Commercial property as security: what lenders look at

Commercial property is assessed differently from homes

A house in an established suburb has a deep market of buyers and a value that is relatively easy to estimate from nearby sales. Commercial property is more varied. Its value depends on what it can be used for, who can use it, how much rent it earns and how many buyers would want it. Two buildings of similar size on the same street can have very different values if one has a long lease to a strong tenant and the other is empty.

Lenders reflect this in how they assess commercial security. Understanding their approach helps you present your property well and set realistic expectations about how much it can support.

Location and market depth

Location matters in every property market, but for commercial property it also determines how many potential buyers exist. A warehouse in an established industrial estate near major roads has many potential buyers. A shop on a declining strip in a small town has few. Lenders consider how quickly a similar property would sell if needed, and that affects the maximum LVR.

The lease and the tenant

For tenanted property, the lease is central. Lenders look at:

• Remaining term and options. Longer committed terms provide more certainty.
• The tenant. An established business or national tenant is stronger than a new venture.
• Rent and reviews. Market-level rent and sensible review mechanisms support value.
• Outgoings. Who pays rates, insurance and maintenance.
• Arrears and disputes. Any history of late rent or conflict.

If the borrower’s own business is the tenant, the lender will consider both the lease and the business behind it.

Vacancy

Vacant commercial property is harder to value because there is no rent to support it. Lenders assess it on what a buyer would pay with vacant possession and consider the leasing plan: is the property being marketed, what do leasing agents say, how long have similar properties taken to lease? Vacancy usually means a lower LVR, but it does not rule a property out. Additional security can help.

Zoning and permitted use

Zoning and planning controls determine what a property can legally be used for. A building with flexible zoning has more potential buyers and uses. One limited to a single specialised use has fewer. Lenders check zoning, permitted uses and any approvals, particularly where the property’s value depends on a specific use. Planning information is available from state planning portals and local councils.

Building condition and compliance

Condition affects both value and saleability. Lenders look at age, maintenance, fire safety compliance, accessibility and any known defects. Major issues, such as roof replacement or cladding concerns, need disclosure and may affect the LVR. Photos and any recent building reports help.

Environmental and title issues

Industrial and commercial sites can carry environmental risks, such as contamination from past uses. Lenders may ask about history or reports. Title searches reveal easements, covenants and other interests that can affect use or value. See title searches.

Ask how your commercial property would be assessed with a short enquiry.

Strata commercial property

Strata offices, shops and industrial units are common security. Lenders consider the building, the strata scheme’s finances and any major works planned, and recent sales within the complex. Small strata suites in good locations can be attractive security because they suit a wide range of owner-occupiers and investors.

How LVR varies

As a general pattern, well-located industrial and commercial property with solid leases supports a higher LVR than vacant or specialised property, and commercial property overall tends to sit a little below established residential property. The exact figures depend on the lender and the deal. The LVR calculator lets you test scenarios, including adding a second property.

GST and commercial property

When commercial property is bought or sold, GST can apply unless an exemption, such as the sale of a going concern, applies. That affects cash at settlement rather than security value, but it is part of planning any commercial purchase. See GST on commercial property.

Illustrative example

Illustrative only. Two warehouses of similar size sit in the same industrial estate. One is leased for five more years to an established logistics company; the other has been vacant for six months. Both can secure a loan, but the leased warehouse supports a higher LVR and a longer term, because its value is supported by income and a likely buyer pool of investors. The vacant warehouse is assessed on owner-occupier demand and the leasing plan, at a more conservative LVR.

What to provide

• the property address and title details
• the lease schedule, current rent and any arrears
• photos and a description of condition
• zoning and any approvals
• details of any strata scheme
• known defects or environmental issues

Owner-occupied commercial property

Many business owners use the building their own business occupies as security. In that case the lender looks at the property in two ways: as a building that could be sold to another owner-occupier or leased to an investor, and as the home of the borrowing business. A business that has occupied its premises for years, with a market-level rent paid to a related trust, presents well. If the rent paid by the business to the owner is well above or below market, mention it, because it affects how the property’s value is read.

Mixed-use buildings

Buildings with shops below and apartments above combine commercial and residential value. Lenders consider each component, including whether the residential parts could be sold or let separately and whether the commercial part has a lease. Mixed-use buildings in active neighbourhood centres often appeal to a wide range of buyers, which supports their value as security.

Regional commercial property

Commercial property in regional towns can be good security, but the buyer pool is usually smaller and sales evidence thinner. Lenders may apply a more conservative LVR and place more weight on the lease and tenant. Combining regional commercial property with a home or metropolitan property can strengthen the overall position. Our guide on regional property as security explains the factors.

Insurance requirements

Commercial security must be insured for its replacement value with the lender noted. For older buildings or specialised uses, insurance can take time to arrange, so start early.

Presenting your property well

The better the information, the fairer and faster the assessment. Tell us the property, its use, any leases and what is owed against it, and a specialist will explain how it would be assessed and what it could support. There is no credit check when you first enquire, your enquiry stays with one team, and a complete lease schedule helps us respond with confidence. Start your enquiry.