A commonly held and mistaken belief amongst new or potential expats is that overseas one cannot secure a commercial mortgage. A commercial mortgage can be many things but here for simplicity’s sake let’s call it a mortgage to secure a commercial property such as a shop or warehouse etc.
Excluding a few countries in the world where religious beliefs prohibit it, Bankers everywhere share one objective if nothing else – they want to make money! They are always looking for promising ideas and deals that help them achieve that. If their clients and the local economy also benefit then they’re doubly happy. As such they may well be predisposed towards saying ‘yes’ so don’t be afraid to ask.
It’s not always easy to differentiate between a commercial or residential mortgage, but let’s consider how a given bank MAY see it.In the case of a residential property, the risks for them are fairly easily quantified. Even in a worst case scenario, if it all goes badly wrong they have a property that can be sold or auctioned off as what it is, a house or apartment etc. Their potential losses normally are small and easily quantifiable up-front. They also know that few people will give up easily on their repayments and commitments if they are keeping a roof over their head.
In the case of commercial mortgages, particularly when requested by expats, it can be harder for them to assess these things. Let’s consider an entirely hypothetical case.
Some expats arrive at your bank brandishing a business plan and property details relating to a dilapidated commercial building on the outskirts of town that has stood empty for 5 years. Their idea is to rent a flat locally, and renovate the building so that it can be used as a large antiques warehouse. They’re going to do the work and want a mortgage to buy the building.
Now according to the manuals and bank training, the person reviewing the request should perform a diligent review of the business case where they’ll hopefully find lots of good market research and figures etc. Once they’ve read it, they should then assess professionally the facts and figures and make an objective and unbiased decision.
They very probably will do all those things but before they even start thinking about the business case they are going to ask themselves some basic questions to understand what the risks are. Those questions will include:
– Who are these people?
– Why have they come to us?
– How much money do they have / are they going to put in?
– How will they survive before their business starts up?
– Why has nobody else purchased this building in the last 5 years?
– If these people ‘do a runner’ what can I do with the building if stuck with it?
All these things will be going through the banker’s mind as they’re still shaking your hand and saying the local equivalent of “good morning and please take a seat” and certainly long before they’ve started looking at the your facts and figures.
These are essentially issues relating to the basic credibility of the applicants rather than the fine detail of the figures in your plan.
It is a fact that these credibility questions, and many more like them, will often weigh far more heavily on a potential lender’s mind with a commercial rather than residential application.
Do bear in mind though that although these things create more difficulties for commercial as opposed to residential mortgage applicants, difficult is not the same thing as impossible!
To succeed, any applicant must position themselves in advance to create the best professional impression possible and to have answers to credibility testing questions readily to hand. Remember that you’ll need to think and speak ‘business language’ at all times and address their business perceptions, as this is a commercial mortgage request and not residential.
This article is not going to advise you on how to build a business plan, but we can offer our top ten tips for mentally ‘gearing up’ towards a commercial mortgage request and to enhance perceptions of your credibility.
1. Accept that things work differently overseas and consider using a commercial mortgage broker. These people have contacts and know the system. They can often secure loans, or at the very least provide introductions, where the normal expat with little local background will surely fail. Only pay them on results!
2. If possible, try to identify properties that combine business and personal residential opportunities. This makes lenders feel a little more secure sometimes in terms of your incentives to succeed – you may also find it can be categorised then as a residential mortgage.
3. Show you have financial reserves available and are putting a lot of them into your proposition. This shows the lender that you’re sharing the risks and in any case, they’ll probably insist upon a big percentage contribution from you for commercial properties.
4. Make sure you understand EXACTLY what the lender expects to see in your business plan. Research this and again use your broker if appropriate to help. It goes without saying that your plan should appear professional and be prepared in the local language not English. If necessary – pay for PROFESSIONAL translation.
5. Demonstrate you understand that they will have concerns and be ready to deal with them. Try to forecast these to avoid being caught out and surprised. Using the example case above, if asked why the building has been empty and unsold for 5 years, an answer of “Good question – I’ve no idea” may not create the best impression!
6. Research thoroughly recent local history, politics, economics and culture. As an example, if you’re asked what effect you think the local closure of a major factory will have on your business plans, a response of “what closure’s that then?” won’t go down well. Equally things such as referring to the local language as Spanish if it is in fact Catalan or showing you have no idea what or where the regional capital is will do far more damage to your cause than it would in the case of a residential application.
7. Highlight your personal commitment by talking about family issues if possible. If you’re not already resident in the country or area, show that you have researched schools, homes, language and so on. Many overseas countries place much greater emphasis on family values than is the case in the UK and if you’re talking about these and integration etc, it will reduce doubts that you could be a ‘here today – gone tomorrow’ type. Avoid shooting yourself in the foot with statements such as “my family will join me once we’re sure it won’t fail” Show prudence of course, but do not demonstrate major doubts about your own chances of success!
8. Make sure you have a credible plan for life showing how you will survive until your business starts to generate real income. This should show your financial income and your outgoings. Be prepared to share this fully if asked and do not suggest that this is your business only. It is also advisable to avoid outlining “self-sufficiency” ideas such living in a tent and boiling turnips to eat while you wait for your commercial property to start generating income. Lenders usually deeply mistrust these sorts of plan for life ideas as being essentially impractical. Share your plans here conversationally and EARLY in the application process.
9. Contact a good accountant at the earliest stages. Not only can they sometimes help in preparing your business plan and applications but they also may have local contacts they can exploit. Having a local accountant ‘appointed’ also looks good to the lender. Get an estimate of their costs in advance – accountants overseas can be expensive, as many expats have discovered to their shock!
10. Finally, make sure you are very familiar with local laws and regulations BEFORE you prepare your business plan and ask for a mortgage. Consult an architect if necessary on plans etc. You do not want it to be the bank that points out to you that your plans won’t work because (e.g.) you’ll never get change-of-use planning permission from the local authorities, or that you’ll need an entirely new drainage and sanitation system because of new laws in place for all commercial properties. Not only would it be embarrassing for your potential lender to have to point these things out, it’ll also call into question your basic professional credibility before the serious discussions around your business plan have even started.
In conclusion, be bold, but be professional!