Complete guide to commercial property loans

Industry experts explain the principal elements of commercial loans, from how much you can borrow and how to qualify to general security agreements.

Inexperienced commercial investors should remember that commercial loans are very different to their residential counterparts.

These distinctions include how much you can borrow; loan terms, periods, rates and fees; and rental reviews.

How much can I borrow for a commercial property?

“Roughly speaking, you’re looking at a 65%-70% deposit for standard non-specialised assets [and] this is a lot compared to residential loans,” Grow Capital managing director, Nick Wormald, explained.

However, commercial property loan deposits are highly subjective and vary widely depending on the lender, the transaction and the investor, Mr Wormald said.

Mortgage Choice commercial broker Alston Soff added that in some instances, lenders may go up to a 75%-80% loan-to-value ratio [LVR], or borrowing power.

“But this is the maximum deposit and you won’t be able to get away with an 80% borrowing from the bank for every property and every situation,” he said.

“So your safest bet is to work on a 65%-70% deposit, which is where the majority of players play.”

How much can I borrow with a guarantor?

Technically speaking, commercial investors can borrow up to 100% of a property’s value with a guarantor.

However, borrowing ability will depend on the value of the guarantor’s equity or security pool, and their servicing position, according to Johnathon Reeves of Time Home Loans.

A guarantor loan can use equity in an existing property or asset to secure a loan. Picture: Getty

“When most people think of a guarantor loan, they think of Mum and Dad using the equity in their house to help children into their first home,” the commercial director said.

“This specific structure doesn’t really exist with commercial lending but you can increase the amount you can borrow by utilising additional security.”

As an example of this situation, Mr Reeves explained that a guarantor loan could use equity in an existing property or asset to secure a loan.

“You can borrow 100% of a commercial property to purchase, but only if there is sufficient equity in alternate security to proceed,” he said.

“This equity can be cross-collateralised as direct security or offered by a guarantee, which is where the confusion comes in.”

How much can I borrow if the property value is over $1 million?

An investor’s borrowing ability will be 50%-70%, regardless of a commercial property’s value, with lenders more concerned with its potential profitability than its actual financial worth, Mr Reeves explained.

“Not all commercial properties are treated equally with their value based on their security,” he explained.

“So as an example, something like a specialised property, such as a tyre centre or mechanic shop, could have a 50% loan-to-value ratio.

“But your office lending can be up to 80% at some banks, or generally 70%.”

Properties valued at $2 million and more can offer more sophisticated and complex borrowing potential, according to Mr Reeves.

“But LVRs don’t really change as it’s all dependent on the deal and the security,” he said.

Features of a commercial loan

Commercial investors should expect loans to be more complicated and complex than that of residential finance.

However, considering the following key points will assist when beginning the loan process.

1. No Lender’s Mortgage Insurance [LMI]

The luxury of borrowing 90% or more of a property’s value is only available in the residential sector, Mr Soff explained.

“In the commercial space, there is no Lender’s Mortgage Insurance [LMI],” he said.

Without the option of this insurance and its potential for buyers to enjoy a diminished down payment, commercial investors have to prepare for lenders’ requiring a much higher deposit.

2. Shorter loan period

Most lenders will only offer a 15-year loan term on commercial properties, which can be very surprising to first-time property investors, according to Mr Soff.

“This is probably the main difference between residential and commercial investments and it’s certainly the thing that most surprises people who are not used to commercial property investments or property purchases,” Mr Soff said.

He added that while some lenders may offer terms of 25-30 years, investors shouldn’t expect the majority of lenders to do so.

“It’s not all and sundry lenders who offer these terms,” he said.

Mr Wormald agreed, saying that five-15 years was a typical term for commercial loans.

3. Higher rates and fees

Commercial property rates are likely to be more risk-rated than those of a standard home loan, according to Mr Wormald.

“These rates are all based on the risk as all the lender really cares about is ‘How am I going to sell this asset at the end of the day, if something goes wrong?'” he explained.

“So, if the potential asset has a high risk –  whether it’s the repayment of the asset or the asset itself – then it’s going to be more expensive with a shorter term loan period as the lender will want to get that loan paid off as soon as possible.”

Commercial investors will also have to deal with increased bank fees, which again, often come as a surprise even to experienced residential buyers, Mr Soff said.

With 90% of residential lenders, no fees need to be paid thanks to packages, schemes and special offices, but this isn’t the case for commercial lenders.

“This fee varies but with some lenders, it could be as high as 1%-1.5% plus all your other costs while with some lenders, you’ll have a flat fee,” Mr Soff explained.

“So if you’re borrowing up to $1 million, you could get away with an $800 application fee if they have a promotion going.”

Commercial investors will have to deal with increased bank fees and property rates. Picture: Getty.

Mr Soff added that investors will also have to pay lenders for commercial property valuations, which could be very expensive.

This cost varies according to different lenders and an investor’s time frame, with those needing a valuation done in 10 days time or facing other financial constraints possibly paying more.

“Always go with a bank which sources quotes from their panel of valuers,” Mr Soff said.

4. Lender reviews and changes

Again, loan duration reviews and potential increased rental prices will depend on your lender and asset class.

However, as a general rule of thumb, a property’s rental rate should be based on market value with industry experts advising investors to carefully check how and when their rates will be reviewed.

They should also check the details of their loan before signing on the lease’s bottom line.

“The bank actually reviews your portfolio every year, or sometimes every three years if you’re a big bank client,” Metropole CEO and founder, Michael Yardney, explained.

“So, you’ve just got to be careful about what the rents are and if they’re realistic.”

What is a general security agreement [GSA]?

Previously known as a fixed or floating charge, a general security agreement [GSA] is an agreement that secures all present and future assets of the borrower, Mr Wormald explained.

“Basically, a GSA is a full mortgage over a business and on default, the lender can take full control of the business assets,” he said.

“These assets can include – but aren’t limited to – property; plant equipment and vehicles; receivables; intellectual property; inventory; cash and investments.”

Mr Reeves concurred, saying GSAs meant that if a commercial business “went belly up”, everything belonging to it would become the property of the lender.

“Banks and lenders can also put specific charges on a business’ specific bank accounts,” he said.

“So, if a lender is providing a working capital solution, like better finance, they may actually put a charge over a specific bank account, so all of the cash that goes into that account is technically able to be recouped.”

How do I qualify for commercial finance?

Hopeful commercial investors should start their lender application by ensuring they have several years of up to date financial statements and details on hand.

“All any lender wants to do is make sure they lend money to the right person who will pay back their debt, as that’s where they make their money,” Mr Soff said.

“And they want to make sure that whatever they lend you is going to get paid back in interest and principal.”

Mr Soff added that as with residential loans, lenders will want to know where commercial investors’ income is coming from.

“They are trying to understand you and your personal situation,” he said.

“So, what the lender requires from you will really depend on your situation and also on the property that you’re purchasing.”

Mr Wormald agreed, adding that investors should also be aware of lenders’ 5Cs of credit: character, capacity, capital, collateral and conditions.

Take the time to ensure you have financial statements on hand before starting a lender application. Picture: Getty

“We always talk to our clients about the five Cs of credit and about being prepared for what lenders are going to look about regarding these points,” he said.

“A credited assessor is going to apply these five things to an application.”

Should I use a finance broker?

Short answer: yes, with the best brokers highly experienced in negotiating and networking with lenders and through often complicated leases.

“You can do all of the work yourself and we see it all the time but you’ve got to know what you’re doing as – much like buying a home – commercial investment can be a pretty ruthless space,” Mr Wormald said.

Mortgage brokers can assist first-time commercial investors in particular. Picture: Getty

He advised investors to start their search for a finance broker with the person who helped them with their residential loan.

“They might be able to give you some advice, or put you in contact with, someone that has experience in … commercial finance,” he said.

What are the benefits of using a mortgage broker?

• Navigate highly complex and stressful purchases
• Will run servicing calculations
• Tell you how much you can borrow
• Give you a panel of lenders and their charges
• Give you a list of what’s going to be required in fees

What are the disadvantages of using a mortgage broker?

• Unlike residential mortgage brokers, finance brokers require payment
• Not all lenders work with finance brokers
• Provided estimates and details should still be double-checked