A commercial property could be deemed as a property not of a residential nature,(namely ones home or residential investment property) which is either:
– leased out for a term for a rental income return OR.
– Owner occupied, or, by a related third party.
– vacant land with zoning of a commercial industrial nature, acquired for future commercial development.
Commercial Property types include but not limited to:
showroom warehouse, warehouse, retail outlets, shopping centres, office block ,factory units, multi-level apartment developments, multi residential unit developments (generally >3) ,strata offices.
Commercial Property Features
Prior to entering an Offer to Purchase contract one should determine:
(1) Is the property acceptable to a financier as adequate security? Some securities are deemed as specialised by lenders (in other words purposely built) and funding may be refused or limited.
(2) Is location of property to be acquired, or refinanced, in a suitable location?
For instance the property may be located in a regional centre or other rural centre. Funding may not be available, or again reduced, because of location.
(3) If a leased /tenanted property, is the remaining lease term sufficient to secure necessary finances? Should further lease options be sought to assist finances and for future sale purposes?
Lending guidelines are in place for a purchaser, seeking finance to assist with a purchase namely:
(a) Income streams of leased property must cover planned interest expense by 1.50 times. For example if loan interest expense is $100000pa property’s net rental income needs to be $150000pa. (Net of gst and variable, for example rates and taxes)
(b) All associated loans secured against a deemed commercial property must illustrate loan can be finalised within fifteen years (by principle and interest repayments).
(c) Lending against a deemed acceptable commercial type property is limited to a 65%-70%LVR (Loan to Value Ratio). It is common for multi level apartment developments to attract an LVR approaching 80% during construction, with initial loan amount not exceeding 65% of completed end valuation.
(d) Other borrowings whether they be of a commercial or personal nature (home loans etc) must also meet lenders guidelines, on purchasing or refinancing a particular commercial property.
Like all investments one needs to take care in sourcing a property of commercial nature.
The above summary provides a guideline only and any contract to purchase should be conditional to suitable finance and any other conditions a would be purchaser requires.