Commercial Property Finance

The two look identical on a title search and are assessed completely differently.

Owner-occupied

Your business is the tenant. The lender is really lending against your trading performance, so the file is assessed like a business loan with property attached. The upside is that lenders often take a more generous view of the loan-to-value ratio when the occupier is the borrower, because vacancy risk disappears. The discipline it imposes is useful: the business should be able to pay a market rent to itself and still be profitable.

Investment

A tenant you do not control is paying the loan. Now the lease is the asset. Lenders read the term remaining, the options, the rent review mechanism, whether outgoings are recoverable, the strength of the tenant, and how easily the space could be re-let if the tenant left. A short remaining term on an otherwise good building will reduce what a lender will advance, because the lender is pricing the day the lease ends.

A commercial valuer usually approaches the property two ways and reconciles them. The first is capitalisation of net income: take the sustainable net rent, divide by a market yield for that asset class and location, and you have a value. The second is comparable sales, adjusted for size, condition and location.

• Because value follows income, a vacancy or a below-market rent hits the valuation directly, not just the serviceability.
• Specialised assets such as service stations, childcare centres, pubs, medical fit-outs and cold storage are valued on a going-concern basis and attract lower lending ratios, because the buyer pool is smaller.
• Valuers often report a market value and a separate figure for a sale within a limited marketing period. Lenders on tighter files may lend against the lower one.
• The valuation is instructed by the lender, not by you, and you generally pay for it. It is not transferable between lenders, which is another reason not to apply everywhere at once.

Capitalisation of income

Sustainable net rent divided by a market yield for that asset class and location. It is the primary method on a tenanted commercial building.

Net rent

Rent after the outgoings the landlord cannot recover from the tenant. The valuation works from this, not from the headline gross figure.

Outgoings

Rates, insurance, land tax, owners corporation levies and maintenance. Whether the lease makes them recoverable changes the net rent, and therefore the value.

Going concern

The basis used for specialised assets such as service stations, childcare centres and hospitality, where the building and the operating business cannot be separated. It attracts a lower lending ratio because the buyer pool is smaller.

Lease doc is genuinely useful for investors with complicated structures, because the test is whether the rent services the debt with a buffer rather than whether the borrower has finalised last year’s returns. It only works where the lease is strong and the coverage is comfortable.

1. 01

   Work out the total cash required first

   Deposit, stamp duty, GST treatment where applicable, valuation, lender legals, your own legals and any establishment fee. This number is bigger than residential buyers expect, and it should be known before you make an offer.

2. 02

   Get an indicative position before you go unconditional

   Commercial finance clauses are negotiable. A realistic finance period, agreed in the contract, is worth more than optimism.

3. 03

   Build the submission around the security and the income

   The lease, the tenant, the outgoings, the valuation expectation, and either the business financials or the rent coverage, depending on the route.

4. 04

   Instruct the valuation once, through the chosen lender

   Provide the valuer with the lease, the outgoings schedule, any recent capital works and a rent roll. A valuer with good information produces a better report.

5. 05

   Clear the conditions

   Environmental questions on industrial sites, building compliance, essential safety measures, and any tenancy documentation the lender wants sighted. These are where commercial deals lose weeks.

6. 06

   Diarise the review and the interest-only expiry

   Commercial facilities have dates. Knowing them a year out is what makes the next refinance a choice rather than a scramble.

Most commercial facilities offer an interest-only period. It preserves cash while a business beds into new premises or while an investor completes works. It is a tool, not a default setting.

• A contracted term shorter than the amortisation period leaves a balloon at the end. That balloon has to be refinanced, repaid or the asset sold, and the lender will decide at the time based on the conditions of the day.
• Interest-only periods end. When they do, the repayment steps up, and it steps up harder because the principal is now amortising over a shorter remaining period.
• If you intend to hold the asset for a long time, paying principal early is what protects you when a review date arrives in a tighter market.
• Model both before you choose. The comparison calculator here is indicative only and is not an offer of credit or a guarantee of approval, but it shows the shape of the decision clearly.