Lease Doc Commercial - Or How I learned to love Lease doc to continue investing

Discussion in 'Commercial Property' started by Corey Batt, 18th Oct, 2015.

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  1. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

    14th Jun, 2015
    Adelaide, SA
    I've mentioned this type of product a few times and find that quite a few investors aren't aware that it exists, or how exactly it works. In the environment that APRA has created, this is can be a handy pathway for investors who have substantial equity but no capacity to borrow through traditional means.

    In the commercial space you'll generally find three tiers of products
    • Full Doc
    • Lo Doc
    • No Doc/Lease Doc
    Full Doc:

    The name is self-explanatory – full documentation is provided to verify income, assets and liabilities etc. Generally this will require 2+ years of financials for self-employed applicants, pay slips for PAYG. This is your standard type of loan in all types of lending within the property market.

    Lo Doc:

    A step back from Full Doc – Lo Doc products can have less strenuous verification requirements in terms of income verification. This may include accountant declarations of income, BAS/Bank statements to verify business income instead of fully lodged tax returns etc.

    No Doc:

    Generally self-declaration of income without any other form of verification, can have minimum lease requirements or be fully dependent on a signed declaration of income by borrower. Interest rates to the upper end of the market, lower LVR’s.

    For the most part it’s most practical to utilise products in the Lo doc or Lease doc space, than go into the true No Doc product sphere.

    Lease Doc:

    No income requirement, just require lease – in many cases just 12 month remaining on a lease required. Fairly standard LVR’s around 65%, and rates mid 5’s to mid 6’s depending on the lender. Potentially loans can include IO periods and 25 year loan terms.

    There are some blurring of the lines between products, some Lo Doc are almost No Doc in nature and vice versa.

    Why can No Doc/Lease doc be particularly useful

    • Extends borrowing capacity for investors impacted by APRA’s intervention into serviceability models for lenders
    • Allows self-employed applicants to borrow if their financials are not in a position to be used in the Full Doc space

    Where do commercial products products differ from Residential lending?
    • Upfront costs – valuation, legal fees, establishment fees
    • Exit costs - DEF not illegal, so can have substantial penalties for refinancing/selling quickly
    • No offset accounts – though many have redraw available.
    An Example where Lease Doc can enable investors to continue borrowing

    Joe Blogs, a successful restaurant owner of 15 years decides he wants a change of lifestyle – sells his business for $1,500,000 so he can stay home with his growing family. He has a small portfolio of residential investment properties, has a small mortgage on his PPOR and has no intention of going back to employment – however he would like to continue to invest.

    Joe finds an industrial site for $1.6 million that he would like to purchase, with a current tenant paying $120,000 on a 5x5x5 lease, with 2 years remaining.

    How do the figures look?


    $1,600,000 Purchase price

    $102,112 Government charges + solicitor fees

    $960,000 Amount of Funding sought LVR 60%

    $742,112 Deposit

    5.89% Interest Rate

    2.0% Sensitised buffer rate

    7.89% Rate used for servicing

    $75,744 Sensitised Interest Expense

    Lease Details

    $120,000 gross lease income

    $10,800 Outgoings (lease has landlord paying outgoings)

    $109,200 Net Lease income for servicing

    Net Position: $33,456

    Servicing Pass

    The end result is that Joe is able to use a 960k loan to grow his investment portfolio further, gains a positive cash flow position maintains future borrowing potential through these products so long as sufficient deposits are provided. In this scenario Joe would be eligible for a 25 year loan term with 5 year interest only period.


    Whilst not suitable for everyone, the Lease/No/Lo Doc market is providing opportunities to investors to continue to expand their portfolio in the current market, whilst still maintaining competitive rates and product features.

    *example and figures used are descriptive and may not be available to all borrowers. Specific advice can only be determined by assessing your specific individual circumstances.
  2. bonanzawealth

    bonanzawealth Well-Known Member

    23rd Jun, 2015
    Sydney NSW
    nice... been thinking about this since last week. Thanks Corey
  3. chindonly

    chindonly Well-Known Member

    18th Jun, 2015
    Thanks for the example Corey.

    The issue I have with this, is you are investing a deposit of $742k for just a 4.4% return.

    Obviously this is using the sensitised rate, and would be better at current realistic rates, but commercial rates could and will increase at some stage - possibly by quite a bit.

    Also, you talk about a 25 yr loan term, but we seem to have to renew commercial loans about every 4-5 yrs. When refinancing, there is then also the risk of low revaluation depending on market conditions.

    I haven't done any commercial myself yet, but am heavily involved at work in a few sites, so play around with these numbers on a regular basis.
  4. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

    14th Jun, 2015
    Adelaide, SA
    Such is the nature of any property investment, just look at how many people are investing at a negative net yield! You will find that the general calculations most client's are factoring off long term growth in rents.

    As per your comment on renewals - those would be 'reviews'. This is dependent on the type of product and lender chosen, as an example the type of products mentioned above have no reviews for the life of the term.