Commercial Property Loans and Valuations: Cap Rates, WALE and Vacancy

Key takeaways

• Value = net income ÷ cap rate: a 0.5 percentage point rise in the cap rate cuts value by about 7% when cap rates sit around 6-7%.
• Valuers check the result against direct comparison - sales of similar properties per square metre - and reconcile the two.
• WALE (weighted average lease expiry) measures how long the income is locked in; short WALE means letting-up allowances and lower LVRs.
• A lease about to expire is valued as if the space may sit vacant, with lost rent, incentives and leasing fees deducted.
• Valuing on face rent instead of effective rent can overstate value badly when incentives are large - $307,692 in one example.
• Lenders test both LVR on the valuation and interest cover on the net income; either can set the loan.

How does a valuer value commercial income property?

The lender appoints a valuer from its panel, and the loan is sized off that report, not the contract price. For income-producing property the valuer usually uses two methods and reconciles them:

• Capitalisation of net income. Take the net income the property earns - rent received less outgoings the landlord cannot recover - and divide by a market capitalisation rate drawn from recent sales of similar properties. Then adjust for anything the market would price in: an expiring lease, a vacancy, an outstanding incentive, capital works needed.
• Direct comparison. Compare recent sales of similar properties on a rate per square metre of lettable area or land, adjusted for location, quality and lease terms.

Larger assets may also be valued by discounted cash flow, and specialised buildings by summation (land plus depreciated building). The result is reported exclusive of GST. If you paid for a valuation of commercial property, the Banking Code of Practice commits subscribing banks to give you a copy of it and the valuer's instructions (paragraph 97), except where enforcement has started - ask for it.

Why does a small change in the cap rate move the loan so much?

Because value is income divided by the cap rate, a small change in the divisor moves the answer a lot. A property earning $250,000 a year net, with a lender lending 65% of value (illustrative figures):

A rule of thumb: the percentage change in value is roughly the change in cap rate divided by the new cap rate. Half a point on 6.75% is 7.4%, which matches $296,296 off $4,000,000. If the property already carried a $2,600,000 loan when it was valued at 6.25%, a revaluation at 6.75% lifts the LVR from 65.0% to 70.2% - enough to breach a 65% covenant and trigger a request to pay down debt.

Cap rates move with interest rates, investor demand and the outlook for rents. Base rates for business lending rose in 2026: the RBA's cash rate target was 4.60% from 30 September 2026. Sector conditions matter too - the RBA's October 2026 Financial Stability Review reports valuations improving across most commercial real estate markets, with prime office supported by tenant demand but lower-grade office weaker, retail valuations and rents rising gradually as vacancy falls, and industrial strong though new supply has eased growth. Test your own figures in the commercial LVR and security calculator.

What is WALE and why do lenders care?

WALE - weighted average lease expiry - is the average time left on the property's leases, weighted by income (or sometimes by area). It tells the lender how long the income that services the loan is contractually secure.

WALE by income is 905,000 ÷ 250,000 = 3.62 years. Lenders read it alongside the expiry profile: here 20% of income expires within six months, which matters more than the average. A short WALE commonly means a lower maximum LVR, a shorter loan term, or a covenant requiring leases to be renewed by a date. For loans assessed mainly on rental income, see our guide to lease doc loans based on rental income.

How do vacancy and incentives reduce the valuation?

A valuer does not assume an expiring tenant stays. For tenant C, with six months left, the valuer might assume the space sits empty for nine months after expiry and then lets on a new three-year lease with an incentive. Illustrative allowances, deducted from the capitalised value:

At a 6.5% cap rate the property capitalises at $3,846,154; less $73,500, the valuation is about $3,772,700. A vacant tenancy at the valuation date is treated the same way, often with a longer letting-up period.

Incentives hide in leases too. A tenant paying a face rent of $100,000 a year who received 20% of five years' rent as an incentive ($100,000 in total) is paying an effective rent of $80,000. Capitalised at 6.5%, face rent suggests $1,538,462 and effective rent $1,230,769 - a $307,692 gap. Valuers look for the effective figure; so should you before you sign a contract.

How does tenant quality change the valuation and the loan?

Tenant quality moves the cap rate the valuer chooses, and it moves the lender's appetite separately. Two buildings with the same income can attract cap rates half a point apart because one has a national tenant on a 10-year lease and the other a local operator with a year to run.

How do lenders turn the valuation into a loan?

Most commercial lenders apply two tests and lend the lower result:

• LVR - the loan as a share of the valuation. Indicatively, around 60-70% for standard investment property, lower for short WALE, specialised or regional property, varying by lender.
• Interest cover ratio (ICR) - net income divided by interest, often at a sensitised rate above the actual one. Indicatively, lenders look for around 1.5-2 times, varying by lender and asset.

Using the example: a $2,300,000 loan at an illustrative 7.0% costs $161,000 a year in interest. On $250,000 of net income the ICR is 1.55 times; if tenant C leaves, $200,000 of income gives 1.24 times. A lender with a 1.5 times hurdle would accept the first and may ask how the vacancy will be covered. The ICR and DSCR calculator runs this test on your numbers.

A building's GST position affects the price, not the valuation: values are reported net of GST, and a tenanted building sold with its leases can be GST-free as a going concern under section 38-325 of the GST Act if the conditions are met.

When will the lender revalue, and what if the value falls?

Most commercial facilities let the lender order a fresh valuation periodically, at an annual review, before any increase or extension, and whenever it reasonably believes the value has fallen - usually at the borrower's cost. A revaluation that pushes the LVR above the covenant typically leads to a request to pay down debt, add security or accept a higher margin.

How hard the lender can push depends on the contract and on who you are. For standard-form small business loans covered by the Banking Code, paragraph 87 lists the non-payment defaults a subscribing bank may act on, and a fall in value is not one of them; financial covenants are permitted only in specialised loans such as property development, SMSF and construction lending (paragraph 91). The Code's small business test includes total debt to all lenders under $5 million. Larger borrowers and non-bank loans sit outside it, so read the covenant clauses themselves.

Even where a covenant cannot trigger a default, the valuation still decides what happens at review or expiry, when the lender chooses whether to renew and on what terms. That is why the valuation inputs above are worth managing years before the loan ends.

What can you do before the valuer visits?

• Give the valuer the full tenancy schedule: leases, rent, reviews, options, incentives, arrears, bank guarantees and outgoings recoveries. Gaps get filled with conservative assumptions.
• Renew or extend leases early. Extending a short lease before a refinance can lift the WALE and remove a letting-up allowance.
• Show the outgoings budget and what is recoverable, so net income is not understated.
• Point out comparable sales the valuer may not have, with addresses and terms - but do not argue the number.
• Fix visible defects, or have quotes ready, so the valuer does not deduct a guess.

Our guide to commercial property loans: LVR and lease doc covers how lenders turn the report into terms. When the leases and numbers are ready, post one commercial property loan request on ADS and 200+ verified lenders and brokers can ask about it.

Frequently asked questions

What is a cap rate in a commercial property valuation?

The capitalisation rate is the yield the market uses to convert a property's net income to arrive at its value: value equals net income divided by the cap rate. A property earning $250,000 net at a 6.25% cap rate is worth $4,000,000. Valuers derive cap rates from recent sales of similar properties, adjusted for location, tenant quality and lease length.

What is a good WALE for a commercial property loan?

There is no single number. Lenders read WALE together with the expiry profile, tenant quality and the loan term. A long WALE with a strong tenant supports higher leverage; a short WALE, or a large share of income expiring within a year, usually means a lower LVR, a shorter term or a covenant to renew leases by a set date.

Why did my commercial valuation come in below the purchase price?

Common reasons are a higher cap rate than the price implied, a lease expiring soon that the valuer allowed a vacancy for, an outstanding incentive, capital works the valuer deducted, or a related-party lease valued as if vacant. Ask for the report, check the tenancy assumptions, and give the valuer any lease extensions or sales evidence it did not have.

Do lenders use LVR or interest cover for commercial loans?

Both. Most lenders size the loan at the lower of a maximum LVR on the valuation and the amount that net income can service at a required interest cover ratio, often tested at a rate above the actual one. For high-yield or short-WALE property, interest cover often decides; for low-yield property, LVR usually does.

Can I use my own valuer for a commercial property loan?

Usually not. Lenders instruct a valuer from their own panel and rely only on that report, although some will accept a recent panel valuation addressed to them. Banks that subscribe to the Banking Code commit to give you a copy of a commercial property valuation you paid for. You can still supply the valuer with leases and sales evidence.

Related reading

• Commercial Property Loans: LVR and Lease Doc
• Lease Doc Loans Based on Rental Income
• Rental Yield: Gross vs Net Calculation

Sources

• Banking Code of Practice 2025 - valuations (paragraphs 95-98) — Australian Banking Association
• Cash rate target — Reserve Bank of Australia
• Financial Stability Review, October 2026 - commercial real estate — Reserve Bank of Australia
• A New Tax System (Goods and Services Tax) Act 1999 - section 38-325, supply of a going concern — Federal Register of Legislation