This section aims to help you think about the financial side of buying a building. It includes information to help you:
Calculate your realistic purchase price
We are assuming here that you will use a mixture of different types of finance to buy your building, with a bank loan as a key element.
Arranging your loan - when and how much?
You may identify a building and need to be confident that you have funding in place before you complete fundraising from donations and grants. In that case, it would be sensible to arrange a loan facility with the bank that enables you to proceed with your purchase even if your final loan requirement is much lower. One point to be aware of here is the fees that you agree to pay when you sign the loan agreement (follow this link to our to section on fees
). The arrangement fee may, for example, be 1% of the total loan agreed. You may therefore pay a fee for money that you do not need to borrow.
Sometimes, you will not know how successful your fundraising has been until after you have completed the purchase, by which point you will have drawn down (begun using) the loan. Most loan agreements include an early repayment penalty so you should be open with the bank about your fundraising activities so that you can reach a suitable arrangement with them. For example, if the building purchase includes a substantial refurbishment, it may be worth exploring the use of an overdraft facility where the outstanding balance would convert to a loan at the end of the refurbishment. This would allow additional time for you to complete your fundraising.
‘Loan to value’ - how much of a deposit will you need to have?
The bank will have a maximum 'loan to value' ratio. This means that they will lend only a given percentage of the value of the building. On commercial property this percentage will usually be around 60% - 70%, although it may go up to 80%. The remaining 20%-40% will therefore need to come from either your cash reserves, or from fundraising.
The best way to approach this is to:
- look at what cash you already have available in your reserves and be clear about how much of this you are willing to invest in buying the building if your other fundraising is unsuccessful
- be realistic about your fundraising potential - what are the best and worst cases for both grants and donations?
For example, using a 60% loan to value ratio, what would be the maximum you could borrow? If you were able to raise £400,000 as a deposit, you would be able to borrow £600,000 on a building valued at £1,000,000. Bear in mind that you will probably need some additional funding to make the building suitable for you to occupy.
Affordability – what level of loan repayment can you manage?
Here are some questions to ask yourself:
- how much rent do you pay now? (Presumably you can afford a loan repayment that is equivalent to this?)
- what is your cash-flow surplus each month? Could you afford to pay more than your current rent?
- do you intend to use the building to generate additional income by letting space to tenants? If so, what level of rental income do you anticipate? Be realistic about the level of income here and how long it might take to let the space (follow this link for our guidance on becoming a landlord)
- do you intend to use the building to develop new trading activities? If so, be realistic about the level of profit this is likely to generate and the length of time it may take to build up the business
Speak to the bank and outline the background of your organisation, including:
- surpluses over the past 2-3 years
- the level of deposit you have
Ask the bank about:
- interest rates - an indication of both base rate linked and fixed rate
- your monthly loan repayments if you were to borrow the amount you are considering
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