As the commercial property market continues to recover in the first quarter of 2021, buyers and sellers are showing renewed eagerness to do business. However, at a time when banks are still reluctant to lend despite low interest rates, securing commercial property financing for large property transactions can be challenging.
Commercial property owners are finding unique ways to address this shortage of liquidity – and one of the most innovative solutions implemented in South Africa today is the vendor loan.
Let’s take a closer look at this type of financing to find out exactly how it works.
Property owners assuming the role of bankers
Anyone who’s ever bought on credit from a retailer will be familiar with the workings of a vendor loan.
In short, this type of financing involves the owner of an asset allowing a prospective buyer to repay a portion of its value for a number of months or years. This eliminates the need to finance the entire transaction using a traditional lender like a bank or mortgage provider.
- An illustrative example of this type of deal would be a property transaction worth R20 million where the buyer has only managed to secure R15 million in financing despite having a sufficient income cash flow and credit worthiness to service a loan for the full amount.
- To avoid financial difficulties becoming a dealbreaker the property owner may elect to extend 5 million in credit to the buyer by accepting 15 million upfront through the buyer’s financial institution and allowing them to repay the balance over a number of months or years.
- The specific period of time of which the balance must be repaid as well as any interest may be determined by assessing the buyer’s financial situation, affordability and other factors.
Is vendor financing the right approach for you?
As one of the latest commercial property trends, vendor lending has yet to become mainstream in the South African market. By the same token, it’s certainly something you’ll want to be aware of in the coming years as the economy moves towards recovery and banks remain cautious about lending.
Many buyers find themselves unable to obtain financing today simply because banks are not willing to extend credit – and this could be an excellent opportunity to sweeten the deal with partial financing as long as you manage the risk involved.
- If you’re not a finance expert you may want to consult your accountant, business banker or financial consultant before agreeing to a vendor financing arrangement.
- Prospective buyers will need to ensure that they and their businesses have excellent credit and a solid income track record before approaching a seller for this type of financing.
- It’s also worth noting that banks may be less keen to part-finance a property that has an additional creditor (the former owner) associated with it. In the event of a default, both the bank and former owner will have a claim on the premises which would have been used as surety on the loan.
Commercial Property Financing Loans
Like any new idea, vendor loans in the commercial property market will take time to prove their effectiveness. If properly structured and negotiated with all parties involved – including the bank – this form of financing may unlock lucrative deals for Commercial Space Cape Town and industrial premises in the coming years.
If you’re in the market to sell or invest in the commercial space, we’d love to hear from you. To find out how our team can assist you, contact us today.