Senior investment term loans

What lenders underwrite on an investment loan

Lenders underwrite a commercial investment mortgage as an income-producing asset, so the rent roll and the covenant sit at the centre of the case. They assess the occupancy and how stable it has been, the split and security of the income across tenants or an operator, the strength of those covenants and their track record, and the lease terms including unexpired length and break clauses. The valuation is carried out on an investment basis, capitalising the net income at a yield appropriate to the asset, the location and the covenant. They size the loan so the net rental income covers the debt service with headroom, applying a minimum interest cover ratio, which is usually the binding constraint rather than loan to value. A deposit of indicatively 25 to 35 percent is typical, because most lenders cap the loan at 65 to 75 percent of value. We package the income story, the covenants and the valuation evidence so the lender sees the asset at its best, and we explain any weakness before it becomes a problem.

Loan sizing, leverage and pricing on a term loan

On a stabilised asset, lenders advance indicatively up to 65 to 75 percent of investment value, with the binding constraint usually interest cover rather than loan to value: the loan is sized so net rental income covers the debt service with headroom, applying a minimum interest cover ratio. A fully let asset at high occupancy with strong covenants supports more debt than a comparable building with weaker or shorter income, because the income is proven and secure. Pricing is typically a margin over SONIA or the Bank of England base rate, or a fixed rate, set by the leverage, the covenant and the asset. Interest-only is available on the right income profile, while part-amortising suits an asset where the lender wants the debt to reduce over the term. We model the achievable loan from the rent roll and a sensible yield before approaching lenders, so the figure we quote is grounded in the income. All bands are illustrative, vary by lender and asset, are subject to principal sign-off, and are not an offer.

Rates, fees and the cost of long-term debt

A senior investment term loan is the cheapest money in the stabilisation lifecycle, because the income is proven and the lender is well secured, so pricing is a margin over SONIA or base, or a fixed rate, rather than the monthly rates of short-dated debt. Expect a lender arrangement fee, indicatively around 1 to 1.5 percent of the loan, an investment valuation, and legal costs for both sides. On a refinance, check for an early repayment charge on the facility being redeemed. The headline margin is not the whole story: a slightly higher margin with a lower fee, a longer interest-only period or a more flexible covenant can be the cheaper facility once everything is counted. We compare the total cost of the debt across the market, disclose our broker fee in writing, and never claim an exclusive panel or an exclusive tie to any lender. The figures are indicative and not an offer of finance.

Investment term loans against owner-occupier and short-dated debt

A senior investment term loan is the right product when you are holding an income-producing asset let to third parties, and it is sized on that rental income. An owner-occupier commercial mortgage, by contrast, funds a business buying its own premises and is sized on the trading profits of the occupying business, so it suits a different borrower entirely. Short-dated debt, whether development, stabilisation, lease-up or bridge-to-term finance, carries an asset through the phases before it is stabilised, and the investment term loan is what each of those structures exits onto: it is the long-term take-out that repays the bridge and holds the asset. We map the sequence so an asset is on short-dated money only while it must be, and settles onto its term loan, the cheapest debt, as soon as the income qualifies.