How commercial property finance works in Australia
Buying commercial property is rarely as simple as finding a property, applying for a loan and waiting for approval. Whether you are purchasing premises for your business, acquiring an investment property or refinancing an existing facility, the lender will assess more than the property and purchase price. Your financial position, business performance, rental income, ownership structure, available security and repayment strategy can all influence whether the transaction is acceptable and on what terms. Understanding those factors before signing a contract can help you establish a realistic purchase budget, identify potential issues early and avoid building a transaction around assumptions a lender may not accept.
What is commercial property finance?
Commercial property finance is lending used to purchase, refinance or raise funds against property held for business or investment purposes. It can support the acquisition of:
- Offices and professional suites
- Warehouses and industrial property
- Retail and hospitality premises
- Medical, dental and allied-health premises
- Childcare centres and other specialised property
- Mixed-use property
- Commercial property held as an investment
The borrower may be an individual, company, trust or another entity, depending on the ownership and transaction structure. Commercial lending is generally assessed on the overall strength of the proposal rather than through one standardised formula.
How much can you borrow?
There is no universal commercial-property lending percentage. The amount available depends on the lender and the transaction, including:
- Property type, location and condition
- The lender's valuation
- Whether the property will be owner-occupied or leased to a third party
- Business cash flow or investment income
- Tenant quality and remaining lease term
- The borrower's financial position and experience
- Loan purpose, term and repayment structure
- Other security or guarantees available
A lower loan-to-value ratio may reduce the lender's exposure, but a substantial equity contribution does not automatically establish serviceability or guarantee approval. A specialised property with limited alternative uses may also attract different terms from a conventional office or warehouse.
What do commercial lenders assess?
Lenders commonly assess three connected parts of a commercial property transaction.
1. The borrower
This can include financial statements, tax returns, cash flow, existing debts, ownership structure, management experience and the financial position of any guarantors.
2. The property
The lender may consider the valuation, location, condition, permitted use, marketability, tenancy profile and whether the property is specialised or readily saleable.
3. The repayment strategy
For an owner-occupier, repayment may depend primarily on the operating business. For an investor, the assessment may rely more heavily on rental income, tenant strength and lease terms. The lender may also want a credible strategy for repaying or refinancing the debt at the end of the facility term.
Why the valuation matters
A lender will usually obtain or require an independent valuation before formally approving a commercial property loan. The valuation is used to assess the property as security and may not equal the agreed purchase price.
Interest rates, fees and loan structure
Commercial property loans are generally priced and structured on a case-by-case basis. Interest rates, establishment fees, ongoing fees, loan terms, repayment requirements, covenants and review conditions can vary materially between lenders.
Depending on the transaction, options may include principal-and-interest repayments, an interest-only period or a separate working-capital facility. An interest-only period may preserve cash flow during fit-out or lease-up, while principal-and-interest repayments reduce debt over time. The appropriate structure depends on the property, cash flow and longer-term strategy.
Stress-test the loan before you commit
A transaction that works only at the current interest rate and expected income may leave little room if rates rise, a tenant vacates or business cash flow weakens. Before committing, it is prudent to model repayments at a higher rate and test a more conservative income position.
This is particularly important where the borrower is relying on one major tenant, the facility has a relatively short term or the property will require material fit-out, repair or leasing expenditure after settlement.
Costs beyond the deposit
The deposit is only one component of the funding requirement. Depending on the transaction, buyers may also need to allow for:
- Transfer duty
- Legal and conveyancing costs
- Valuation and lender fees
- Building, environmental or pest reports where relevant
- Due-diligence costs
- Insurance
- Property management and leasing costs
- Fit-out, repairs or capital works
- A liquidity buffer after settlement
In New South Wales, transfer duty is generally calculated by reference to dutiable value and the applicable rates and thresholds. Buyers can review the current rules through Revenue NSW (https://www.revenue.nsw.gov.au/taxes-duties-levies-royalties/transfer-duty/understanding-transfer-duty/calculate-transfer-duty) and should obtain appropriate tax and legal advice for their transaction.
Owner-occupied and investment property are assessed differently
For an owner-occupied property, the lender will generally assess the business that will occupy the premises and its capacity to service the debt. Financial performance, cash flow, industry conditions and existing commitments may be central to the decision.
For an investment property, rental income and the quality of the lease can carry greater weight. Tenant strength, the remaining lease term, rent reviews, vacancies and outgoings can influence borrowing capacity and lender appetite.
What happens when you apply?
- Assess the borrower, transaction and objectives before approaching a lender.
- Compare lender appetite, policy, structure, pricing and timing.
- Prepare the application and supporting financial information.
- Submit the application and respond to credit questions.
- Arrange the valuation and satisfy any approval conditions.
- Coordinate loan documents, legal requirements and settlement.
The lender makes the final credit decision. Preparing early does not guarantee approval, but it can reduce avoidable delays and provide more time to address issues before a contract or settlement deadline becomes critical.
Why lender choice matters
Commercial lenders do not assess every property, industry or ownership structure in the same way. One lender may be comfortable with a specialised property or multi-entity borrower while another may require a lower loan-to-value ratio, additional security or a different repayment structure.
An experienced commercial finance broker (https://www.3lane.com.au/services/commercial-finance) can compare suitable options across its lender panel and structure the application around the borrower's objectives and the lender's credit requirements.
Plan the finance before you commit
If you are buying or refinancing commercial property, 3LANE Finance can assess the transaction, compare suitable lenders and help structure the application around your circumstances.
Talk to a 3LANE commercial finance broker
Important information: This article provides general information only and does not constitute financial, legal, tax or accounting advice. Lending criteria, pricing and availability vary between lenders and are subject to assessment and approval.
FAQs
Quick answers to common questions on this topic.
Yes. A business may use commercial property finance to acquire premises it will occupy, such as an office, warehouse, retail property or medical suite. The lender will generally assess both the property and the operating business.
There is no universal requirement. The equity contribution depends on the property, valuation, borrower strength, loan purpose, lender policy and any additional security.
Commercial loans are priced differently from residential mortgages. The rate and fees depend on the borrower, property, security, loan structure and lender. The overall cost and conditions should be compared, not only the headline rate.
Yes. Businesses and investors may refinance commercial property debt to change lenders, restructure their borrowing, access equity or potentially obtain more suitable loan terms. The lender will reassess the transaction based on its current financial position and lending criteria
Requirements vary between lenders and transactions but may include financial statements, tax returns, business activity statements, bank statements, details of existing debts, information about the property and details of the proposed transaction. More complex applications may require forecasts, leases or additional supporting information.
Ideally, assess borrowing capacity and lender requirements before committing. This helps establish a realistic budget and provides time to identify valuation, servicing, structure or documentation issues.