Commercial property loans finance the purchase or improvement of property for business purposes.
They are normally for larger amounts than residential property loans.
According to the most recently available government figures, the commercial property loan market in Australia was worth nearly $250 billion per year prior to COVID-19.
What can commercial property loans be used for?
Examples of properties that you could buy, build or refurbish with a commercial property loan include the following.
- Office space
- Retail space
- Land zoned for business use
- Multi-residential unit/apartment developments
- Specialist business premises like a motel, restaurant or car park
How much can you borrow for a commercial property loan?
The amount you can borrow for a commercial property loan depends on three main factors.
1) Purpose of the loan
2) Value of the commercial property (or any other assets) that you can provide as security
3) Deposit you can provide
We will now look at each of these key factors in turn.
The purpose of the loan
Commercial property finance purposes can be broadly classified as being in one of three categories.
For example, taking out a loan to buy, build or refurbish a commercial property that you will rent out to tenants or subsequently sell.
An example would be using a commercial property loan to buy, build or refurbish premises to be used by your own business.
3) Working capital
This would involve taking out a commercial property loan to finance the day-to-day operations of your business.
In general, a commercial property loan used for investment purposes is viewed by lenders as being the lowest risk out of these three categories. Of course, this is assuming that the financials of the investment stack up.
A commercial property loan for working capital on the other hand is usually perceived as being the most risky purpose.
The level of commercial property loan risk obviously affects whether or not the loan application is approved. If it is approved, the risk level also affects the loan’s terms and conditions. The lower the risk to the lender, the better the terms and conditions they will offer.
Commercial property loan security
It’s important to understand that different types of commercial properties can provide more security for lenders than others. For example, buying an established office building with long-term tenants in place would be viewed as less risky than building premises from scratch without any prior tenant commitments.
For higher-risk applications, a commercial property lender may require additional security to be provided, such as other business assets or residential property. Whether this is required or not will depend on your specific situation.
Commercial property loan deposit
In general, the higher the risk associated with the commercial property loan security, the more deposit that you also need to provide.
Different lenders will have different maximum loan-to-value ratios (LVRs) that they’ll be prepared to accept. A loan-to-value ratio is the loan amount expressed as a percentage of the value of the commercial property.
For example, if you have a deposit of $150,000 and want to borrow $1.35 million for a commercial property worth $1.5 million, your loan-to-value ratio would be 90% (i.e. $1.35 million divided by $1.5 million).
The higher the ratio, the more risk to the lender. A higher deposit lowers this ratio and therefore the lender’s risk. This improves the lender’s ability to offer you better loan terms and conditions.
How are commercial loan applications assessed?
Commercial property finance applications tend to be viewed by lenders as higher risk than residential property loans, especially if they are for large amounts or for highly specialised properties. This is because commercial properties typically experience higher tenant vacancy rates. The income they generate is therefore less secure.
A commercial property’s value may also be less stable over the long term, as they are often dependent on uncontrollable factors such as economic conditions and the overall level of business activity.
Because of this generally higher risk, commercial property loan applications often have stricter criteria for approval, especially from major lenders like banks.
Commercial property loan terms and conditions
It’s often difficult to find and compare commercial property loan information on the websites of lenders like banks. This is because key information like interest rates and other important terms and conditions for commercial property loans are often negotiable. They depend on factors such as your financial circumstances, the type of commercial property being bought and its location.
It can also be difficult to get a commercial property loan approved by a bank due to their strict lending criteria. These criteria are likely to become even more strict in the post-COVID-19 Australian economy. For example, lower LVRs, which will mean that applicants will need to come up with a larger deposit.
Getting a commercial property loan through a private lender
Borrowers in Australia are increasingly turning to non-bank lenders (also known as private lenders) for secured commercial property loans.
Private lenders can provide you with the following benefits over traditional bank lenders.
- Less strict lending criteria
- A faster application and approval process
- A repayment schedule that is tailored to your business needs
They are also more likely to approve you if you have bad (or no) credit history, or if you have limited (or no) commercial history.
At DFS, we can arrange a private loan for you from our pool of over 200 specialist lenders Australia-wide. We are private lending specialists.
What information do you need to provide for a commercial property loan application?
The most important information you need to provide to your lender as part of your application is verification of your property security, deposit and income.
There are four broad options available to you to provide income verification information.
1) Full documentation
This information would include your tax returns for at least the last two years plus the accompanying financial statements for your business.
2) Lease documentation
This information should show that the regular rental income from your commercial property tenants will exceed your scheduled loan repayments.
3) Low doc
A ‘low doc’ application usually only requires a letter from your accountant to confirm that your regular income will cover your regular loan repayments. Alternatively, you could provide your most recent BAS statements as evidence of your ability to make the repayments.
If you’ll be undertaking a new commercial property venture and you can’t provide verification of your actual recent income, you could provide forecasts instead. It’s obviously important that those forecasts are realistic.
In addition to your income documentation/forecasts, you should also provide your lender with any relevant information about your business and its history.
Generally, the more relevant information you can provide as part of your commercial property loan application, the better. It’s important to present a strong case to a suitable lender. As the old saying goes, ‘you don’t get a second chance to make a first impression’.
That’s where we can help you at DFS. We’ll take the time to understand your needs before matching you with an appropriate private lender. Commercial loans can be more complex to understand. It makes sense to use a broker who fully understands commercial opportunities like we do.
What factors affect my commercial property valuation?
Your lender will most likely independently value your commercial property to determine the level of security it provides for your loan. This valuation may affect the amount of deposit you need to provide.
The major factors that are likely to affect your commercial property valuation are the following.
There’s an old saying that the three most important factors in real estate are location, location and location. It’s a cliché, but it’s true and it applies just as much to commercial property as it does to residential property.
A good commercial property location will be in an area where there is high demand from tenants or buyers for the specific property type (e.g. office space, warehouses, multi-residential developments, etc.).
2) The condition and appeal of the property
Commercial properties in good condition and with appealing features will be worth more than older, more run-down properties in the same location.
3) Economic conditions and the level of market competition for your commercial property type
The state of the economy always affects both commercial and residential property values. In addition, the level of competition for your specific type of commercial property will influence its value. If there is a shortage of its type in a high-demand area, its value will be higher, and vice versa.
The bottom line
Commercial finance can help you to capitalise on business opportunities. It’s crucial to get the right commercial financing deal for your needs.