Commercial Property Loan

How Do Commercial Property Loans Work?

A commercial property loan will allow you to buy, or conduct work on, a commercial property. This type of loan is what you could use as a business owner to purchase your business premises. Or, if you wanted to expand your business or renovate the property, you could apply for a commercial property loan to cover the costs. You could also use the money to pay for the operating costs of the property. As an investor, you could use a loan to purchase a commercial property to lease or sell.

What you plan on using the loan for will have an impact on how easy it is to qualify for the loan you want. This is because lenders view your loan as either a low, medium, or high risk facility, based on what it is used to pay for. For example:

• Commercial property investments in which you plan on leasing out the property are viewed as a low risk.
• Buying the property your business occupies is considered a medium risk.
• Funding day-to-day operations and liquidity shortfalls is viewed as a high risk.

There many possible reasons for a commercial property loan. Lenders will assess your purpose individually, looking at the details of your situation to get an idea for how much risk could be involved.

How Do Commercial Property Loans Differ from Residential Property Loans?

When approaching commercial property financing, don’t expect the same protections and processes that exist with residential loans. Unlike residential lending, commercial loans aren’t regulated by the National Consumer Credit Protection (NCCP) Act.

Here are some of the key distinctions you should be aware of with commercial property loans:

• There’s no Lender’s Mortgage Insurance (LMI) applicable to a commercial property loan, which means you aren’t likely to get a high Loan to Value Ratio (LVR) facility. In order to qualify, you’ll need to have more money upfront as a deposit than you would need for a residential loan, or a high-value security.
• The loan term will be much shorter. Commercial loans are paid off faster than residential loans. Instead of a 25 or 30-year term, your loan will have a 15 or 20-year term for loans under $1 million. For larger loans, the loan period will be even shorter but will focus on the interest payments.
• Pricing varies a lot. With home loans, you can easily compare rates and features by researching the loan products on the market. Whilst some banks post commercial rates, the rate you end up could be significantly different. It will depend on a number of factors including your security, the business location, and the type of business.
• Lenders assess serviceability differently. With commercial property loans, lenders use a calculation to make sure you have enough surplus income after paying all your business expenses to pay for the interest. This is different to the process used to assess residential loan serviceability.
• Commercial lending is generally more expensive than residential lending. Especially if you have a somewhat risky business, such as a newer organisation, or one in a traditionally volatile industry, the interest rate on your loan will be high. You're also likely to experience higher fees for services like valuations.
• There are bank reviews. Even after you qualify, the bank is not done assessing how risky you are as a borrower. With commercial loans, especially larger ones, your lender will regularly assess your financials to ensure you can still afford the loan. For loans over $2 million, high LVR loans, or interest-only loans, or if you are using a specialised property as security, you’ll probably have to deal with annual review.
• You may have to provide a General Security Agreement, or GSA, for your security property and your business assets, unless your income from the property is high enough to service the debt.

How Much Can You Borrow with a Commercial Property Loan?

How much you can borrow depends primarily on the size of the loan and on your security. With smaller loans, those under $1 million, the most you could borrow without another property to secure the loan would be 80% of the purchase price.

Most banks will prefer to keep the loan amount to 75% or 70% of the property value for loans over $1 million.

The way around this is if you have a guarantor, or if you’re using your own residential property as security. If a guarantor secures the loan or you have enough equity in a residential property, and the rest of your application is strong, you may be able to borrow 100% of the property value.

For any non-standard commercial lending facility, like a low doc loan, you will need an even larger deposit.

How Banks View the Commercial Property

With commercial loans, the type of property you purchase is a big factor in determining things like how much you can borrow, your interest rate, and whether you qualify at all. This is because certain types of property are low risk – meaning they have a high appeal and the bank could more easily sell the property in the case of a default.

Offices, retail space, warehouses, factories, and shop fronts are considered more secure. Specialised commercial properties like the following are a higher risk, which means you may need a larger deposit:

• Hotels
• Restaurants
• Event spaces
• Aged care facilities
• Petrol stations
• Farms and vineyards
• Private schools and child care facilities
• Shopping centres

What Features Do Commercial Property Loans Have?

Just like residential property loans, you’ll see a lot of the same features like additional repayments on variable rate loans, interest-only loans, and line of credit loans. There are other differences:

• Offset accounts aren’t normally available.
• Terms are usually up to 15 years without a residential security.
• Capitalised interest is available if you are seeking finance for a commercial development property or a sub-division.

How Do Banks Verify Your Income?

With less rigid regulation in place, banks have more flexibility in creating their lending policies for commercial property finance. Because of this, there’s more flexibility when it comes to loans outside of the standard full doc loan application. Keep in mind, however, you’ll probably end up with a higher interest rate and fees. You also will need a larger deposit.

• With lease doc loans, the bank will require you to prove that your lease income exceeds the interest repayments.
• If you don’t have the proper financial documentation for a full doc loan, a low doc loan is the next best alternative. In this case, you can use financials like bank statements, BAS statements, and an accountant’s letter to prove you can afford the loan.
• With a no doc loan, you won’t have to provide income verification documents. However, you’ll only qualify with a non-bank specialist lender because of the higher risk.
• Lenders may also look at your profit and loss forecast. Your financial forecasts need to show that your business will earn enough to afford the loan repayments.

How Do Banks Assess Risk?

With commercial lending, how risky the bank views your loan application will determine the cost of your loan. As a lower risk, you’ll get a lower rate so it’s worth gaining a general understanding of the factors banks assess to determine risk.

Whilst each bank has their own way of addressing risk, these are the factors that usually matter when figuring out the rate you’ll pay:

• Loan to Value Ratio
• Your asset portfolio
• The location of the security property
• If you’re a property investor, they’ll look at the diversity of your existing property portfolio
• What state the property market is in and expectations for the future of the local market
• Level of interest cover
• Your management experience if you’re purchasing a property for your business
• The strength of the tenant or tenants, and the length of the lease, if you’re leasing the commercial property

How to Qualify for a Commercial Property Loan

The reality is, the world of commercial property financing is much more complex than residential financing. As you can imagine, getting approved is also more complicated. It’s also standard to have to negotiate the terms of your loan, especially for larger commercial loans. Different lenders can have widely different lending criteria and you could end up with a remarkably different loan depending on which lender you apply with.

Also, you’ll need to know which banks generally work with the type of borrower you are. Different banks tend to work more frequently with certain types of borrowers. Whether you’re a startup business, a commercial property investor, a corporate borrower, or developer, we can recommend the lenders that are more likely to offer you an attractive loan. We can also help you negotiate with your lender, ensuring that you get the most favourable terms possible.

Our commercial brokers have years of experience working with Australia’s top banks and specialist lenders. We can discuss your situation with you and we’ll let you know what we can do in terms of negotiating with the lenders on our panels and securing a competitive interest rate. We will also connect with your accountant and solicitor so we can take their professional advice into account for your specific situation. Call us on (07) 3146 5732 or contact us online today!