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Alternative ways to finance commercial property purchases

Alternative ways to finance commercial property purchases

Commercial property is a great investment asset, however, costs related to buying commercial property make it difficult for many to own these assets.

Outright cash purchases are rare these days and bond applications are more often than not, declined by banks who are tightening up their lending criteria especially in tough economic times, says Jim Grantham, an Industrial Broker for Broll Property Group Broking in KwaZulu-Natal.

He explains that for those investors wishing to add commercial property to their investment portfolios, there are alternatives ways of purchasing property. In fact, there are two, namely the instalment sale agreement and the Kunstingsbrief.

The instalment sale method is governed by the Alienation of Land Act No 68 of 1981 while the Kunstingsbrief  is the registration by the purchaser of a bond over the property in favour of the seller and more fully described below

Grantham says would-be buyers who wish to purchase commercial property through either mechanism should do so with the help of a qualified property attorney who will be able to advise and guide them through the process.

An instalment sale is simply between a buyer and a seller stating that the buyer will pay off the purchase price in monthly instalments. During the term of the agreement the property remains registered in the name of the seller, explains Grantham.

The Kunstingsbrief is different in that on agreement and upfront, the property in question is transferred into the name of the purchaser. At the same time, a bond is registered over the property in favour of the seller.  He points out that this may feel counter intuitive to  ‘ hand over’ the property without being paid in full but the bond is sufficient protection as it allows the seller to be a preferent creditor should the purchaser (now registered owner) defaults on payment.

With both an instalment sale agreement and Kunstingsbrief, the parties agree on the loan term , interest payable towards the loan, date and manner of instalment payments for example as they would in any sale agreement. However, says Grantham, the term of an instalment sale agreement should not be longer than five years from date of agreement.

The act allows for a recordal against the title deed that the property in question is subject to an instalment sale agreement and therefore freezes so it cannot be sold or transferrd again until all obligations under the agreement are met or the agreement otherwise terminated. 

In the case of an instalment sale this, recordal also confers the benefit of ranking the seller as a preferred creditor although this is limited to residential transactions.  

Grantham says both mechanisms can however be used as a means of securing a deal as quickly as possible while traditional and often lengthy finance applications happen in the background as there is nothing prohibitive about the purchaser making accelerated payments (whether lump sum or increased instalments in order to discharge their obligations).

He says he has negotiated a deal where seller finance was used tactically to this effect thereby removing the sought after property from the market to the relief of the then prospective purchaser and getting substantial and unencumbered deposit across to the seller. 

Ultimately, the Kunstingsbrief method is probably better suited to commercial property transactions as it allows for the protection of the seller. This protection is lacking in the case of an instalment sale agreement of commercial property, adds Grantham.


Broll Property Group

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