Commercial Property Loans: LVR and Lease Doc

Key takeaways

• Commercial LVRs are materially lower than residential - expect a bigger deposit.
• Terms are shorter and often involve a review or balloon.
• The lease is the asset - its term, tenant and structure drive everything.
• Lease doc lending assesses the property's income rather than yours.

How does commercial lending differ from residential?

The last row drives most of the others. A vacant house re-lets in weeks; a vacant specialised commercial property can sit empty for a year or more, with outgoings still payable. Lower LVRs and higher rates are the lender pricing that risk.

What makes a lease bankable?

Commercial valuation frequently works by capitalising net income, so the lease largely determines the value as well as the serviceability.

• Remaining term - a long unexpired term is worth far more than options that may never be exercised.
• Tenant covenant - a national tenant or government department is a different proposition from a new small business.
• Net vs gross lease - who pays outgoings materially changes the net income being capitalised.
• Rent review mechanism - fixed increases, CPI-linked or market reviews.
• Property specificity - a generic warehouse re-lets; a purpose-built facility may not.
• Make-good obligations - what the tenant must restore at the end.

A short remaining term is the most common problem. It reduces value and serviceability at once, and a lender may size the loan on the assumption the tenant leaves at expiry.

What is a lease doc loan?

A lease doc loan assesses serviceability primarily from the rental income under the lease, rather than from full financial statements for the borrower. Where the rent comfortably covers the loan repayment with a margin, the lender can lend without the full financials a standard commercial loan requires.

It suits investors with complex structures, self-employed borrowers whose returns are not yet complete, and SMSF purchases of commercial property. The trade-offs are a lower LVR, a higher rate, and a strict requirement that the lease genuinely supports the debt.

Two cautions. First, when the lease ends, so does the assessment basis - plan the refinance or re-lease well before expiry. Second, commercial lending generally sits outside the National Credit Code, so the consumer protections you are used to on a home loan do not apply. Read the contract, and have a lawyer read it too.

Frequently asked questions

What LVR can I get on a commercial property?

Materially lower than residential, and it varies by property type, tenant quality and lease term. Generic, well-located property with a strong tenant supports the highest lending; specialised property with a short lease supports the least.

What is a lease doc loan?

A commercial loan assessed primarily on the rental income the property generates under its lease, rather than on full borrower financials. It typically has a lower LVR and higher rate in exchange for the reduced documentation.

Why are commercial loan terms shorter?

Because the risk profile changes with the lease. Lenders commonly write shorter terms with a review or balloon so they can reassess when lease circumstances change, rather than committing for thirty years against a five-year lease.

Do consumer credit protections apply to commercial loans?

Generally no. The National Credit Code covers credit for personal, domestic or household purposes and residential investment property. Commercial lending sits outside it, so responsible lending obligations and consumer protections do not usually apply.

Related reading

• SMSF Loans: Limited Recourse Borrowing Explained
• Secured vs Unsecured Business Loans: Which Should You Take?
• Business Acquisition Finance

Sources

• Moneysmart - business finance — ASIC
• Financial Stability Review - commercial property — Reserve Bank of Australia