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How does a commercial property loan work?

December 18, 2019

Demand for commercial property lending is being fuelled by investor desire to secure affordable prices, yields of 8% or more, and the ability of SME owners to hold the shop or industrial unit where they do businesses through their self managed superannuation fund (SMSF). 

Generally, SMSFs can’t engage in transactions with ‘related parties’ of the fund, which includes members of the fund, their family members or business associates. For example, owning your mother-in-law’s home through an SMSF is a no-go zone. However, there are exceptions, including the ‘business real property’ exemption. This exemption allows an SMSF to acquire your firm’s office or warehouse and lease it to a related party of the fund, such as your own company. Our data indicates that many business owners are using this strategy to buy into a commercial property. You’ll need to double-check with your accountant before making a move to buy a commercial property as part of an SMSF. 

On the investment front, we are lending increasingly against properties with a mix of residential and commercial spaces such as shop tops. Also, commercial properties located in high traffic areas and with a national brand secured to a long-term lease are attracting investor and SMSF attention. 

Also, while the APRA restrictions on residential mortgages applied to commercial lending, the cap restraints were not as extensive. This lending advantage has helped to fuel a level of demand for commercial property loans. 

Overall, the basics for applying for a commercial loan are very similar to those for a residential mortgage – there is just a small amount of additional paperwork. You’ll need the tax return completed from the previous tax year. Lenders will also insist on more recent cashflow evidence such as your latest BAS, as well as data provided by your accounting software provider such as Xero, MYOB or Reckon. Also, be warned that many lenders will take a dim view if your business owes money to the ATO.

Moreover, most major lenders will typically require a down payment of between 20 - 30% of the property purchase price before approving a commercial property loan. Plus, expect to pay interest rates of up to 6% and much more if the loan isn’t secured against a property asset.

If you are considering borrowing money to buy commercial property in 2020, contact your Our Broker for more information on 02 8232 0327.