Structures and requirements.

What defines commercial financing

The term “commercial” refers to how the property is used, not to the legal form of the buyer. A private individual buying a multi-family house to let it out finances commercially. A limited company buying a house for its managing director to live in usually finances privately. The bank examines what the property is actually used for.

Typical asset types in commercial financing: multi-family houses, office buildings, mixed-use properties (residential plus commercial), purely commercial buildings, let apartments above a certain scale, and specialised assets such as logistics or care facilities. In the Rhine-Main region we see the focus on multi-family houses and mixed use in Frankfurt, Offenbach and the Main-Kinzig district. If you invest in a structured way here, you will quickly find yourself at home in our commercial financing service.

The key metric: loan-to-value ratio

While loan-to-value ratios of 100 or even 110 percent are possible in private financing, for commercial properties they typically range between 60 and 80 percent of the lending value. The lending value, in turn, is not the purchase price but a security-oriented valuation by the bank, frequently with a discount.

In practice this means you need more equity than for a private financing. For existing properties with a solid tenant structure and a sound location, we typically calculate with an equity ratio of 20 to 30 percent. For specialised assets or weaker locations, the ratio rises further.

Repayment, interest and the cash flow view

In commercial financing, banks measure the debt service against the rental income the property can sustainably generate. This ratio is commonly referred to as the DSCR (Debt Service Coverage Ratio). If it is not clearly above one, the bank will not finance the deal or will demand additional collateral.

Repayment structures are more varied than in private financing: alongside the classic annuity, interest-only (bullet) loans with a repayment substitute, bullet structures for a defined holding period and instalment-based repayments are common. If you want to repay in full early, you will often look at a full-repayment loan with a longer fixed-interest period. Which structure fits depends on the holding scenario, your tax situation and your cash flow target — and thus also on the effective interest rate, not just the nominal rate.

Which documents banks want to see

The list of documents is considerably longer than for private financing. For the property, banks expect:

• A current sales brochure and floor plans
• A tenant schedule with lease terms and rents
• The full text of all lease agreements
• Service charge statements for recent years
• The state of refurbishment and maintenance, ideally with an expert report
• An energy performance certificate

On the buyer's side, corporate entities need to add their most recent annual accounts, BWA (interim financial statements) and ownership structure. Private individuals provide creditworthiness, a statement of assets and their track record as a landlord or operator. Self-employed buyers and business owners with irregular income are often better placed to start with our financing for the self-employed.

Typical pitfalls in practice

What we see in many initial consultations:

• Underestimated operating and management costs
• Overly optimistic rent assumptions without a market comparison
• Neglected maintenance reserves
• A refurbishment backlog in existing properties that reduces the lending value
• Concentration risks when a single tenant accounts for most of the income
• No plan for vacancy periods and tenant changes

A sound calculation prices these risks in from the outset. Banks notice when the figures are presented before signing, and they scrutinise them very closely.

What we look at first in every enquiry

In the initial review, three things interest us: a realistic letting concept backed by a market comparison, the equity base in relation to the loan-to-value ratios of the suitable banks, and whether the property supports the relevant lending value. If one of these does not hold up, every further application to banks costs, above all, time.

If the three points are sound, we approach the banks that fit your specific situation in a targeted way. Which bank prefers which profile is a matter of experience and cannot be read from publicly available terms. For your follow-up strategy once the first fixed-interest period expires, our guide on fixed-interest periods is worth a read.