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Same, Same but Different

Have you experienced the excitement, mixed with trepidation, when picking up and driving a newly purchased car? As you sit behind the wheel for the first time, your adrenaline is pumping. You’re trying to find out where everything is (indicators, hand brake, mirrors etc) and your brain’s muscle memory is adapting to the new environment. It’s different.

As you cautiously pull out of the car dealership, you wouldn’t be the first person to think – “be careful, go slowly and don’t prang this brand-new vehicle on day one!”

A fortnight later, you can’t even picture what your old car looked like, your confidence is back and you’re driving on auto-pilot. It’s the same.

These are similar emotions and reactions we experience in business when we branch out into new areas. For mortgage brokers, it may be the first foray into working with and advising clients on Commercial Property Lending.

A commercial property loan is a business loan specifically designed for the purchase or refinance of property to be used for business purposes. This includes office space, retail space, warehouses, factories, apartment building construction, and land for development.

As with other loans, commercial property loans feature regular repayments inclusive of interest and fees. Interest can either be fixed or variable. Repayments will have to be made within the loan term, which can range up to 20+ years. Your SME clients may have the flexibility of making interest-only payments for the loan term. There will also be fees, such as establishment and monthly or annual fees.

How do commercial loans work?

Commercial loans are designed to finance the purchase, refinance, or construction of commercial real estates, such as office buildings, retail space, warehouses, or mixed-use properties. These loans are typically larger and more complex than standard residential mortgages, and as such, they come with different rules and regulations. To qualify for a commercial loan, borrowers typically need to have a strong credit history and a down payment of at least 30%. Commercial loans are often “recourse loans.”

What kind of security can be used for commercial property?

The kind of property offered as security can have a big impact on the amount your self-employed clients may be able to borrow. This is because of the risks attached to the security itself.

Standard commercial properties are usually ideal security for a loan. These are properties that have a broad appeal to a wide range of buyers, are in a good location, and are zoned appropriately for their desired use. Standard commercial properties include:

  • Offices

  • Retail spaces

  • Factories

  • Warehouses

  • Residential properties (such as a block of units)

Your client could offer specialised commercial property as security. But the lender will need to perform a detailed valuation of the property and assess the risks associated with the property. As a result, it's likely that you'll qualify for a much lower LVR. Specialised commercial properties include:

  • Restaurants and pubs

  • Hotels, motels, caravan parks and other accommodation properties

  • Childcare centres

  • Private schools

  • Aged care facilities

  • Farms

  • Shopping centres

What are the tax implications of buying commercial property?

Goods and services tax (GST) is payable when buying a commercial property. Capital gains tax (CGT) is payable when selling a property used for running a business. Speak to your clients’ accountants for tax advice tailored to their specific financial situations.

What are the benefits of a commercial loan?

Commercial loans can be structured to suit your client's specific needs. You can also choose the loan term and repayment schedule that best suits their business. For example, your client can choose to make interest-only repayments during the life of the loan, which can help to keep their cash flow healthy.

Commercial vs. residential property

  • Long term leases

Commercial property leases usually run for longer periods than residential properties – several years rather than 6 to 12 months. This gives greater certainty of rental income, plus rents tend to be reviewed annually. However, vacancy periods can be longer.

  • The impact of GST

Goods and services tax (GST) applies when buying a commercial property, so allow an extra 10% on the property’s purchase price. As an investor, one can claim the GST back as an ‘input tax credit’ against GST charged on the property’s rent.

  • The lessee pays maintenance costs

Unlike residential property, the costs of maintenance, rates and repairs on commercial property are paid by the lessee – not the landlord. This means more of the rent received goes towards profit. However, be sure the commercial lease clearly identifies who is responsible for the property’s ongoing expenses.

  • Some commercial properties serve a limited purpose

It can be harder to secure a lessee on a property designed for a specific purpose. Opting for a property with multi-use appeal can help attract a broader range of tenants.

  • Location is still key

As with any property investment, location plays a big role in the success of commercial property. Look for an area offering good transport links, a nearby pool of workers, and surrounding businesses that could offer support to lessees.

  • Could a commercial property deliver better rental returns?

Commercial property is usually regarded as a higher-risk asset than residential property, and reflecting this, the rental return is usually higher. However, the decision between investing in residential or commercial property is a personal choice that will depend on the investor’s financial circumstances, goals, and willingness to take on this higher-risk investment.

Commercial Property Lending is part of the Commercial and Business Loans module in the Business Finance Certification, a professional development program that helps position you as an SME Finance specialist, so you can help your clients succeed and prosper.

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