Commercial Property Finance: How Much Can I Borrow?

If you’re thinking about purchasing a commercial property, like most people your first question is most likely – how much can I borrow? Apart from the most obvious factor of serviceability (how big of a repayment could you afford), there are a few fundamental factors that affect the loan size you will be approved for.

How large of a loan do you need?

While residential property loans allow you to leverage to very high levels with the addition of lender’s mortgage insurance (LMI), commercial property loans don’t. Generally speaking, the size of the loan plays a large part in the maximum allowable loan to value ratio (LVR). The following is a rough guideline of what can be expected:

Up to $1,000,000  –  80% LVR
$1,000,001 to $2,000,000  –  75% LVR
$2,000,001 to $5,000,000  –  70% LVR
$5,000,001 and above  –  Via negotiation

What type of property are you purchasing?

The type of security you are looking to purchase has a significant bearing on the loan size you will be approved for as a function of your LVR (i.e. certain security types will allow you to leverage more than others). Lenders classify commercial property as either standard or specialised. To understand the difference between the two classifications, ask yourself these questions:

  1. Can the property be used by a wide variety of businesses, or does its design limit it to certain types of businesses or even one industry?
  2. Does the location and zoning of the property appeal broadly and allow for flexibility?

A standard security is property that has broad appeal, is in a good location and is zoned as residential, commercial, industrial or mixed-use. For example, offices, factories, warehouses and retail spaces are generally classified as standard. These properties will generally allow you to borrow at a higher LVR. A specialised security is property that does not fit the criteria for standard securities in one way or another. For example, accommodation, aged care facilities, car yards and child care facilities are generally classified as specialised. These properties will generally require a larger deposit i.e. lower allowable LVR.

Note: If you use a residential property to secure the loan, you may be able to borrow up to 100% of the property’s value.

Can you provide full documentation?

The ability to provide a full set of documentation to the lender not only allows you to borrow more, but generally also affords you a better rate. The most critical of the documentation is the financial documentation, which includes:

  1. Statement of Financial Position (Balance Sheet)
  2. Statement of Financial Performance (Profit and Loss Statement)
  3. Statement of Cash Flows
  4. Bank statements and/or Business Activity Statements (BAS)

Lenders will generally require at least two years’ worth of financial information as well as cash flow projections. A good commercial broker will help you put together a three-way model, which is a set of projections for the Statement of Financial Position, Statement of Financial Performance and Statement of Cash Flows.