Commercial Property Finance Guide — Australia

1) How commercial property loans differ from home loans

A commercial property loan is not just a bigger home loan. The biggest difference is what the lender is lending against. With residential lending, the assessment is heavily standardised and “borrower-first” (income, living expenses, and a fairly consistent set of policy rules). In commercial lending, lenders still assess you — but they also put the property itself under a microscope because the property is expected to perform as a mini business. The lease, the tenant, the location liquidity and the valuation method can matter as much as your tax returns.

In practice, commercial loans tend to have shorter formal terms, more active review points, and a higher focus on “what if” scenarios. A lender wants to know what happens if rates rise, a tenant leaves, or the valuer marks the property down. That’s why commercial finance discussions quickly move to concepts like DSCR (cashflow coverage), LVR (security buffer), lease risk, and the facility’s ongoing covenants.

If your goal is to minimise friction, the cheat code is to think like credit from day one. Before you negotiate a purchase price or sign heads of agreement, model the numbers with a lender lens. Our Commercial Property Calculator is designed for that first-pass modelling. If the numbers are tight or the lease is unusual, speak with a commercial broker page early — it can prevent expensive contract extensions and avoidable “computer says no” declines.

2) Start with the deal: owner‑occupier vs investor

The cleanest commercial finance strategy starts with one question: what is the property’s role? An owner‑occupied purchase (your business operates from the site) is assessed differently to an investor purchase (the property’s cashflow comes from a third‑party tenant). That distinction impacts everything — deposit expectations, how DSCR is calculated, the lease documentation the lender expects, and how valuations are approached.

Owner‑occupier scenarios

Owner‑occupier deals often rely on the underlying business performance. Lenders will focus on trading history, margins, add‑backs, stability of revenue and the “why” behind the move (capacity, consolidation, lease expiry, new location strategy). The property is still important, but the repayment story is usually driven by the business. Owner‑occupier facilities can sometimes achieve stronger policy outcomes when the business is stable and the property is in a liquid location.

Investor scenarios

Investment deals are more “asset and lease” driven. The key questions become: who is the tenant, what is the WALE, what is the rent review structure, and how re‑lettable is the property if the tenant vacates? In commercial lending, a “great looking yield” can be a trap if the lease is short, incentives are large, or vacancy risk is high. Lenders often prefer boring stability: a strong tenant, a clean lease, and a property type that has demand even in softer cycles.

Investors should also consider their broader portfolio and cash buffers. A commercial asset can be lumpy: vacancy can mean months of outgoings, incentive costs and leasing fees. Your facility structure needs to survive these periods without forcing a distressed sale. This is also why the market outlook for commercial property matters — lenders can tighten policies fast when valuations are uncertain or leasing fundamentals deteriorate.

SMSF trustees: a special case

SMSF commercial property lending can work brilliantly for the right fund — especially for business owners buying their premises with an arm’s‑length lease. But SMSF structures are rule‑heavy and cashflow‑sensitive. Lenders typically want conservative settings, clean documentation and a clear liquidity plan. If you’re exploring this route, start with the SMSF commercial property case study to see the moving parts, then speak with a specialist commercial broker alongside your accountant/solicitor to confirm compliance.

Deep dive: Commercial deposits & LVR (what changes max leverage and how valuation variance affects cash).

3) Deposit & LVR: what actually moves the needle

LVR (Loan‑to‑Value Ratio) is simply the loan amount divided by the property value. LVR matters because it’s the lender’s first line of defence if the market moves against you. If values soften, an over‑leveraged facility can trigger re‑pricing, tighter conditions, or (in worst cases) covenant stress at review time.

The deposit you “need” is not just a percentage on a brochure. It’s a function of: (1) how liquid the asset is in a forced-sale scenario, (2) how stable the income is, and (3) how comfortable the lender is that the valuation will stack up. A prime industrial warehouse with a long, clean lease can be treated very differently to a specialised asset with short WALE or secondary location risk.

What can make lenders comfortable with a higher LVR?

• Owner‑occupied, stable business: especially where the trading history and financials are clean, and the property is mainstream (warehouse/office/retail in a strong area).
• Strong security profile: good access, flexible zoning, standard configuration and broad tenant appeal.
• Clear exit strategy: refinance options, other security, strong cash buffers, or predictable asset saleability.
• Low complexity: straightforward entity structure, clean ATO position, and a tidy submission pack.

What tends to push LVR expectations lower?

• Specialised or niche assets: properties that are hard to repurpose (or rely on a single industry).
• Short lease or high vacancy risk: if the tenant leaves, the cashflow story collapses.
• Secondary locations: fewer comparable sales and longer leasing times mean more valuation uncertainty.
• Cashflow tightness: if DSCR is marginal under stressed rates, lenders often compensate with lower LVR.

One important nuance: some lenders publish niche pathways with higher LVR allowances for specific use cases (for example, simplified criteria for owner‑occupied lending). These are not universal, and eligibility can be strict — but it’s a reminder that “the market LVR” is not a single number. It’s a set of policy bands that move with borrower strength, property type and loan purpose.

Deep dive: DSCR explained (how lenders calculate it and stress-test rates).

4) DSCR & serviceability: cashflow under stress

DSCR (Debt Service Coverage Ratio) is one of the most important numbers in commercial lending because it answers a simple question: does the income comfortably cover the debt repayments?

In plain terms, DSCR is net operating income divided by annual debt repayments. A DSCR above 1.0 means the income exceeds repayments; the higher the DSCR, the more breathing room you have if rates rise or income falls. Commercial lenders commonly assess DSCR using stressed assumptions (higher interest rates, conservative expenses, and sometimes vacancy or rent haircuts), because they are trying to protect you and them from a facility that becomes fragile.

A simple DSCR example

DSCR is where “cheap headline rates” can mislead borrowers. A slightly lower rate can look great today, but if the structure includes aggressive re‑pricing at review, short fixed periods, or a repayment jump, the long‑term DSCR story might be worse. This is also why commercial approvals are often won in the packaging: credit wants to see a coherent, conservative story that stays compliant over time.

Common DSCR “levers” borrowers can control

• Deposit size (LVR): lower loan amount often improves DSCR instantly.
• Term and amortisation: longer terms can reduce annual debt service (where policy allows).
• Interest-only periods: can improve short-term DSCR, but must be sensible for long-term strategy.
• Income quality: stable, documented income beats “optimistic” projections.
• Expense realism: underestimate outgoings and you may fail at credit or annual review later.

DSCR also interacts with lease risk. A lender may accept a lower DSCR for a prime asset with a strong tenant and long WALE, but demand a higher DSCR when the lease is short or the property is in a secondary location. That’s not “unfair”; it’s the lender pricing vacancy risk.

5) Leases, tenant risk & WALE

In commercial property finance, the lease is not paperwork — it’s the asset’s income engine. Lenders care about lease terms because the lease determines how stable the cashflow is, how rent can grow, who pays outgoings, and what happens if the tenant defaults. A strong lease can support valuation and approval; a messy lease can reduce LVR, tighten covenants, or force you into a more expensive lender tier.

WALE: why it shows up in credit conversations

WALE (Weighted Average Lease Expiry) is a way of describing the average remaining lease term, weighted by income. Put simply: it’s a shorthand for “how long the property’s income is locked in for”. For single-tenant assets, WALE is basically the remaining lease term (plus options, depending on how lenders view them). For multi-tenant assets, WALE weights each lease by rent contribution.

A lender-minded lease checklist

• Tenant identity and business model: is it a national brand, government/healthcare, or a thinly capitalised SME?
• Lease term + options: remaining term, option conditions, and whether options are likely to be exercised.
• Outgoings: who pays what (rates, insurance, land tax, maintenance)? Are there caps?
• Rent reviews: fixed, CPI, market reviews; any ratchet clauses; timing and documentation.
• Security: bank guarantee, cash bond, director’s guarantee (where relevant).
• Assignment/subleasing: landlord consent requirements and tenant substitution risk.
• Make good / incentives: who pays when the tenant leaves; any incentives that distort “true” net rent.

If you’re under contract, the smartest move is to pressure-test the lease with the lender’s likely viewpoint before you rely on “it should be fine”. A commercial property broker can often flag issues early (lease doc pathway constraints, unacceptable clauses, short WALE) and suggest practical fixes. That’s one of the under-rated benefits of using a commercial broker rather than guessing what the bank will say.

Deep dive: Covenants & annual reviews (DSCR/LVR tests and reporting).

6) Covenants & annual reviews: what happens after settlement

A common mistake in commercial property finance is treating approval as the finish line. In many facilities, settlement is the start of a relationship where the lender expects periodic comfort that risk has not deteriorated. This is where covenants and annual reviews show up.

Covenants are simply agreed financial tests or obligations in the loan documentation. In commercial property facilities, covenants often relate to: LVR (has the valuation moved?), DSCR/ICR (does income still cover debt costs?), and sometimes broader business financial reporting. Annual reviews are a structured check-in where the lender reviews updated financials, lease status, insurance and valuations (in some cases), and may re-price risk.

If you want to understand how lenders are thinking in the current cycle, read the Commercial Property Market Update. Market shifts can influence valuation assumptions and covenant sensitivity, especially for office, secondary retail, and assets with short WALE.

The practical takeaway: don’t optimise purely for maximum leverage on day one. Optimise for stability across the full loan life. That may mean a slightly lower LVR, a more conservative DSCR, or a different lender tier that aligns better with your property type. A commercial broker page can structure this deliberately and explain trade-offs in plain English.

Deep dive: Commercial valuation process (valuer inputs, timelines, common issues).

7) Valuations: what valuers and lenders look for

Commercial property valuations can feel opaque if you’re used to residential comparables. In many commercial assets, the valuation is heavily influenced by income and perceived risk. That means two buildings that look similar can value very differently depending on lease terms, tenant strength and market rent assumptions.

Three common valuation influences

For purchases, valuation timing matters. If you’re trying to settle fast, a valuation delay can break the timeline. For refinances, valuations can shift covenant positions (LVR) and trigger re-pricing decisions. This is why commercial finance often involves scenario planning: what happens if the valuation comes in 10% lower, or if the valuer tightens vacancy assumptions?

Deep dive: Commercial loan costs & fees (valuation, legal, lender fees and budgeting).

8) Costs & fees to budget for

Commercial property lending often includes more moving parts than residential lending. Budgeting properly helps you avoid “approval shock” where a deal is technically approved but becomes unattractive once all costs are considered.

Common cost categories

• Valuation fees: commercial valuations can be more expensive and can increase for complex assets or multiple approaches.
• Legal fees: borrower legal advice, plus lender legal fees in some cases (especially on non-standard facilities).
• Lender fees: application/establishment fees, line fees on some products, and documentation fees.
• Ongoing review costs: annual review fees, periodic valuations, or covenant monitoring costs (where applicable).
• Break costs: if you fix rates and refinance early, break costs can be material.
• Broker fees: commercial broker fee models vary; good brokers disclose early and structure to net benefit.

9) Common structures: IO vs P&I, fixed vs variable, SMSF basics

Commercial facilities are often structured as a set of trade-offs. There is no single “best” structure — there is a best structure for your goal, your risk tolerance, and your expected holding period.

Interest-only vs principal & interest

Interest-only (IO) can improve short-term cashflow and DSCR, which can be useful for investors managing portfolio liquidity or businesses funding fit-outs. Principal & interest (P&I) reduces long-term debt and can improve future refinance flexibility. The right choice depends on whether your strategy is cashflow-first, deleveraging-first, or a hybrid.

Fixed vs variable

Fixed rates can reduce uncertainty, but they can also reduce flexibility. Variable rates can be easier to refinance or restructure, but they expose you to interest rate movements. Many commercial borrowers choose a split structure so part of the debt is stable and part is flexible for working capital or unexpected events.

SMSF: understand the constraints early

SMSF commercial property lending is typically done under an LRBA structure with specific legal requirements. Lenders can be conservative, and the fund’s liquidity matters. If you’re considering this, read the SMSF commercial property case study and speak to your accountant/solicitor before you commit. A specialist commercial broker can also help you avoid policy dead-ends.

10) Timeline & process: purchase and refinance

Commercial transactions can move quickly — or stall for weeks — depending on documentation and valuation complexity. The most common reason borrowers miss settlement deadlines is not “the bank was slow”; it’s that the deal wasn’t packaged in a credit-ready way early enough.

Indicative timeline (varies by lender and complexity)

If you’re under contract with tight finance dates, don’t DIY guesswork. Use the Business Loan Eligibility Check to triage quickly, then speak with a commercial broker page to lock the lender path and protect the timeline.

Deep dive: Lease-doc vs full-doc (documentation lanes and trade-offs).

11) Documents checklist: build a credit-ready file

Commercial lending outcomes are often driven by the quality of the submission pack. When documents are clean, consistent and complete, credit can say yes faster. When documents are missing or contradictory, the lender defaults to caution — delays, conservative assumptions, or a decline.

Core documents lenders commonly request

12) Tools & next steps

If you’ve read this far, you’re already ahead of most borrowers — because you’re thinking about commercial finance as a system. The next step is to turn your situation into lender-ready numbers and a clean plan.

FAQs