SMSF Commercial Property Loans

Super law generally prevents a fund from acquiring assets from related parties and strictly limits investments involving them. Business real property is a deliberate exception, and it is the reason this structure exists at all.

• Business real property broadly means land and buildings used wholly and exclusively in one or more businesses. A warehouse, a shop, a surgery, a workshop, an office.
• A fund can generally acquire business real property from a related party, provided it is acquired at market value.
• The fund can then lease that property to a related business, provided the lease is on arm’s length terms at market rent, documented, and the rent is actually paid on time.
• Residential property does not get this treatment. A fund cannot acquire a residential property from a member and cannot lease one to a related party.
• Whether a particular property qualifies as business real property is a technical question, and it is one for your adviser and accountant, not for a broker.

Business real property

Broadly, land and buildings used wholly and exclusively in one or more businesses. Whether a particular property qualifies is a technical question for your adviser and accountant.

Related party

The members, their relatives and the entities they control. Super law generally restricts what a fund may acquire from them, and business real property is the deliberate exception.

Arm’s length terms

The terms two unrelated parties would have agreed. On a lease back to your own business that means market rent, documented, and actually paid on time.

Limited recourse

If the loan defaults, the lender’s rights are limited to the property held in the holding trust. The fund’s other assets are not exposed, and that is the point of the structure.

Single acquirable asset

Each borrowing must relate to one asset. A property on one title is straightforward; several titles generally means several arrangements, each with its own trust and its own loan.

The commercial appeal is easy to see. The rent your business already pays goes towards an asset the fund owns rather than to a landlord, and the property sits inside the superannuation environment. Whether that is right for you depends entirely on your fund, your balance, your liquidity and your retirement timeline.

An SMSF cannot simply take out a mortgage. It borrows through a limited recourse borrowing arrangement, and the structure is prescribed.

1. 01

   Confirm the trust deed permits borrowing

   Many older deeds do not. The deed may need updating before anything else happens, and that is a job for the fund’s solicitor.

2. 02

   Establish the holding trust and its trustee

   A separate bare trust, usually with its own corporate trustee, holds legal title to the property. The fund holds the beneficial interest. Most lenders require a corporate trustee for both the fund and the holding trust.

3. 03

   Sign the contract in the correct name

   This is the step that goes wrong most often, and it can have duty consequences that are expensive to unwind. The contract must be executed correctly for the structure, which is why the solicitor and the adviser have to be involved before an offer is made.

4. 04

   One acquirable asset per arrangement

   The borrowing must relate to a single acquirable asset. A property on one title is straightforward. Multiple titles generally require separate arrangements, with separate loans and separate holding trusts.

5. 05

   The lender takes limited recourse security

   If the loan defaults, the lender’s rights are limited to the property held in the holding trust. Other assets of the fund are protected. Most lenders require personal guarantees from the members, and those guarantees are themselves limited in the way the arrangement requires.

6. 06

   Settlement, lease and ongoing compliance

   A written lease at market rent, rent actually paid, and an annual audit that will look at all of it. The fund’s administrator manages the compliance; we make sure the loan fits inside it.

The market for SMSF commercial lending is narrower than for ordinary commercial lending, and lenders enter and leave it. That is a large part of the value a broker adds here: knowing who is genuinely writing this business right now, and on what terms.

• Liquidity. Property is a large, indivisible asset inside a fund that will eventually need to pay benefits. Trustees have to plan for that well ahead.
• Concentration. If the fund owns one building leased to your own business, the fund’s performance and your business are exposed to the same risks at the same time.
• Rigidity. Improvements can be made, but borrowed money generally cannot be used to fundamentally change the character of the asset while the arrangement is on foot. Ask your adviser before planning works.
• Cost and complexity. Establishment, legal, deed, trustee and ongoing administration costs are higher than a straightforward commercial purchase.
• Compliance. Rent must be at market and must actually be paid. An audit that finds unpaid related-party rent is a serious problem for the fund.
• Refinancing. Fewer lenders operate here, so switching later is harder than it would be with an ordinary commercial loan.

Funds that borrowed years ago sometimes find themselves on a facility with a lender that has left the market, or on terms that no longer reflect what is available. Refinancing a limited recourse arrangement is possible and is done regularly, with some care.

1. 01The new borrowing must maintain a compliant limited recourse structure. It replaces the existing loan over the same single asset in the same holding trust.
2. 02The existing documentation is reviewed properly. Older arrangements are sometimes not documented as well as they should be, and that has to be corrected rather than carried forward.
3. 03The fund’s current financials, audit reports and contribution history are assessed as they would be for a new application.
4. 04Your adviser and accountant confirm that the refinance itself does not create a compliance issue for the fund before anything is signed.
5. 05Duty and legal implications are checked by the fund’s solicitor, particularly where the holding trust or trustee is being changed.

It is worth reviewing an older arrangement even if you do not act. Knowing where your fund stands, and who would lend to it today, is useful information to hold.