Key Takeaway Table
| Key Point | Description |
|---|---|
| Definition | Commercial real estate refers to properties that are used for business purposes. Some examples include office spaces, commercial buildings, retail stores, restaurants, malls, warehouses, and apartment complexes. |
| Business Loans for Commercial Real Estate | Business loans can help with the purchase, refinancing, development, or renovation of commercial properties. You can get business loans for real estate through both bank and non-bank lenders, with differing requirements, approval criteria, terms, and interest rates. |
| Requirements for Commercial Real Estate Loans | The requirements can differ depending on the lender. Traditional lenders like banks may ask for full financial and tax documents, and they may require a higher credit score. However, some lenders may ask for fewer or even no documents and may approve a loan despite bad credit and tax debt. It’s crucial to find a lender that provides the right loans for your credit profile. |
| Benefits of Commercial Real Estate Loans | Owning a commercial property helps you diversify your income by earning rental income if you decide to lease your property or your business occupies your commercial real estate. |
Owning commercial real estate can open doors for businesses. It can open avenues for rental income, or it can be a way for businesses to establish themselves at a brick-and-mortar location. Since commercial property is a major investment, businesses turn to loans to help them finance these properties.
What is Commercial Real Estate?
Commercial property is any real estate used solely for business purposes. Examples include offices, warehouses, restaurants, hotels, malls, physical retail stores, and factories. Business owners can use the property for their own operations and earn rental income by leasing the property.
Business Loans for Real Estate
Business loans for real estate are designed for the acquisition, development, refinancing, and improvement of commercial properties. Real estate business loans can be provided by various lenders. You can get a loan approved by both bank and non-bank lenders, but the rates, fees, terms, and requirements may differ greatly between lenders. The approval process may also be different, so take note of how soon you need the loan and the lenders’ credit criteria before committing to a lender.
Here are some uses for commercial real estate loans:
Purchasing Property
One of the primary reasons for securing a commercial real estate loan is to buy commercial property. The aim could be to provide a physical space for the business or to generate income through leasing or selling the property.
Refinancing
Businesses may seek to refinance an existing commercial real estate loan to take advantage of lower interest rates, extend the loan term, or reduce monthly payments.
Property Development
Loans can fund the development of a new commercial project from the ground up, including land acquisition, construction costs, and initial operating expenses.
Renovation or Expansion
Financing is often required for renovating, remodelling, or expanding an existing commercial property to increase its value, enhance its functionality, or accommodate business growth.
Benefits of Commercial Real Estate Loans
Here are some ways acquiring a commercial property through a loan can positively impact your business:
- Property Ownership: Real estate business loans allow businesses to acquire commercial properties. They may use the property for their daily operations or lease it out as investment property.
- Control Over the Property: Purchasing a commercial property through a loan allows you to control your operational space completely, which may not be possible if you’re only renting. You can adapt and customise the property to suit your business needs without restrictions.
- Potential Appreciation: Over time, commercial real estate typically appreciates in value, offering business owners the potential for profit upon selling the property.
- Fixed Payments: If you opt for a fixed-rate loan, your monthly repayments will stay stable throughout the entire loan term, which prevents financial strain in the case of market fluctuations or rent increases.
Requirements for Commercial Real Estate Loans
The requirements for commercial real estate loans will differ from lender to lender. Banks and other traditional lenders usually ask for more documentation and a higher credit standing. However, non-bank lenders can be more flexible, which allows borrowers with outstanding tax debt or a less-than-ideal credit history to get approved for real estate business loans.
Here are some requirements you may need to prepare when applying for a commercial real estate loan:
| Requirement | Description |
|---|---|
| Property Details and Use | Some lenders may ask for detailed information about the property, including its location, size, condition, and how the property will be used or developed. |
| Financial Statements | Some lenders, typically banks, will ask for detailed financial statements, including income statements for the last 2-3 years. These documents help lenders assess your capacity to pay back the loan. |
| Tax Returns | Banks and other lenders will ask for tax returns to see proof of lodgment and income verification. However, other lenders will still approve loans even if you have tax debt. It’s just a matter of finding the right lender for your circumstances. |
| Credit Score and History | A good credit score and clean credit history for the business and its principals. Creditworthiness is a crucial factor in determining the eligibility for a loan and the interest rate offered. |
| Borrower’s Contribution | Lenders can ask for a substantial deposit or contribution from the borrower for commercial property, generally at least 20% of the purchase price. This can also be mitigated by leveraging equity held in other properties by cross-collateralising the properties to achieve an overall loan-to-value ratio (LVR) that meets a lender’s policy. |
| Security and Guarantees | While there are a number of ways to structure a commercial loan the most common is with a mortgage over the commercial property that’s being financed. 1st and 2nd mortgages, like those offered by private lenders, are also available. In almost all cases personal guarantees will be required in addition to a mortgage over the property. |
| Legal Documents | Lenders will ask for documents that prove ownership, zoning compliance, and more depending on the kind of loan. |
Commercial Real Estate Loan Rates
The interest rates of a commercial property loan in Australia are influenced by a range of factors that determine how much a lender charges for borrowing funds. Key factors include:
Loan Amount and Term
The interest rate of a commercial property loan can depend on the loan amount or the value of the property you are buying. Larger loans may attract slightly lower rates.
Type of Commercial Property
Different types of commercial properties (e.g., office spaces, retail shops, industrial properties) carry varying levels of risk. Properties perceived as higher risk (like specialised use properties) may have higher interest rates.
Properties in prime or high-demand locations tend to secure lower interest rates as well.
Borrower’s Financial Profile
Borrowers with strong credit scores are often offered lower rates, as they are considered less risky. Many lenders will also review the financial health of the borrower’s business.
Economic and Market Conditions
The Reserve Bank of Australia’s (RBA) cash rate and general market interest rates significantly influence commercial property loan rates.
Additionally, during periods of economic uncertainty, lenders may increase rates to mitigate potential risks.
Lender’s Risk Appetite
Banks, non-bank lenders, and private lenders have different levels of risk tolerance. Banks typically offer lower rates but are stricter, whereas non-bank and private lenders may offer more flexibility with slightly higher rates.
Find the Right Commercial Property Loan
If you're looking for a business loan to acquire a commercial property, finding the right lender will help you get the best rates and terms depending on your needs. Loan experts can help you secure business loans of up to $50M, even with less than ideal credit history and existing debt. Talk to us today to learn more.
