while the repayment portion increases (as can be seen in the graph), this does not affect the rate you pay as a borrower over the years.

  • Installment loan

In the case of an installment loan, the rate is constantly lower during the term, as the interest to be paid decreases due to the constant repayment.

This is how the financing of a commercial property works

Would you like to purchase a commercial property? Start by assessing your financial situation and calculating the costs incurred. Only in this way do you know what you can actually afford and assess how the loan will integrate into your life over the next few years. You can calculate possible conditions for your loan with a financing calculator for commercial real estate. Afterwards, the consultation of a bank or a credit institution will help you.

Your creditworthiness plays a major role in the further course of your financing. Because traders in every industry know that the economic situation can deteriorate at any time. This is a risk that a bank wants to minimize as much as possible when financing a commercial property. Therefore, the bank as a lender checks not only your balance sheets, but also your creditworthiness very carefully. The assessment of your creditworthiness also helps you as a borrower to get good and tailored conditions for your loan.