Unlike the loan you take out for purchasing a home, commercial property loans are much more complex. This is because the banks don’t publish their pricing and lending policies vary widely and the method the banks use to assess commercial property loans is extremely complicated as each application and security property is unique.
So what are the key considerations?
The Loan Purpose
The purpose of your commercial property loan will affect how your loan is assessed by the lender.
- For Investment Purposes: Purchasing or refinancing a commercial property that will be leased to generate income. This purpose is considered a low risk.
- Owner-Occupied: Purchasing or refinancing a commercial property that will be leased or occupied by your business. This purpose is considered a medium risk.
- Get Finance for Your Business: Refinancing a commercial property you own in order to use available equity to provide funds to operate or grow your business.
- Purchasing a Business: Refinancing a commercial property you own in order to use available equity to purchase a business.
- Other Purposes: Any other commercial, business or investment purposes are considered on a case by case basis.
The Type of Security
The type of security that will be financed will represent different levels of risk to the lender.
- Standard Commercial Property: Standard Commercial Properties include Retail, Warehouses, Factories, Offices, Showrooms, Storage Units, Medical Practices, Vacant Land, Simple Tenancies (1 or 2 tenants). Standard Commercial Property Security is usually seen as a lower risk to lenders as they are zoned as Residential, Commercial, Industrial or Mixed.
- Specialised Commercial Property: Specialised Commercial Properties include Hotels, Motels, Pubs, Service Stations, Aged Care Centres, Childcare Centres, Shopping Centres, Restaurants, Accommodation, Land Subdivisions, Property Developments, Multiple/Complex Tenancies and Income Producing land such as Farms. Specialised Commercial Property Security is usually seen as a higher risk to lenders as they are difficult to value and don’t sell as easily as standard commercial properties.
There are different documents you can provide depending on the lender and product type.
- Full Doc: A standard loan application where you provide full financial statements.
- Alt Doc: A loan application where you provide alternative income evidence such as an accountant’s letter, bank statements or BAS statements.
- Lease Doc: A loan application where you must prove that the income generated from leasing the property is higher than the expenses including the interest repayments.
- Low Doc: A loan application where you will not have to provide evidence of income.
- Forecasts: An application where you provide a profit and loss forecast showing that this loan will allow your business to earn additional income which will be sufficient to cover the repayments.
Every lender will have a different cost of funds depending on where they obtain their money that they lend out. Usually, lenders with lower risk appetites tend to have lower interest rates.
The interest rate that the lender will offer will depend on the LVR and loan amount as well as many other factors.
Many lenders have a risk matrix which they use to price commercial property loans that consider the following:
- The 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
- Loan to Value Ratio (LVR)
- Length of time until the lease expires
- Strength of the tenant(s)
- Borrower’s Asset Position and ability to repay the debt
- Management experience / track record.
Choosing Your Lender & Applying
There are many different lenders in the commercial space with different policies and risk appetite so its important to pick the right lender for your circumstances.
After you have chosen your lender, 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.
Should You Use A Finance Broker?
In order to have the best chance of getting your commercial loan approved it is advisable to work with an experienced Finance Broker who specialises in Commercial Lending. They will walk you through the process, find the right lender for your requirements and prepare your application presenting you to the lender in the best way possible.
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