Commercial Property Loans

A Guide to Commercial Property Finance

Looking for a commercial property loan? Our guide covers the options available, whether you’re purchasing or refinancing. Contact us today!

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Purpose and Definition

Introduction to Commercial Property Finance

Commercial real estate finance involves mortgage loans granted for commercial properties such as office blocks, hotels, and shopping complexes. Unlike residential properties, commercial properties are intended solely for business use. Investors or business owners purchase commercial real estate to either use it themselves or lease it out to generate revenue through rent.

How Commercial Lending Works

Understanding Commercial Real Estate Lending

For many business owners, purchasing their property is only possible through a commercial loan. Unlike home loans, commercial loans typically require a larger upfront cash deposit of 20-30% and offer no mortgage insurance options. These loans are often structured for shorter terms, usually up to 20 years, and are not covered by the National Consumer Protection Act, providing less borrower protection.

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Types of Commercial Loans

Commercial property buyers can choose from various loan types, including fixed, variable, or combined rate loans. They can opt for interest and principal repayments or interest-only repayments. The most common commercial real estate loans include:

Refinancing or purchasing a commercial property

Suitable for first-time property investors or premises with existing tenants.

Construction and development loans

Ideal for developing properties in commercial or residential spaces.

Purchasing or refinancing businesses

Designed for acquiring an established business.

Other loans

 For subdividing property or expanding existing premises.

Buying Commercial Property as an Investor vs. Business Owner

Investing in commercial property can provide both ongoing rental income and long-term capital growth. However, investors should be aware of notable differences from residential property investments:

To mitigate risks, investors should choose properties in areas with diverse economies and broad business appeal, ensuring they can handle periods of vacancy. Professional support from a mortgage broker is crucial for securing the best finance options and strategies, including through a self-managed super fund (SMSF).

GST Implications

A 10% GST is payable on the purchase price.

Longer Leases and Lessee Responsibilities

Commercial leases usually last a minimum of five years, with the lessee responsible for maintenance and repairs, potentially lowering investment costs.

Higher Risk

Commercial properties often experience longer vacancy periods and can be harder to sell due to a smaller buyer pool and specialized use.

Owning business premises offers long-term security and the potential for capital appreciation. Business owners can invest in their premises through:

Buying in the business’s name

The property becomes a business asset, and the business’s cash flow repays the loan, building equity for future financing.

Buying in a personal name or through an SMSF

 The owner benefits from capital appreciation, and the business leases the property, providing long-term access while building personal wealth.

Interest Rates and Fees

Commercial Property Loan Costs

Consider using this if you need to provide more context on why you do what you do.

Commercial real estate loans have different cost structures compared to home loans. Interest rates are determined based on qualifying criteria, including the borrower’s ability to service the loan. This involves assessing income after all outgoings are paid. Fees and conditions, known as covenants, are also higher and more stringent than for residential mortgages.

Qualifying Criteria for Commercial Property Loans

Eligibility Requirements

Commercial loan eligibility is more flexible than for home loans, with several documentation options:

Full documentation

Complete financials required.

Lease documentation

Proof of income from lease agreements.

Low documentation

Minimal income proof, such as bank statements.

No documentation

No income proof required.

Forecasts

Profit and loss predictions showing loan repayment feasibility.

Despite the relaxed criteria, banks still avoid high-risk investments. Applications are assessed based on risk levels, from low (investment properties) to high (financing business operations).

Applying for Commercial Finance

Application Process

Before applying for a commercial real estate loan, consider the following factors:

Loan term

Typically shorter than home loans, ranging from five to fifteen years. In recent years, loan terms of up to 25-30 years have become possible for certain security types.

Loan amount

Higher amounts compared to home loans, based on the business’s repayment capacity.

Fees

Include upfront and ongoing maintenance fees.

Repayments

Flexible options, including interest-only repayments during tight cash flow periods.

Annual reviews

Regular financial reviews to assess loan terms and conditions.

Working with a mortgage broker can simplify the complex application process and help secure the best deals.

Financing Options and Ownership Structures

Types of Lenders

Australia offers a range of commercial property lenders, including banks, non-banks, and independent lenders. Key differences include:

Bank Loans

 Lower interest rates, stringent credit risk assessments, and terms up to 30 years. Banks require annual financial reviews and offer more flexibility in property location and type.

Non-bank and Independent Lenders

Set-and-forget loans with terms up to 30 years and higher LVRs. Interest rates are higher, and these lenders prefer properties in capital cities and major regional centres.

Low doc and Lease Doc Loans

Lower documentation requirements but higher interest rates and lower LVRs.

Private Loans

Short-term solutions with high fees and interest rates, suitable for bridging finance or construction loans.

Ownership Structures

Types of Risks

Investing in commercial property involves several risks:

Interest rate risk

Unfavorable changes in interest rates.

Credit risk

Borrower’s failure to meet contractual obligations.

Market risk

Declining property values or rental markets.

Liquidity risk

Challenges in converting property to cash or accessing funds for obligations.

Professional advice is essential to develop effective risk management strategies.

Managing Risks

Commercial properties can be owned through various structures:

Company structure

Either an existing business or a dedicated company.

Trust structure

An existing or dedicated trust.

Individual ownership

In an individual’s name.

Each structure has unique benefits and should be chosen based on specific circumstances.

Conclusion

Commercial property finance in Australia offers diverse loan options and structures, each with unique benefits and risks. Whether purchasing as an investor or a business owner, understanding the nuances of commercial loans and seeking professional advice is crucial for a successful investment. Working with a knowledgeable mortgage broker can streamline the process and ensure the best financial outcomes.

FAQs

Not sure? Have additional questions? Try here 

A Commercial Property Loan is a loan specifically designed to finance the purchase, development, or refinance of commercial real estate such as office buildings, warehouses, retail outlets, and industrial premises. These loans are regarded as commercial and typically differ from residential home loans in terms of loan size, loan to value ratio (LVR), and eligibility criteria.

Applying for a commercial property loan in Australia involves several steps, including finding an experienced commercial finance broker, gathering necessary documents like financial statements, and undergoing a credit check. It’s important to contact multiple lenders to understand the options available.

Residential home loans are meant for residential properties such as freestanding homes, townhouses and apartments, whereas commercial property loans are used to finance properties regarded as commercial, such as offices, retail spaces, and warehouses. Commercial property loans often come with different loan terms, loan to value ratios, and interest rates, reflecting the higher risk and longer duration of investment.

While not mandatory, hiring an experienced commercial finance broker can be beneficial. Mortgage brokers specialise in finding competitive loan products and can help you manage the entire process of applying for a commercial loan, from gathering documentation to negotiating loan terms with lenders.

Loan to Value Ratio (LVR) is the ratio of the loan amount to the value of the property being purchased, expressed as a percentage. A higher LVR means you are borrowing a larger portion of the property’s value, which may require additional security or higher interest rates. Standard commercial property loans often have lower LVRs compared to residential loans, reflecting the different risk profiles.

Yes, you can refinance your commercial property loan, often to take advantage of lower interest rates, better loan terms, or to free up equity for additional investments. An experienced commercial finance broker can help you find the right refinancing options available to you.

Yes, many lenders offer specialised commercial loan products for small businesses. These may include features like flexible repayment options, lower LVR requirements, and tailored loan sizes to suit small business borrowers. Contact us or consult with a commercial mortgage broker to find the most suitable options.

Lenders assess the financial health of your business, including cashflow, profit margins, and overall sustainability, to determine loan approval. Strong financials can improve your chances of securing a loan with favorable terms. Bank’s also evaluate the serviceability of your business loan to ensure you can meet repayment obligations.

Yes, both Low Doc and Full Doc loans are available for commercial properties. Low Doc loans require less documentation and are often suited for self-employed borrowers, while Full Doc loans require comprehensive financial documentation. Discuss your situation with your broker to determine which loan type best suits your needs.

Why not give us a call, or send us an email and get a direct response from one of our finance experts. We’d be happy to give you a hand and help point you in the right direction.

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aPPLY ONLINE CALL: 1300 66 12 11