Unlike typical home loans, commercial property loans provide negotiable lending policies and pricing options that offer flexibility.
So, which lender is best for your commercial purchase, refurbishment, or fit-out?
Security for a commercial property loan
Different types of security represent different risks to the banks. Standard commercial properties are usually the best type of security for a commercial property loan. For example:
- Offices.
- Factories.
- Warehouses (including showrooms and storage units).
- Retail space.
- Shopfronts.
- Residential (block of units, house, unit, or townhouse).
Properties with standard security features are often preferred because they tend to be situated in desirable locations and designated for either residential, commercial, industrial, or mixed-use. Conversely, commercial properties that are tailored for specific purposes can be more challenging to assess and market, posing a greater risk to lenders:
- Accommodation (backpacker, motel, hotel, resorts, bed and breakfast, caravan parks).
- Aged care centres.
- Car yards.
- Child care/preschools.
- Farms / other rural properties.
- Function/reception centres.
- Land subdivisions.
- Petrol stations.
- Commercial property developments (or residential).
- Pubs/hotels/taverns.
- Restaurants.
- Vineyards.
- Landfill/garbage dump/waste management facility.
- Supermarkets. Note that there are a few lenders that can consider them non-specialised though.
- Private schools. Note that most lenders see schools as too specialised but not all of them.
- Recreation centres. Note that most banks see them as specialised properties, but some can consider your application depending on what you plan to do with the property.
- Shopping villages/centres.
Specialised properties will require a detailed valuation and risk assessment from the bank. You'll normally be required to have a sizeable deposit to get your loan approved.
With some types of commercial transactions, you can buy the leasehold, which is the right to occupy and run the business but not the freehold property itself.
Where a property can be used in several ways, then the lender may request an alternative use valuation, which can work for you or against you, depending on the transaction.
Commercial property loan purpose
The NCCP Act does not oversee loans taken out for commercial or investment purposes on non-residential properties. This means that commercial borrowers do not receive the same level of protection as those purchasing homes.
The purpose of your commercial property loan will affect how your loan is assessed:
- Investment (low risk): To buy or refinance a commercial property that will be leased.
- Owner-occupied (medium risk): To buy or refinance a commercial property that is leased to or occupied by your own business.
- Working capital (high risk): Financing the day-to-day operations of your business or liquidity shortfalls.
- Other purposes: All other commercial, business, or investment purposes are considered on a case-by-case basis, e.g., buying an insurance broking practice.
Please keep in mind that the intended use of the loan, rather than the collateral, is what determines whether it is classified as a commercial property loan. If you are considering using commercial property as collateral for a loan that is not related to business or investment purposes, such as using your office as collateral for a residential property purchase, it is advisable to proceed with caution. In this case, the loan would be regulated under the NCCP Act, and some commercial lenders would not be able to approve your application.
Proving income for a commercial property loan
It should be pointed out that regulations that control loans for commercial properties are fewer in number, thereby granting banks more leeway in their loaning procedures. They are not bound by law to show proof that a debtor has the means to pay back a loan, which has led to different methods for verifying income:
- Full doc: To apply for the loan, you must furnish comprehensive financial records.
- Lease doc: It is necessary to show that the revenue gained from renting is greater than the amount of money paid in interest.
- Low doc: To prove your income, you will need to provide documentation such as a letter from your accountant, a bank statement, or a BAS statement.
- No doc: There is no requirement for you to present any proof of your ability to repay the loan.
- Forecasts: To secure the loan, you need to present a projection of your business's financial gain and loss that confirms it can generate enough revenue to pay back the loan.
It's crucial to ensure that only those who possess the capacity to repay the loan for the commercial property are the ones to whom it's lent. It's important to keep in mind that banks are unlikely to give approval for loans with a high degree of risk. It may be worth exploring other options for funding instead.
Commercial property loan features
What are the typical features of a commercial property loan?
- Full doc: Permissible entities comprise people, corporations, trusts, and self-administered retirement funds.
- Term: The security system can be valid for as long as 15 years, and you can request an extension if needed. If you are using it for residential purposes, you have the option to extend the validity up to 30 years.
- Interest-only: Up to 5 years (longer on application).
- Interest rate type: Variable, fixed (up to 5 years), or bank bill facilities.
- Additional repayments: Allowed on variable loans.
- Redraw: Allowed for amounts that you have pre-paid.
- Offset accounts: Normally not available.
- Line of credit (LOC): Available at higher interest rates.
- Capitalised interest: Available for development or land sub-division finance.
Each lender has their own target market, products, and pricing, so it is important to get matched with a lender that can accommodate your needs. This is where an experienced commercial mortgage broker can help.
What is a general security agreement?
When applying for a commercial property loan, you're usually required to provide a residential property as security.
Despite the collateral you provide, most banks will also ask for a General Security Agreement (GSA) over the property and any and all of your business assets.
However, as long as you can afford the loan or you have sufficient equity, your mortgage broker can argue against a GSA or Guarantee and Indemnity (G&I).
To explain, if your income from the property itself can service the debt, then some banks will consider just the property as security without a personal guarantee from the directors.
If you need a director's income, then you must have a director's guarantee.
Commercial loan without switching business banking
In order to obtain a loan for a commercial property purchase, it may be necessary to transfer your business banking to the lender providing the loan.
However, there are ways to avoid this requirement.
Choosing a lender
Getting a commercial property loan approved
The assessment process that banks use for evaluating loans for commercial properties is complex, considering that every application and property is distinct. Working out which lender is right for you isn't easy because no bank is going to tell you that they aren't the market leader in a particular area.
Step 1: Choose the right lender
Which lender specialises in the type of finance that you are after? As mortgage brokers, we tend to see one or two banks dominate each niche within the commercial funding market.
For example, we would recommend different banks for different client types:
- Startup businesses.
- Low-risk commercial property investors.
- Highly-geared commercial property investors.
- Corporate borrowers.
- SMSFs.
- Developers.
By choosing a lender that has more experience lending to people with properties like yours, you'll be much more likely to get your commercial property loan approved.
Step 2: Present a strong case
Don't just fill in the application form and provide the documents that they ask for! You need to highlight the strengths of your application and present your situation in the way that the bank prefers to receive it.
Often, banks have their own templates and forms that they want to be filled in. Some banks like to see as much information as possible, whereas with others, it is best to provide the bare minimum.
Most of our mortgage brokers have actually worked in a bank's credit department, approving and declining home loan applications. So this is something that we can help you with.
Step 3: Mitigate their concerns
What if the bank doesn't approve your application right away? Then, it's time to negotiate and see if you can resolve the problem.
There are two main ways to do this:
- Provide additional information to show that their concern is unjustified.
- Change your situation to better match their lending guidelines.
- Negotiate pricing to match the risk of your application.
For example, maybe the lender sees that you have a bad credit history from a dispute with one of your suppliers.
You could provide additional information in the form of a letter from your solicitor explaining what happened and a bank statement showing that you could have paid the debt if you had wanted to.
Or maybe the lender isn't comfortable with the size of your loan, considering that you are a new borrower to the bank.
In this case, changing your situation by reducing your LVR would lower the risk to the bank and enable them to consider your application.
Getting a low-interest rate
Firstly, each lender has a different cost of funds depending on where they obtain the money that they lend out. Naturally, lenders with lower-risk appetites tend to have lower interest rates.
Secondly, many lenders have a risk matrix that they use to price a larger commercial property loan. This risk matrix will take into account:
- Location of the security property.
- Diversification of the property portfolio.
- Condition and appeal of the security property.
- Current and future state of the local property market.
- Level of interest cover (ability to repay the debt).
- Loan to Value Ratio (LVR).
- Length of time until the lease(s) expire.
- Strength of the tenant(s).
- Asset position of the borrower.
- Management experience/track record.
This risk matrix is a lot different from smaller commercial transactions where the LVR, loan size, and loan amount are the main determiners of the interest rate and fees.
What other things do I need to consider?
As always, be careful who you do business with! You should see your lender as a business partner, and you should know who you are doing business with.
Some private lenders are known for trying to take possession of development sites or for finding excuses to charge the default rate of interest.
The reputation of your lender matters. For small transactions with large lenders, you will have little bargaining power to negotiate specific terms. On the other hand, with a larger commercial loan, you may be able to negotiate a loan contract that is more favourable.
The major banks can be incredibly ruthless with commercial customers, so make sure that you negotiate from a position of strength and don't push your boundaries! When faced with a challenging circumstance, individuals usually prioritize their personal benefits above other people's, which may include yourself.
Why do annual reviews matter?
For a small commercial property investment, there is rarely any need for the bank to conduct annual reviews. However, where the risk to the bank may change from year to year, they may require a review.
The most common situations where a lender will require an annual review are:
- If the commercial property loan is over $2,000,000.
- Unsecured facilities.
- Specialised security properties.
- High-LVR, interest-only loans.
- If you are struggling with your repayments.
The lending institution will ask for documentation of finances, such as a report of income and expenses, a summary of assets and liabilities, and a projection of cash inflows and outflows. In some cases, they may also revalue your security property.
The bank may use this as an excuse to label your commercial property loan as a higher risk and change the margin on your loan.
If this is likely to be a problem for you, then let us know upfront, and we can apply with a lender that doesn't require annual reviews.
Should you use a mortgage broker?
Applying for a commercial property loan is much more complex than a residential property; banks don't publish their pricing, and lending policies vary widely.
Numerous wealthy investors tend to opt for the services of commercial mortgage brokers who specialize in the purchasing of commercial investment properties, citing various reasons.
- Experience: A great mortgage broker won't just get you a loan; they'll help to guide you through your purchase.
- Specialisation: Are you involved in a complex transaction? A mortgage broker that specialises in that type of finance can get you a better result.
- Relationships: Knowing the decision-makers with each lender can make all the difference.
- Competitive pricing: When a loan is submitted by a broker, the banks know they have more competition and a well-informed borrower.
- Flexible lending policies: Access to lenders with different risk appetites and funding sources allows for larger loan sizes and less restrictive terms.
How can we get you a better deal than going direct?
Getting the best deal
It may sound counter-intuitive, but we can often negotiate with your bank to get a cheaper loan than if you went to them directly.
Commercial bank managers are measured on their budget and their return on equity. In other words, they are focused on the banks' profit, whereas most other bank employees don't really care.
As a result, many borrowers lose out when they deal with the bank directly.
- If you are in a difficult situation, then they'll use this as an excuse to overcharge you.
- If you don't know what competitors can offer, then they'll charge as much as they can.
- If you are a loyal customer with many accounts, then they think you will be far less likely to leave, so they will charge you more!
- And, of course, they'll never tell you if a competitor has a sharper interest rate!
What does a commercial broker do?
Initially, we'll have a discussion to determine if we are a good fit for you and your business direction.
Once you have sent us all of your documents and we have a clear understanding of what you want, then we'll negotiate with our lenders to see which are most likely to approve your commercial property loan with favourable terms at a competitive interest rate. This also includes unique purchases such as a financial planning practice loan.
After this, we'll provide you with an Indicative Funding Proposal (IFP) to confirm the likely conditions of the loan. Once you accept the proposal, we can then arrange a valuation and submit a full loan application for approval by the lender.
During the process, we will liaise with your solicitor and accountant to ensure that their advice is taken into account to get you the best result possible.
Our mortgage brokers also know what it takes to increase your commercial property value to attract potential buyers or tenants without spending too much.
Frequently Asked Questions
1. Which types of properties are preferred as security for commercial property loans?
Standard commercial properties such as offices, factories, warehouses, retail spaces, and residential units are generally preferred due to their desirable locations. Specialized properties like aged care centers, petrol stations, and recreation centers may pose higher risks, requiring a detailed valuation and a larger deposit.
2. How does the purpose of a commercial property loan affect the approval process?
The purpose of the loan is categorised into an investment, owner-occupied, working capital, or other purposes. Each category poses different risks, influencing the assessment process. Loans for commercial and investment purposes on non-residential properties do not receive the same level of protection as residential loans under the NCCP Act.
3. What are the income verification options for a commercial property loan?
Different income verification methods include full doc (comprehensive financial records), lease doc (showing rental income exceeds interest), low doc (documents like a letter from an accountant), no doc (no proof of repayment ability), and forecasts (projecting business financials to demonstrate repayment capability).
4. What are the typical features of a commercial property loan?
Features include full doc eligibility for various entities, terms up to 15 years (or 30 for residential use), interest-only periods up to 5 years, variable or fixed interest rates, additional repayments on variable loans, redraw options, and the availability of a line of credit and capitalised interest for development or land subdivision finance.
5. What is a General Security Agreement, and can it be avoided in a commercial property loan?
A General Security Agreement (GSA) is often required in addition to property collateral. However, if the property income can service the debt without personal guarantees, a GSA may be negotiable. It's essential to discuss this with a mortgage broker to understand the implications and potential alternatives.
Please contact us for more detailed information.
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