Commercial office loans
Looking for an investment or ready to stop renting office space for your business? You'll need finance. Find out how to get approved for a commercial office loan.
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Whether you're tired of paying rent on a commercial office for your own business use or you're a savvy investor looking for an investment opportunity, now could be the right time to apply for a commercial office loan. The commercial office market is strong in many parts of Australia. In particular, Melbourne and Sydney have seen strong rental returns and low vacancy rates.
Australian banks are notoriously wary of extending finance for commercial offices, opening the floodgates for smaller and independent lenders to assess finance on a case-by-case basis and offer lending opportunities to more people. Read on to find out how to apply for a commercial office loan and how to maximise your chances of being approved.
Commercial office loans you can apply for
Why buy a commercial office?
There are generally two reasons why you might consider purchasing a commercial office: to use as office space for your own business, or as an investment opportunity.
For many business owners, purchasing commercial office space can be a prudent financial decision if your business is well-established and you're not planning on moving locations in the near future.
For property investors, commercial property has distinct advantages over residential property, with the potential for higher investment returns and longer lease terms. Within the commercial property sector, offices have their own advantages over industrial or retail properties, potentially offering a safer and more flexible investment opportunity.
Running your own business from a commercial office
If you are looking to purchase commercial office space and intend to run your own business from the property, your finance application will look very different to that of a person looking to purchase a commercial office as an investment opportunity.
Lenders will want to be satisfied that you are running a viable business and will take an in-depth consideration of the financial status of the business. This will require you to provide full audited financial documents for the business, including tax returns and profit and loss statements for at least the last two years. You will also need to provide a detailed business plan including cash flow forecasts.
As the borrower, you will need to satisfy the lender that you have sufficient business experience to continue running a successful venture into the future. Lenders will also look to see whether you have a secondary source of income should your primary business fail.
A commercial office as an investment opportunity
If purchasing a commercial office as an investment opportunity, the lender will not be as focused on your personal business experience, but will look more closely at the tenancy arrangements you have in place for the office premises. If the office space is already tenanted, the lender will want to know that a strong tenancy agreement is in place and that the tenant is planning on staying in the office space in the long term.
Lenders will also look at vacancy rates within the area, to assess the potential difficulty in leasing out the office space should the current tenants end the lease agreement.
If the office space is vacant, the lender will want to know that you have a viable plan for renting it out. With rental rates for commercial offices typically based on a square meterage rate per month or per year, a suitably qualified accountant will be in a good position to help you determine an optimal rental rate for the property. While residential leases are typically between 6 and 12 months, commercial office leases are usually between 2 and 5 years, and upwards of 10 years in certain circumstances. Commercial lease agreements also tend to include incremental rental rate increases with options to renew the lease term at the end of the current agreement.
Discuss these matters with your accountant and formulate a viable lease agreement plan before approaching a lender for a commercial office loan.
Finding finance for a commercial office
Comparing loan types
When comparing commercial office loans, consider the following:
- Interest rate. Do you have a choice between a variable or fixed interest rate? Does the lender offer a split loan facility, where part of the loan is on a fixed interest rate and the other part variable?
- Redraw facility. Are you able to withdraw any additional payments made in advance?
- Additional ongoing or lump sum repayments. Does your loan give you the ability to pay it off faster or reduce the amount of interest paid by making additional payments? Do any fees apply?
- Early repayment. Do the loan terms allow you to pay out the loan early? Are early repayment fees applicable?
- Portability. Do you have the option to keep the same business loan should you move to a different location?
- Fees and charges. In addition to the interest rate, consider initial and ongoing fees and charges applicable to each potential commercial office loan.
Loan amounts for a commercial office loan
Unlike loans for purpose-built commercial facilities like a car dealership, office space is considered standard commercial property. This is good news for borrowers, as lenders are typically more willing to approve finance applications and extend larger loan amounts for standard commercial property.
The following loan amounts may apply:
- 70% of the value of the property if using the office space itself as security for the loan
- Up to 100% of the value of the property if approved for a business loan with guarantor
- No and low doc loans can be available in certain circumstances, with business loan amounts typically capped at 65%
Standard loan terms
In general, loan terms for all types of commercial property are significantly shorter than loan terms for residential property. While residential property may have a loan term of 25 or 30 years, the majority of commercial office loans have a term between 5 and 15 years.
Unlike loans for residential property, business and commercial property loans are generally unregulated and lenders are not required to advertise their interest rates. For this reason, it is always a good idea to compare your options and choose the lender that best suits your circumstances.
Lenders offering commercial office loans will determine interest rates on a case-by-case basis, after detailed consideration of the lender's financial circumstances, whether the office space is intended to be used for the lender's own business or as an investment property, as well as a myriad of other factors.
If the office space is a converted residential property, then you may be able to qualify for a different kind of loan and potentially lower interest rates.
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