How do commercial mortgages work in a leveraged buyout?

I've been looking at ways to leverage the property (real estate) in a leveraged buyout if a business owns its own premises. Obviously a sale & leaseback on the premises is one way to raise a good chunk of money to give the seller on completion, with you as the new owner taking on a lease when you become new owner of the business. You may be able to get up to 100% of the value of the premises (if the sale & leaseback provider doesn't make you a below market value offer).

In my experience, it's relatively easy to get sale & leaseback offers for business acquisitions (provided the numbers stack up) as you are not borrowing money, you are simply selling the sale & leaseback provider an asset, so the application process is easier. The caveat being I still haven't closed my first deal yet, but I have had a few sale & leaseback offers on deals that I didn't end up closing.

But what about getting a commercial mortgage instead? I heard this would result in lower monthly payments than a lease, so would place less strain on the cashflow of the business you acquire. I looked into commercial mortgages in the UK and I see that the most you can raise is 75% loan to property value. Does this mean that you as buyer will have to put in the remaining 25%, and does it mean the seller only gets 75% of the value of the property on completion, or can you apply for these without putting your own funds in? I want to do leveraged buyouts without using my own money, so not sure how the commercial mortgage option works.

Actually, I did see some 100% LTV commercial mortgages that can be funded with additional security, but if using the property alone then it seems 75% LTV is the max you can get.

So it would seem that with a commercial mortgage, you can't raise as much upfront to pay the seller as you would be able to with a sale & leaseback, but it'll give you lower monthly payments than a lease perhaps.

What happens to the mortgage and the balance of it owed when you sell the business (say, after 5 years or so)?

Finally, what about interest only mortgages? If paying 'interest only', at what point is the balance due and where does that money come from, especially if you sell the business after 5 years.

All the above is related to deals and financiers I've looked at in the UK. I haven't looked at financiers or deals in other countries as of yet.

3 comments