A commercial lender looks past the building. It looks hard at your tenant.
Residential lending is underwritten against the borrower. Commercial lending is underwritten against the income, and the income is your lease.
The covenant strength of the tenant, the term remaining, the rent review mechanism, and what happens at expiry will do more to determine the terms of your facility than the building itself. A well-located property with a weak lease is a harder credit case than an ordinary property with a strong one. Most owners understand this after they have signed. It is more useful before.
What the credit team is looking at
- Lease term and weighted average lease term (WALT). A facility maturing after the lease expires is a risk the lender will price, or refuse.
- Covenant strength. A listed company on a fifteen-year lease and a two-year-old business on a three-year lease are not the same asset, whatever the yield says.
- Rent review mechanism. Fixed, consumer price index (CPI), market, or ratchet. It affects the income projection across the term of the facility, and lenders model it.
- Vacancy and re-letting risk. How long it takes to re-let, at what rent, and what incentives the market currently requires.
- Owner-occupied vs investment. If you are the tenant of your own building, the lender is assessing your business, not the lease.
Buying premises for your own business
If your business occupies the building, you have two entities and one asset, and the way you arrange them has consequences that outlast the loan. Whether the property is held inside the operating company or in a separate entity. Whether the lease between them is at market rent or nominal. Whether the debt sits against the property or the business.
These questions are decided by your accountant and your lawyer. We do not decide them, and we will not pretend to. What we will do is tell you how each structure is read by a lender, what it does to your borrowing capacity, and where a decision made for tax reasons is quietly costing you lending capacity.
Loan-to-value ratio (LVR), and why it moves
Commercial LVRs sit well below residential, and they vary more. The variation is driven by asset class, location, tenant covenant, lease term, and the lender's current appetite for the segment. Industrial, office, retail, and hospitality are not treated alike. The equity contribution required for a given property is not knowable from a rule of thumb, and an assumption made at offer stage is the most common cause of a deal falling over at finance.
Structure decisions that affect you later
Cross-collateralisation. If a lender takes security across your commercial property and your home, or across two commercial assets, the assets are entangled. Standalone security is more work at the outset and preserves every option afterwards. Facility term. Commercial facilities are commonly shorter than residential, with a review or a refinance event before the debt is repaid. That date should be set deliberately rather than accepted as a default. Interest-only and amortisation. Cash flow now against equity later. The right answer should be modelled rather than assumed.
Portfolio, and the residential boundary
If you have arrived here from residential investment, you may be at the point where a lender moves you across. Above a certain number of properties, or a certain total exposure, some lenders reclassify a residential portfolio as commercial. The rules change, the LVR changes, the pricing changes. It is worth knowing which side of the line you are on before a lender tells you. Investment property lending →
Common questions.
How much can I borrow against commercial property?
Commercial lenders usually lend a lower share of the property's value than residential lenders. The amount depends on the type of property, its location, the tenant and the lease.
Why does the tenant matter so much?
For an investment property, the rent is what services the loan. Lenders look closely at the strength of the tenant, the length of the lease and how rent reviews work.
Can I buy premises for my own business?
Yes. When you buy premises for your own business, the lender looks at both the property and the strength of the business behind it.
What is a weighted average lease term (WALT)?
It is the average time left on the leases in a building, weighted by rent. A longer WALT generally gives a lender more confidence in the income.
What clients say about working with Carl.
Carl was an absolute pleasure to work with. His knowledge, professionalism and prompt communication gave us confidence throughout our first home purchase. He secured us an excellent deal with Westpac and made the entire process seamless. We highly recommend Carl to anyone looking for a mortgage broker.
Three of us, all self employed, wanted to get a home loan for a shared house. Without the expertise, help and the precise instructions to fill in the various documents or organise specific items we would not have had a chance to get the mortgage over the finish line. Carl was extraordinarily helpful and always found a way to continue this not so easy application. I can highly recommend Carl. Very grateful for his assistance.
Carl was fantastic to work with. Our mortgage application was not straightforward as we were multiple people, all self employed with new businesses. We had tried using other brokers but they weren't able to get our approval across the line. Carl was tenacious with the banks, and had so much knowledge he was able to guide us through all the information we required and how to present it. After a difficult process he was able to secure us a mortgage with very favourable terms. I couldn't recommend him enough, the effort and work he puts in is second to none!
Carl Mann is a fantastic mortgage broker. He is knowledgeable, professional, and has excellent communication. Carl kept us updated along the way and provided sound advice. I would definitely recommend Carl to anyone needing assistance with mortgage finance or refinancing.
Carl helped us work through the finance for our next investment property without losing sight of our existing lending. He understood what we were trying to build over the longer term and worked through the different options with us before we made an offer. That preparation made the purchase much smoother.
Development finance was very different from arranging a normal mortgage. Carl understood the feasibility, valuations, build costs and timing the lender needed to see, and helped us get everything organised before it went to credit. Having someone who understood the development side of the deal saved a lot of back and forth.
We were purchasing premises for our business and needed someone who could look at both the property and the strength of the business behind it. Carl worked through the numbers with us, explained what the lenders would focus on and helped structure the application properly from the start.
Bring us the deal.
The property, the lease, the tenant, and what you are trying to do with the asset over the next ten years. We will tell you what is fundable, and where the structure is working against you.
Every conversation is confidential.
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