Property Purchase Finance


Property Purchase finance for commercial property is the most straight forward form of Commercial finance and in some cases very simple to arrange. Commercial Property finance is made up of two segments; Owner Occupied and Investment.

Owner Occupied

For the lender the risk here is in; (a) the type of security and (b) the borrower’s business operation, profitability and stability. The entity (either directly or by way of related ownership) which owns the property is mostly relying on its business operation to repay the loan. Lenders can often be more flexible on Loan to Value Ratio (LVR) when lending for owner occupied commercial property if the business is strong.

Investment

In addition to the above risk factors, the lender here also looks to assess the strength and terms of the lease. For strong security properties, with low LVR’s, some lenders (where the lease amount exceeds interest amount), may choose to rely on the lease as its sole source of servicing assessment, (Quasi lo doc). The rationale being the venture has owner equity and is cash-flow positive, so the lender may not always assess other income.

Note: lenders will vary their LVRs and servicing flexibility if the property is “specialised”. Generally speaking, a property will be considered specialised if it has limited alternate purposes to its current use. i.e. Motel, Hotel, Purpose built restaurants etc.


The basic information we will be seeking at the initial client meeting:

  1. Who is the borrowing entity:

  2. Many commercial borrowers have multiple entities. It is essential we identify which entity is borrowing the money. The main trading entities found in commercial deals are:

    • Sole Traders
    • Partnerships
    • Companies
    • Trusts

  3. What are the related entities to the borrowing entity and their current activities?

  4. Generally there will only be one or two. In many cases a trading company runs the business and the directors own the property in their own name or an investment company.

  5. Where is the property located and what is its use.

  6. Are there any capital expenditure requirements on the property and what effect will this have on disruption to trade (if owner occupied) or rental returns (if investment)?

  7. If it’s investment, who is the tenant and what are the terms of the lease? We will be seeking a copy of the lease - the lender will more than likely require it.

  8. The amount of the loan and the LVR required. What is the strategy behind this level of gearing - does it make sense?

  9. Client background and asset/liability position.
The above details will supply us with sufficient information to discuss the deal with lenders and ascertain approximately what borrowing structure and terms are available. At this point (in conjunction with the lender) we will be able to go back to the client with an indicative structure and also advise what financial information is required (tax returns etc). This will vary greatly from deal to deal and lenders will advise us as to their individual requirements.


Typical Scenario – Property Purchase

  • Phil and Mary own and run a picture framing retail business.
  • The Trading entity is ABC Pty Ltd trading as Smiths Picture Framing.
  • Directors: Phil Smith and Mary Smith.
  • They have been trading for 4 years and have been relatively profitable.
  • They started the business from scratch and funded it by cash. No Borrowings.
  • The store they have been leasing at $22,000 per annum has just come up for sale at $350,000.
  • Phil and Mary have decided to purchase the property in their personal names and rent it to back to their business ABC Pty Ltd trading as Smith’s Picture framing.
  • They have cash resources for 30% deposit plus costs (stamp duty etc). They wish to borrow $245,000.

Borrowing Entity: Phil Smith and Mary Smith
Loan Amount: $245,000
Loan Type: Interest Only or P&I term loan.
Security: Registered Mortgage over Property

The lender may also wish to take a guarantee from the trading entity:
ABC Pty Ltd Trading as Smith’s Picture Framing.

Income: When assessing income we will need to consider the total business income, plus any personal income Phil and Mary have.

Note: Rent previously paid will no longer be an expense (as they will now own the building) and this will need to be added back as additional income. The expenditure may increase by council rates, insurance etc. And needs to be allowed for in the calculations.