Banks have strict requirements when considering a commercial development loan application.
It’s important to do your research on the location where you’re planning to build and that the builders you contract are certified.
How much can I borrow?
A commercial development loan is very similar to a residential construction loan except banks are a little tighter with the Loan to Value Ratio (LVR).
Generally speaking, the following is available to you:
- Standard commercial property: Borrow up to 75% of the land and construction costs or Land to Development Cost Ratio (LDCR) or 65% of the on completion value. With a guarantor, you can borrow up to 100%!
- Specialised commercial property: 50-60% LDCR for specialised commercial properties including landfill or waste management facilities.
- Max loan amount: Anything over $20 million on a case by case basis.
- Max loan term: Up to 3 years.
- Interest only period: For the duration of construction up to 3 years.
- Line of credit: Available. However, line fees can be expensive.
- Low doc, no doc and lease doc loans: Not available.
- Bad credit loans: Not available.
- Residual stock loans: Available to help maximise your return on investment.
Speak to a commercial development loan specialist today!
Call us on 1300 889 743 or complete our online assessment form and discover if you qualify.
Why speak to a specialist mortgage broker?
A mortgage broker that specialises in getting a commercial development loan approved is a lot different to a relationship manager with a major bank and here’s why.
A commercial broker is an expert at commercial credit policy and has product knowledge of a wide range of finance solutions from a number of different lenders including the major banks.
We can properly assess your situation and needs and help you put together a commercial development loan application that clearly shows your strengths as a borrower.
Once we know exactly what you’re planning to do, we can not only line you up with the lender and product that’s right for you, but we can deal directly with the decision makers in the credit department to ensure a faster and more seamless approval.
Because of the relationships we have, we can help you borrow up to maximum LVR based on your financial situation and even negotiate significantly reduced commercial interest rates.
What can I use as security for the loan?
- Registered mortgage over the property being developed.
- General Security Agreement (GSA) over all of your rights and undertaking in relation to all security property, including pre-sale deposits.
- Directors’/shareholders’ guarantee.
- Rights to designs and intellectual property (an architect can help with this).
How will banks value the property?
The valuation is key!
There is typically two valuations that take place.
One is for the construction cost plus the land value (75% LDCR) and the other is for the on completion value, which is usually higher.
This is the reason why the LVR is generally lower (65%) for this component why the bank bases the final loan amount on the lower of the two.
For example, if the land costs $2 million and the cost to build the development is $6 million, the total cost will be $8 million and you can borrow up to $6 million (based on the initial valuation and not including the soft costs of construction).
However, if at the end of construction of a 30 unit block, selling at $500,000 per apartment, the final value might be $15 million instead.
So at an LVR of 65%, you can borrow up to $9.75 million.
However banks will usually take the lower of the LDCR or LVR, so you might only be able to borrow up to $6 million for entire development.
The bank will organise for a valuer that specialises in the type of commercial property that you want to buy.
They will base the valuation off the development plans you have in place: it’s quite a thorough process.
You can organise the valuer yourself but they have to be certified, usually with the Australian Property Institute.
Bear in mind that you’ll have to foot the bill for this (anywhere between $5,000-$10,000).
The valuer will want to know:
- How many units are being built.
- Where the property is being built.
- The size of each unit (units less than 50sqm2 are known as studio apartments and lenders are conservative on approvals and LVR).
- Comparable sales in the area for the type of property you want to buy i.e. industrial, commercial, retail or residential.
- The cost of construction (hard costs not soft costs).
- How much you’re contributing to the purchase and contingency funds you have in place.
- Construction schedule and date of completion.
- For a unit or apartment block development, you generally need at least 70-90% pre sold.
- You need experience in building commercial properties either in a development capacity (small development) or as a project manager, head engineer or an on-site manager for a commercial construction company.
Will the property get revalued?
There’s usually an annual review requirement for commercial developments and the property will get revalued every 3 years, or 5 years for commercial development loans at a lower LVR.
Basically, banks are concerned with fluctuating prices, particularly in locations in economic turmoil.
The valuer will need to ensure that the commercial property has financially strong tenants or that the business tenants will remain in the property for the long term.
If tenancy rates drop and there are signs that there is a loss of appetite for the type of property you own, the bank may call in the loan and move to lower the LVR in line with how many leases or tenants there are in the property.
The bank will usually run a weighted average lease expiry (WALE) to work out when properties are likely to become vacant.
This happens a lot with pub owners who decide to sell up when the state or federal government introduces laws related to smoking or drinking.
Trade can quickly drop as patrons depart so pub valuations soon follow. In the past, it was found that the remaining commercial loan was at 110% LVR!
The banks want a return on investment
Lenders will usually run an internal calculation to work out how much they want to get back based on how much they’re lending.
If you’re applying for a commercial development loan with your bank, you already have existing loan facilities with them in the form of a home loan and perhaps a couple of investment loans.
You may also have cash funds or a few million sitting in a transaction account.
Because of this, your mortgage broker is in a stronger position to negotiate lower commercial rates as well as a reduced line fee.
For example, a typical line fee might be charged at 2-3% of the loan amount so our brokers might be able to negotiate a 1% line instead.
The customer will probably already have existing facilities with the bank or they’ll try to tack things onto the loan such as a higher interest rate and a line fee.
Does it matter what type of commercial property I want to develop?
No matter whether you’re looking to build a block of residential units, a warehouse, a pub or a hotel, a specialist valuer is needed to look over your plans.
You’ll need to have DA approvals so the bank isn’t approving a commercial development loan for a child care centre in a location zoned industrial, for instance.
In most cases, you’ll be able to borrow up to 50-60% of the property value but it really depends on whether the property is considered a standard property or specialist property.
The development of specialised properties like service stations and pubs may be considered more favourably if there’s a genuine need for the service such as in a new suburb.
The location and its population may support the property that you want to develop and this will help attract business tenants who want to lease the premises for their business.
Check out the commercial property loan to find out the different types of commercial properties we can get finance for.
Tips on commercial developments
Beware of oversupply
Choosing the right location is really important when it comes to commercial development.
Because it can take anywhere from 2 to 3 years to complete a site, you have to be quite forward thinking and consider changes in the market.
From a residential point of view, consider whether your proposed block of units will exacerbate a growing overdevelopment problem.
Sometimes there might be plans in the works to build large apartment buildings in the location you want to develop.
Check with local council about approval plans for the suburb.
Cities with steadily growing populations including strong migration numbers are always a plus when it comes to developing residential units but you have to consider the appetite for the particular type of commercial real estate you’re planning to construct.
For example, are you planning to develop a small office building or a warehouse in an area where the council has already approved plans to build a business park, complete with a retail centre and a good tenant mix, nearby?
These are the types of questions you need to ask and it may not always have to be a death knell for your development plans.
If you have the marketing skills or can outsource this component, you may still be able to successfully draw in the tenants you desire.
Have you done your due diligence?
Although developments can be a long process and involve a lot of hard work and planning, there are a few things you can do to ensure a smoother ride:
- Check for changes to government regulations: This is in regards to building standards for the type of property you want to develop. For instance, aged care facilities and child care centres require very stringent fire precautions to be in place including fire exits, working sprinklers and fire alarms.
- Make sure you’re developing in the right zone: In particular, check with local council before even apply for a commercial development loan. You have bought the land a few years ago but the site may been rezoned from industrial to residential in which case you won’t be able to build a factory.
- Other council plans in the pipeline: The development of infrastructure can either support or be a detriment for the commercial property you’re developing and the type of tenants you want to attract. For example, a retail business owner won’t be looking to rent space in a strip shop that’s now located next to a freeway i.e. much of the main road or highway traffic would have been diverted to the motorway.
- Research the location: Check out commercialrealestate.com.au or realcommercial.com.au to find out how much commercial properties similar to what you’re developing are being sold for. You may find that it’s not the right market for the property you want to develop.
- Get a strong team together: Ensure you have a licensed builder with a team of experienced tradesmen. You’ll also want to have an architect and perhaps also a town planner that can help you with a smooth DA process.
Commercial development loan FAQs
Why are presales important for unit blocks?
Not all lenders are the same when it comes to presales!
When it comes to presale requirements for a unit block, the end game for the developer is to sell the units to clear the debt remaining on the commercial development loan.
That’s just the bare minimum not including profit because the banks want to be sure that the property can be sold or that rental income can be generated.
If 50% presales is what is need to clear the debt, then that is the benchmark the bank will use.
However, this is generally only for GRV that is under $5 million.
Anything over this and you may be required to meet 100% presales debt cover.
What if I want to develop a mixed use shop front?
With commercial properties that provide commercial or retail spaces at the bottom of the building and residential units on top, you’ll generally only need a good number of tenants in the residential units while preleased commercial tenants can come later.
What if I just want to refurbish or fit-out a shop?
If you’re looking to get a fit-out loan, know that there are a few lenders that offer refurbishment loans but getting a great deal comes down to choosing the right lender.
You can learn more in detail about this in the commercial fit-out loans page.
Beware of studio apartments
Units under 40sqm2 are difficult to get approved.
Even if you have plenty of experience in developing commercial properties, banks often place a big question mark over apartment developments where the units are less than 40sqm2.
Commercial developers often try to limit the size of each unit to maximise the amount of tenants they can sign up to the property.
The problem is the market for these types of units is limited to students, young singles or couples, or people after cheap rent.
Banks are wary about commercial property with limited market appeal so you may be declined for a loan and have to increase the size of each unit just to get approved.
Call us today
Call 1300 889 743 or complete our online assessment form to speak with a commercial development specialist today.
Our mortgage brokers can give you an indicative funding approval if you can give us the information we need for the commercial development you’re planning to build and can also help you find out whether or not you will need a development application (DA).