Commercial property loans explained: how they differ from home loans

A commercial property loan is finance secured against a property used for business, such as an office, shop, warehouse, factory or medical suite. It might be a building your own business will occupy, or one you buy to lease to a tenant.

Commercial lending is for business purposes. It isn’t designed for buying a home to live in, and it sits under different rules to consumer home loans. That’s one reason the process can feel quite different, even if you’ve bought a home before.

How commercial loans differ from home loans

Lenders see commercial property as carrying different risks to a family home. Vacancies can last longer, the pool of buyers is smaller and values can move with the fortunes of a particular industry. Those risks shape the loan in a few ways.

• A bigger deposit. The maximum loan to value ratio (LVR) is usually lower than many home buyers are used to. Expect to contribute a larger share of the purchase price, plus stamp duty and other costs.
• Shorter terms. Commercial loans often run for a shorter term than the 30 years common for home loans. Some are set up as facilities that the lender reviews every few years.
• Different pricing and fees. Pricing tends to reflect the property type, the strength of the borrower and the lease. Fees can include establishment, valuation and legal costs.
• More conditions. Some loans include ongoing requirements, such as providing updated financial statements each year.

Lease and tenant quality

If the property is leased, the lender is really assessing two things: you, and the income the building produces.

A lender will usually want to see a copy of the lease and will look at:

• Who the tenant is. An established business with a solid track record is generally viewed more favourably than a brand new venture.
• How long the lease has left to run. A longer remaining term gives more certainty of income.
• The rent and how it changes. Lenders look at whether the rent is in line with the market and how reviews are worked out.
• Who pays outgoings. Whether the tenant or the owner pays rates, insurance and maintenance affects the net income.

A vacant property, or one with a short lease, can still be financed in some cases, but the lender is likely to be more conservative.

How valuation works

Commercial valuations are done by valuers who specialise in this type of property. Rather than just comparing recent sales, they often look closely at the income the property earns and the return a buyer would expect from it.

That means a strong lease can support the value, while a vacancy or a lease about to expire can pull it down. Because the loan amount is tied to the valuation, it’s worth having realistic expectations before you sign a contract.

How lenders assess serviceability

For a home loan, serviceability is mostly about your personal income and expenses. For commercial property, the lender looks at the whole picture:

• Business financials. Profit and loss statements, balance sheets and tax returns, usually for the past two years.
• Rental income. For an investment property, the net rent is a key part of whether the loan can be repaid.
• Existing debts. Other business and personal borrowings, including any guarantees you’ve given.
• Personal position. Directors are often asked to give a personal guarantee, so your own assets and liabilities matter too.

Owner-occupied vs investment

Owner-occupied means your own business will operate from the property. The lender focuses on the strength and stability of your business, because your business is effectively the tenant. Many owners like the idea of paying off their own premises instead of paying rent to someone else, although the business.gov.au guide notes that buying also means a higher upfront cost and taking on maintenance.

Investment means you lease the property to someone else. Here the lender pays close attention to the lease, the tenant and the rental income, as well as your wider finances.

A note from Jenny Commercial applications move much more smoothly when the paperwork is ready before we approach a lender. I like to sit down with you and your accountant early, so the structure and the numbers are settled before any application goes in.

Documents you’re likely to need

Every lender has its own checklist, but most will ask for:

1. ID for each borrower, director and guarantor.
2. Business and personal tax returns, usually for the last two years.
3. Financial statements (profit and loss and balance sheet), and sometimes recent management accounts.
4. Business activity statements and your ATO account position.
5. The contract of sale, and the lease if the property is tenanted.
6. A statement of your assets and liabilities.
7. Details of the entity that will own the property, such as a company or trust deed.

The role of your accountant

Your accountant is an important part of the team. They can prepare up to date financial statements, explain any one-off items in your figures and help a lender understand how your business really performs.

They can also advise on which entity should own the property, how GST and stamp duty may apply, and the tax position of owning versus leasing. These are decisions to make with professional advice before you sign, because changing the ownership structure later can be costly.

Getting started

A good first step is a conversation about what you’re buying, how it will be used and how your business is travelling. From there, your broker can compare how different lenders are likely to view the property and the lease, and help you prepare an application that tells the full story.

The information in this guide is general in nature and doesn’t take your circumstances into account. Commercial lending is subject to lender criteria, and you should seek tax and legal advice before buying.

This information is general in nature and does not take into account your objectives, financial situation or needs. Lending criteria, terms, fees and charges apply and vary between lenders. Speak with us for advice about your circumstances.