Function Centre Loan
Do all lenders offer a function centre commercial loan?
A function centre commercial loan allows you to make your dream of owning and operating a reception centre a reality.
From birthday parties, banquets, fundraisers, community and sporting events, and the lucrative wedding industry, there is a potential to earn a high return on investment (ROI).
With help from a specialist mortgage broker, you can get off to a good start with a commercial property loan that fits with your business goals.
How do I get approved for a function centre commercial loan?
Commercial properties in the hospitality industry are generally considered as ‘specialised’ by lenders.
While in some cases there may be Loan to Value Ratio (LVR) restrictions, we may still be able to help you borrow the amount you need.
It all depends on the property and the way you present your case as a commercial investor.
How much can I borrow?
Basic borrowing limits
- Freehold purchase: Borrow up to 60% of the property value or 70% in strong cases.
- Borrow up to 100%: With guarantor or a residential property as security, borrow more and get longer loan terms.
- Leasehold purchase: Borrow up to 50% of the business value (going concern).
- Maximum loan term for principal and interest repayment: 5 years (debt to reduce to 40%).
- Maximum loan term for interest only: 3 years.
- Business plan with projections typically required for approval.
- Low doc options not usually available.
- Interest rate discounts vary depending on the strength of your application.
Call us on 1300 889 743 or fill in our free assessment form.
One of our specialist mortgage brokers will get back to you to discuss your situation.
How do I get approved?
Firstly, the bank will want to know who you are as a borrower.
You may not need to provide full financial statements for a function centre commercial loan.
You can learn more about these options on the commercial property loan page, bearing in mind that banks won’t simply approve a high risk loan.
As a general rule, you’ll need around 1.5 to 2 times the amount of income to proposed income expenses. This is known as the Debt Service Coverage Ratio (DSCR) and it’s a requirement for most commercial investments.
If you’re running the reception centre yourself, you generally need 5 years plus experience in a managerial role in a similar industry.
You’ll also need to provide a business plan and forecasting with the help of a qualified accountant.
The bank will run what it calls a SWOT analysis of the business, whether you’re running it or not.
SWOT stands for strengths, opportunities, weaknesses and threats and the analysis allows banks to weigh up the positives and negatives of the business.
You can think of applying for a function centre commercial loan like applying for a job: you’re building a picture of yourself as a sophisticated investor who can pay their mortgage!
Luckily, a specialist mortgage broker can help you do just that by liaising with your accountant to make it happen.
Are banks conservative?
Generally, banks see function centres as “hit and miss” and they take a somewhat conservative approach when deciding whether to approve a function centre commercial loan.
Banks know that function centres and reception halls can fail if they’re not managed properly.
On top of that, the security (the property itself) tends to be purpose-built.
In saying that, it really depends on the nature and location of the property.
What if someone else is running the business?
If you’re simply buying the freehold and leaving the lease as it is, the bank will still want to see the financials of the current business owners (as should you!).
A tenant that misses or defaults on their rent may mean that they’re currently in financial hardship.
If there’s evidence of missing rent in the past, it’s a red flag to the bank and should be a red flag to you as well because without the rental income you may struggle to meet the repayments.
The bank likes to see long lease terms (usually upwards of 10 years) because it shows stability to them.
What about location?
Function halls and reception centres in metro and inner city areas are expensive because there is such a high demand for them.
They’re close to public transport, motorways and distribution outlets for food and alcohol, staples of any good function centre.
Function centres in country and rural areas are also highly sought after from a business and lifestyle perspective.
The potential to make a big profit on any single booking is also higher because these types of properties tend to attract upscale and larger wedding parties. The venue capacity is simply a lot larger than some metro locations.
The drawback of a rural locations is that they tend to only attract a niche buyer market, typically investors reaching retirement and looking for a venture to match their lifestyle.
Although weddings will always be popular, there is also the potential to suffer from less business overall because of the proximity of the function centre to major towns and cities.
Because of this, banks may simply decline function centre commercial loan applications based purely on location.
Zoning is a big one as well. If the property is zoned as mixed use, you may be in with a better chance of getting approved for a mortgage.
It’s likely though that the hall has been built to a specific purpose and may be difficult to alter to fit other purposes in the event the property needs to be sold.
What can I use as security for the loan?
The function centre commercial loan can be secured by the following:
- Residential security.
- Registered fixed or floating charge or Bill of Sale over the business assets.
- Directors’ guarantee.
- A deed of consent between lessor/lessee and the bank.
How can a broker get you a great deal?
A mortgage broker that specialises in function centres and reception venues doesn’t work for the bank!
What this means is that they will assess your situation and commercial investment plans and build a case to present to a number of different lenders, including the major banks.
The brokers shop you around to the decision makers in the credit departments.
Because of the relationships that Home Loan Experts has with the commercial arms of almost 40 Australian lenders, we’re in a unique position.
We know how low they will go on their commercial interest rates and what kind of loan they’re willing to offer to get your business.
These loan features may include loan terms of up to 25 years with select lenders and 5 years interest only. You can read more about these features on the commercial loan features page.
Discover if we can get you approved for a function centre commercial loan by calling 1300 889 743 or by completing our online enquiry form.
We’ll get back to you within 24 hours to discuss your situation.
Tips For Buying
Reception centre and function rooms can vary greatly depending on which market the venue is targeting.
It pays to do your research before making an offer on a commercial property: that means really understanding what you want to achieve by investing and whether the property matches these goals.
Getting independent advice from specialist business brokers, solicitors and accountants is essential in making the right choice for your reception centre.
How do I value a function centre?
Function rooms are often way over-priced
As you begin your search online, the worst thing you can do is get drawn into the well-written descriptions on real estate websites.
Business owners often ask ridiculous amounts for their businesses out of the love they have for it: you have to be smarter.
What can give you a more objective estimate on price is to use a capitalisation rate (cap rate) to determine the potential return on investment.
The cap rate is used by a number of banks and commercial investors to determine the value of a business overall, including the property itself.
The cap rate then influences the valuation figure the bank sets when working out how much they will lend to you.
The rate is based on the average net operating income (NOI) of the function centre over the past two years as well as comparable sales in the area.
By using it, you too can get a pretty good idea if the asking price for the property is way over the mark.
Some things that can really add value
- Is the property WIWO (walk-in walk-out)? That’s a massive plus because you’re buying the property “as is” and won’t need to hire new kitchen, waiter and bartending staff. If it includes management, that’s a huge boon.
- Is the reception centre plus stock at value (SAV)? Like pubs and restaurants, most function rooms include stock like alcohol.
- Does the venue come with an existing food and liquor licence? These licences can literally be worth thousands of dollars and the cost only goes up the larger the capacity of the venue.
Ask the owner why they’re selling?
It’s a simple question but you can really work out whether the reception centre is worth it.
It may simply be that they’re looking to upscale or retire but don’t be surprised to find that the business or the vendor is personally in financial trouble.
This can put you in a strong position to negotiate.
Are you just buying the freehold?
Although there isn’t as much potential return on investment (ROI) as running a business from the venue, owning the freehold alone is generally a more stable commercial investment.
Banks are always wary if you’re starting up your own business unless you have considerable experience in the industry and flawless business forecasting.
In saying that, you need to really have an understanding of the financial situation of the current tenants.
Ask them for their last 2 years financial statements including profit and loss statements and go through them with your accountant.
It’s what the bank will ask for when assessing the function centre commercial loan application.
Check the contract of sale
Sometimes things like food and liquor licences and SAV aren’t advertised on the real estate listing.
Either way, knowing what you’re actually paying for is crucial. Go through the contract of sale carefully with a conveyancer that specialises in hospitality and function centres.
They can help you negotiate with the business broker/vendor to ensure that stock is included, licences be renewed or repairs and replacements be undertaken before the sale goes ahead.
This can include:
- Fittings and appliances like faulty dishwashers, microwaves or ovens that need to be replaced if they’re not under warranty and not fit for purpose.
- Operational, health and safety (OH&S) and fire safety equipment and systems that need to be in working order, such as fire extinguishers and having working fire exits.
The reality is, some function centres may need some renovation but as long as you’re absolutely certain you’re getting what you’re paying for, that’s what counts.
Minor, cosmetic renovations are likely: It’s the structural elements that are going to cost the most amount of time and money to fix.
Why is zoning important?
Since function centres tend to serve food and alcohol, they tend to be broken up into two zones: Commercial 1 and Commercial 2.
- Commercial 1 Zone: Allows for pubs and function centres as long as you have a food and liquor licence.
- Commercial 2 Zone: Prohibits accommodation, except for caretaker’s house, motel and residential hotel which requires a permit.
These zones can really disrupt any future plans you have to renovate or what kind of activities you can undertake on the property.
Reception centres zoned Commercial 2 can obviously prevent you from building overnight accommodation or lodges for patrons. These onsite lodges can often be subleased depending on the size of the accommodation, giving you another revenue stream.
That’s a massive loss in building a good level of working capital.
Worse than that, the zoning may have changed for that particular area and the vendor has failed to tell you because they want a quick sale.
You may find yourself with a property that is prohibited from playing loud music after a certain time of night because the property has been zoned as neighbourhood.
It’s essential you find out about zoning from the local council before signing the dotted line.
Do I need permits and licences?
Like a pub or club, function centres require liquor, food and operating capacity licences.
Visits from the local health inspector are a reality and the occupancy licence is needed to verify the number of people allowed under one roof at any given time per your local council’s fire codes.
A fire evacuation and prevention plan is mandatory and you shouldn’t assume that the previous owners were up to code.
Before purchasing the venue, ensure that sprinklers, alarms, extinguishers and other OH&S measures are in working order.
You should be able to make this a condition of sale but check with your conveyancer.
What about liquor licences?
A venue that comes with an existing liquor licence adds a bit of value. Annual fees can be upwards of $4,000 and $7,000 as a base rate.
Depending on the venue capacity, this cost can rise quickly depending on the venue capacity.
Bear in mind, your responsibility may not end when an inebriated patron leaves the premises. If they are assaulted or injured on the way home, you can find yourself up for some damages.
For New South Wales, this would be the Office of Liquor, Gaming and Racing (OLGR) and, for Victoria, the Victorian Commission for Gambling and Liquor Regulation (VCGLR).
While each state has its own licensing requirements, you should expect to wait up to 6-8 weeks to receive your permits after submitting your application. Get on this quickly!
Each day you are unable to operate is costing you a fortune in potential revenue.
This is something the bank may consider when looking at your function centre commercial loan.
Check out the Australian Business Licence and Information Service (ABLIS) for details on regulations and permits you may require when operating a function centre.
What other features should I be looking at?
Again, this really comes to how much you’re willing to spend and what type of clients you want to attract.
Some of the best function centres come with reverse-cycle air-conditioning, flat-screen televisions, DVD players, kitchens, high pressure hot and cold water systems with no restrictions and wi-fi.
Other things to ask include:
- Does the venue offer all day trade including breakfast or just dinner? Branching out as a restaurant and function centre may be something to consider.
- Ask the previous owners for the booking list for the past two years? Is there the potential for repeat clients and what can the business owners guarantee?
- Are the business owners on top of marketing or will you need to be involved?
- Is the commercial property located near your suppliers?
- What’s the condition of the building? It’s recommended that you walk through a potential buy with a valuer that specialises in commercial properties in the hospitality industry.
- Is the current business accredited? Accreditation with the Australian Bridal Industry Academy (ABIA) is highly sought after in the wedding industry and usually comes with repeat business.
- Consider subleasing the accommodation or the commercial kitchen as another revenue stream.
- Is the catering to a good standard? This will determine the type of clients you will attract: up market weddings may be completely off the cards depending on the service.
- Does the function centre come with scenic or farmland views? Again, these are highly sought after.
Bear in mind that these aren’t necessarily features you need for a function centre commercial loan: it’s just something to consider from a business perspective.
Function Centre Commercial Loan FAQs
What if the function centre is on farmland?
Sometimes you may come across a reception centre situated on many acres of land, particularly those catering to weddings.
In most cases, these properties sit on land that has been subdivided by a larger landholder. You’ll only be buying the commercial property and the subdivided land.
What if there is accommodation or a lodge on the grounds?
This could provide you with another revenue stream but this will be located on its own subdivided land.
Is there room to partner with this “motel” or are you in a position to buy them as well?
Of course, this would require you to apply for another commercial loan.
What if the function centre is attached to a pub or restaurant?
Most functions centres are self-contained, with the kitchen/restaurant and bar area all included.
However, sometimes you’ll find that the reception centre only is for sale while the attached pub or restaurant is already owned by someone else.
Dual occupancy or duplex buildings are often treated conservatively by the banks in the residential space.
The reason is that they often value it as one block of land not two even if the subdivision has been approved.
Luckily, this makes little sense when you’re comparing a pub (with harsh liquor licence requirements) or restaurant (operating 7 days a week) with a function centre.
Lenders that offer a function centre commercial loan will take into account the condition of the property and its location but the business itself will be assessed as separate to the pub or restaurant.
The same goes for function centres that are located in an office building. These types of function centres would fall under strata title so you’re not being assessed based on the office building and its revenue as a whole.
Does the bank require annual reviews?
The most common situations where a lender will require an annual review are:
- If the commercial property loan is over $2,000,000.
- Unsecured facilities.
- Specialised security properties.
- High-LVR, interest only loans.
- If you are struggling with your repayments.
- The lender will ask you to provide a profit and loss, balance sheet and cash flow forecast.
- In some cases, they may also revalue the reception centre.
Should I buy furnishings and furniture?
Essential function centre furniture like dining chairs and tables can actually be purchased wholesale from a hospitality industry furniture dealer.
While you’ve saved money there, you may want to consider only hiring tablecloths, linen, dishes, glassware and flatware when you’re speaking with a potential client.
These are elements that customers like to coordinate and tailor to their particular event, particularly weddings.
Trying to find room to store many different options for decorations and furnishings is challenging at best. China and crystal is highly breakable and expensive to replace.
Because of this, it’s essential to build strong relationships with these types of businesses and distributors.
Speak to a function centre commercial loan expert
Discover if you qualify for a function centre commercial loan by calling 1300 889 743 or by completing our free assessment form to discuss your situation with a mortgage broker today.