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Commercial Lending

Discussion in 'Commercial Property' started by legallyblonde, 21st Mar, 2016.

  1. legallyblonde

    legallyblonde Well-Known Member

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    I recently spoke with my bank (CBA) about commercial property lending (just prior to finding IP2 which is now awaiting settlement) and was informed for anything outside of a CBD they only assess the rental income for the term of the lease. AKA for a 15 year loan they want a 5x5x5 lease with options. If there are only 1 or 2 year leases, the property is presumed vacant for the remaining term. This is obviously VERY different from resi lending where a rental appraisal is acceptable. Oh and however long the lease is, they also subtract a year a year of income as a buffer. Do most lenders expect these long term leases to be in place to lend for commercial loans? Many high yielding properties are able to comfortably service their own 15 year P&I loans whilst remaining cashflow positive. So if I am able to fund a deposit I am wondering if borrowing for a commercial might be possible in the near future? As my serviceability has hit a bit of a wall as my income has reduced and I am about to settle on IP2 so my debt levels are about to increase.

    Thanks in advance for your thoughts.

    TLDR: Do most lenders expect these long term leases (5x5x5) to be in place to lend for commercial loans?
     
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  2. D.T.

    D.T. Adelaide Property Manager Business Member

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  3. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

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    I'm not a commercial pro, but I have done quite a few commercial deals.

    No they don't, Adelaide Bank will will take lease income, if the lease has a year or longer remaining.

    To be honest I have only done commercial loans with NAB and smaller lenders. NAB, at least, will take least income outside CBD if current lease is in place.

    If you are looking at commercial investments <$1m I suggest not looking at the big 4 banks. They will charge an absolute arm and a leg.
     
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  4. pinkboy

    pinkboy Well-Known Member Premium Member

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    The commercial space is not bound by the inhibitions of APRA. However, the flip side is, the valuation and subsequent 'deal' is highly scrutinized.

    Let's take you're 5x5x5 lease for example. 3 identical properties side by side. One is an accounting firm, already been in the premises for 5 years. The next is a tech start up group - entity just created for the business to start. The last is an old school Civic video store, been in the building 20+ years already.

    Of the 3 above, which will the lenders most likely 'love', 'like' and 'not touch with a barge pole' ?

    If you are buying commercial with tenants already in place, you have to get some solid knowledge about them, their industry, their operations, etc - so you can be rest assured that they can full fill the lease fully. You also have to know the lease back the front and sideways - because any breaches become substantial very quickly.

    There is also a lot of scope for 'out of the ordinary' with commercial, and some nice little niches. You do need a savvy broker and not take word from a big 4 lender whose cream is the resi space.

    pinkboy
     
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  5. Blacky

    Blacky Well-Known Member

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    It's good you've figured this out! Yes commercial lending is a very different animal to redo lending. What ever you think you know about lending is upside down in the commercial world. The lending 'policies' are often more like 'guides'.
    You'll need a broker experienced with commercial lending. Your CBA redo lender most likely has very little idea about what the guys 'upstairs' actually do.


    Interesting peice of advice. Maybe true for loans ranging between $2mil up to about $5mil.
    You can fall between that gap of commercial lenders and business bank (to small for the former - too hard for the latter).

    Generally commercial lending is 'owned' by the big 4 with SGB, bank west and Macquarie often getting a look in as well.
    Bank west and SGB used to have specialist lenders who looked after commercial investors.

    Each deal will be looked at 'on its merits' far less 'hard and fast' rules.
    Anything which isn't 'perfect' but can be adequately mitigated still has a chance to fly.

    Lenders will move I and out of neither as their asset books fill/empty based on risk.

    As I said bank west and SGB used to be very strong in this area. Not sure about nowadays though.

    You'll need a specialist (commercial) broker/banker.

    It's a different world

    Blacky
     
  6. legallyblonde

    legallyblonde Well-Known Member

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    That is really interesting to know! That is what I was hoping to hear!

    APRA is a major motivator for looking at commercial.



    Thanks for all the feedback! By the sounds of it the 30% deposit (plus closing costs) is going to be my biggest issue... Well, that and I work two casual jobs at the moment. Hopefully a more permanent source of income is in my future.. However, once I save a 35% deposit I will be ancient! ;) Although, that is merely motivation to be more creative.
     
  7. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

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    If a client comes in wanting to borrow $500k commercial, Big 4 will do high 5% too low 6% on 15 years, I can get that same guy 4.4% with a smaller lender on 15 years, with way lower fees or 5.1% on a 25 year loan term to help manage their business' cash flow. I'm always going to go for the smaller guys as a first choice.

    I find a lot of commercial brokers always put deals with the same couple of banks. They seam to think "get the approval and the rate doesn't matter", I start from who will do the best rate and then get the approval.
     
  8. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    Agreed Simon - the second tier and niche lenders are very much becoming competitive in this space, whilst the Big 4 sit on their laurels thanks to their brand bringing in the deals. Generally rate and fees will be more competitive with the second tier, but their products may not have the same features - ie cheap rate isn't going to be the same product line which will allow construction, development, less prime locations or SMSF etc.

    It's all a balancing act, each lender having their value proposition and niches - some more useful than others. But I know I'll continue working with lenders outside of the Big 4 who will compete to grow market share - just had an approval last week with app fees waived, saving the client ~$4,000 upfront there alone.

    As to the original poster, as many have already outlined commercial is a completely different beast and I wouldn't rely on what any one lender has to say - as the branch member will likely have limited experience and access to only a restrictive set of products.
     
  9. Blacky

    Blacky Well-Known Member

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    Sorry - I miss read your first post. I thought you said >$1mil.
    Yes - agreed. Not many business bankers in the big 4 will cut you a decent deal for lending under $1mil unless there is strong potential for future business. Does depend on the security offered though.

    Blacky
     
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  10. imbi3

    imbi3 Well-Known Member

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    Commercial loans have a lot variables and can be creative in crafting the solution. In addition to lease term, banks may also look at your other income. If other income source(s) is strong, they may be satisfied with shorter lease term. My previous manager used to tell me that finding a good commercial broker is hard, mainly due to these issues (ie variance in banks' policy/appetite in commercial space)
     
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