Property management involves a lot of risk, and at apm our focus is on risk reduction strategies for our owners.  Part of this service includes hosting property investment seminars on topics of interest to our clients including lending for commercial investment properties.

At our recent property investment seminar ‘Understanding Property Investment and Recent Legislation Changes’, we were joined by Mortgage Advisors Linda Eagleton of Loan Market, and Adam Day of Personalised Mortgages. They discussed lending requirements for residential and commercial properties. James Bangerter, apm Southern Area Commercial Manager then outlined the differences between management and ownership of residential and commercial property.

Below are some key takeaways from Adams’s chat on Investment Lending for Commercial Properties. You can soon learn more from Linda’s and James’ topics on our website here.

*Disclaimer – The below information is general and nothing in this article is to be taken as individual financial advice*

Types of Commercial Property

There are many different types of commercial buildings to consider when investing in the commercial space. They range from small to large and everywhere in-between – Heavy industrial (e.g airports), Light Industrial (e.g. warehouses and factories), Retail (e.g. shops, stores), Offices, Accommodation, and Specialist (e.g. fuel stations, medical centres, childcare centres).

Investing in Commercial Property

Commercial property investment allows for a diversified investment strategy with an opportunity for capital growth and strong returns with less regulation than the residential investment market. One of the more important aspects of setting yourself up for success with Commercial investments is understanding it’s a team effort – it makes sense to have a really strong work relationship with good Lawyers, Accountants, Commercial Leasing Agents, and of course a good Mortgage Advisor.

For a standalone commercial investment, investors need to understand the maximum Loan-to-Value (LTV) ratio is 65% and up to 50% for specialist property. Therefore between 35% and 50% of equity is required as a deposit.

Unlike with residential lending, there is no pre-approval for commercial property purchases.

Standalone Commercial Investment Property – The loan for a standalone commercial property has a maximum amortisation of 15 years (loan repayment term) with a loan term (length) linked to the length of the current lease. This means that if the current lease only has 3 years remaining, the term of the loan will also be a maximum of 3 years. This differs from residential property investment loans.

Owner Occupier Business – Generally banks offer more lenient terms when the investor has a business that operates out of the commercial property. In this scenario the bank can lend above 65% LVR as long as the business is strong and a formal lease agreement is always required.

New Building Standard – Commercial investment properties generally need to be 67% or above the New Building Standard (NBS) in order to secure lending. Banks will generally need an IEP (Initial Evaluation Procedure) Report which compares the buildings’ earthquake strength and determines if a property is earthquake prone. If the property doesn’t meet the 67% threshold, then an assessment can be completed to determine what the cost of remedial works would be and how that would be financed.

Security – As well as the property being purchased, generally a General Security Agreement (GSA) is needed by the bank to secure most commercial loans, as this will tie the lease to the security. In many cases the bank will also request Personal Guarantees from the property owner.

Be Prepared for Lending – A good Mortgage Advisor assists in getting together the correct documents for the bank – these include a draft Sale and Purchase agreement, and the property Information Memorandum including the Lease Agreement. They will also want to see a Statement of Position and Proof of Income for the property owner. Most banks also want a registered valuation of the property however they only use specific valuer firms on the bank’s panel. The Advisor will arrange the valuation through the bank.

Mortgage Advisors offer independent advice whilst building a long-term relationship to help with your property journey. Using a Mortgage Advisor is generally a free service (if a fee is to be charged, it is communicated very early on in the process) and they are able to access and negotiate across many different lenders to tailor lending to your portfolio needs.

Thanks to Adam Day of Personalised Mortgages for joining us at our recent seminar. If you wish to discuss commercial property investment, then contact Adam and his team today.