What will banks look for in your application?
With sharper interest rates and more flexible loan terms being offered on commercial office loans, there’s never been a better time to invest.
Sophisticated commercial investors see offices as a safer opportunity compared to the retail and industrial sector thanks to longer lease terms.
For business owners looking to expand, buying a unit often makes more sense financially than continuing to rent, especially if you’re not planning on moving any time soon.
How much can I borrow?
Since offices are considered by banks to be non-specialised or standard commercial properties, you’re in a strong position to borrow the amount you need.
As a general rule:
- Borrow up to 70% of the property value (freehold).
- Borrow up to 100% with the help of a guarantor.
- Loans over $5,000,000 are assessed on a case by case basis.
- Maximum loan term: 20 years.
- Maximum interest only term: 5 years.
- The bank will generally require a business plan and profit forecasting of either your tenants or the business you’re running.
- Low doc available: Borrow up to 80% in strong cases.
- No doc available: Borrowing typically capped at 65%.
- Interest rate discounts vary depending on the lender and your financial situation.
If the office is a converted residential property such as a terrace and can easily be converted back for residential use, you may qualify for a residential home loan.
What that means for you is lower interest rates and longer loan terms (up to 30 years!).
Our specialist mortgage brokers can tell you how much you can borrow!
Call 1300 889 743 or fill in our free assessment form today!
How can a specialist mortgage broker help?
Our mortgage brokers can properly assess your situation and needs so you can borrow at the maximum Loan to Value Ratio (LVR) for your office.
That’s because we have strong relationships with the commercial arms of almost 40 lenders including the major four banks.
Our brokers are in a position to get you a great commercial interest rate!
With a commercial office loan, borrowers deemed risky will typically be charged a higher interest rate.
Put simply, the higher the LVR, the higher the rate you will be charged. As a general rule, interest rates on commercial loans tend to be 1-2% higher than home loans.
What makes Home Loan Experts different is that we’re office mortgage specialists. We can build a strong case and find out which lenders will approve your loan so you can pick the commercial finance that’s right for you.
On top of that, we can often negotiate a competitive interest rate and flexible loan terms on your behalf!
Call us on 1300 889 743 or fill in our free assessment form to get an indicative funding proposal for your office property.
What security can I use for the loan?
As a general rule with most major banks, you can use either a residential or a suitable commercial property as security.
Securing a commercial property on your home has important cost advantages, including a lower interest rate, fewer fees and the ability to borrow up to 100% of the property value.
Because you are using an asset you already own as security, you may be able to finance your deposit via equity, rather than cash.
You can also use the following to secure a commercial office loan:
- General Security Agreement (GSA) over all of the investor’s/owner’s rights and undertakings in respect of all security property.
- Directors’/shareholders’ guarantee.
What do the banks assess?
The features you’re looking for in an office are not necessarily what the lender is looking for in a suitable security.
However, when the valuer does check the property, location is a key factor in working out whether the property will appeal to wide market should the property need to be sold in the event of default.
Offices close to or nearby CBD locations have a higher chance of being approved because they tend to be close to transport links and other infrastructure like adequate parking.
These attributes are highly sought after by investors and business owners alike.
Unlike petrol stations, mechanical workshops and other types of specialised property, offices are considered standard security so they tend to be more readily accepted.
In saying that, lenders will be considering your application with a resume type approach if you’re planning on running your business from the premises.
They basically want to see that your business can stay afloat by checking the financials of the business you’ve been running up until this point.
The will usually be in the form of Business Activity Statements (BAS), an Australian Taxation Office (ATO) tax portal printout or bank account transactions for the last three to six months showing your company’s profit and loss.
You’ll also need to provide a business plan detailing cash flow forecasts, market competition and your business model. Luckily though, we know lenders that won’t undertake a yearly review of your business in addition to you providing a business plan.
What if I’m just investing?
If you’re simply buying an office and renting it out, then experience isn’t as necessary although you’ll need to show that you have a strong tenant and that you’re in a strong financial position to deal with any changes in the market.
The bank will also want to see that you have a strong tenant who is planning on staying in the one location for a while.
High vacancy rates can turn lenders off approving your mortgage and it’s something affects properties in the office space.
In today’s online world, direct competition from a physical location perspective isn’t as much of a concern as it once was when buying an office.
In saying that, offering a unique service in a low competition environment is still important.
For example, opening up your own real estate agent up the road from an established franchise such as L.J. Hooker would be a red flag for most lenders to steer clear of your application.
We know what the banks are looking for!
Complete our online enquiry form, tell us about your plans and we’ll see if we can get you approved for an office mortgage.
Building a strong business case is the key to approval
A lender will assess every case on its merits so our job as a broker is to present a good case and mitigate any weaknesses with the strengths of your application.
In relation to running a business from the office as your sole source of income, the bank will usually undertake what is known as a SWOT analysis, an acronym for Strengths, Weakness, Opportunities and Threats.
Although it works differently from lender to lender, a SWOT analysis for your office business may look something like this:
Strengths: You’ve had several years of experience running your business and have a solid plan with forecasting on why your expansion plans make sense.
Weaknesses: You have no experience in managing and marketing a business and you don’t have another source of income should the business fail.
Opportunities: You’re buying an office in a prime location that’s close to your desired clientele and/or business suppliers.
Threats: This refers to factors that are largely out of your control, such as advances in technology that make your business offering or service obsolete.
Call 1300 889 743 or complete our free assessment form and one of our commercial mortgage brokers can help you build a strong case with the right lender.
What are the benefits of investing in an office?
One of the main benefits of investing in an office unit is that you tend to have the security of long-term leases.
Most office tenants remain for upwards of 5 and even 10 years. Of course, it comes down to choosing the right lessee and verifying that they can stay viable for the foreseeable future.
A commercial accountant can assist you when it comes to choosing a reliable lessee. Beware of existing or new tenants that are reluctant to provide you with their turnover.
The bank will also want to see that you have reliable tenants in place before approving your loan if you’re relying on rental income to pay the mortgage.
The other great thing about office, retail and industrial sectors is that they tend to enjoy higher yields than residential particularly in times of investor nerves and tightening rental markets. In fact, yields in the office space can be upwards of 10% in some cases!
For an excellent source of articles, tools and tips on being a successful commercial landlord, check out realcommercial.com.au.
Can I buy a freehold office building?
Yes, we can help you buy a freehold office building but you’ll generally need to be in a strong financial position.
It is possible to find office real estate in prime locations but it’s rare and most of them tend to be smaller and old enough that they require regular maintenance work.
Some may even need to be redeveloped altogether and you’ll have to meet strict zoning requirements when undertaking such renovation work.
There are also requirements that the builder have experience in this type of construction. It can all get quite complicated!
Most importantly, the property will need to accepted as security for the loan.
If you’re running your business from the location as your sole source of income, you’ll need to be in a strong financial position and have several years experience running a successful venture.
For investors wanting to buy a whole building as a freehold, the property will need to have a strong, long term tenant.
Bear mind, as the owner of the property, you’ll be liable for maintenance on the property so you should factor this when buying a freehold office building.
What most commercial investors buy
Larger office buildings in prime locations are constructed and owned by large property real estate investment companies and property managers like:
- Knight Frank.
- Jones Lang LaSalle.
- Lend Lease.
The property manager acts as the landlord and leases suites or even entire floors of the office to commercial investors. As the investor, you then sublease to tenants/business owners and collect rent as normal.
So although you’re collecting rent, you’re also paying a strata levy to the property for the services they provide for the building.
Depending on the nature of the office building (serviced offices are more expensive) and lease arrangement, this can range from anything from:
- Maintenance and repairs to the building.
- 24 hour security.
- Lobby concierge service.
- The upkeep of alarm and camera systems.
- Professional cleaners.
- Lifts and escalators (anything mechanical increases the cost of strata).
- The use of the address for mail sorting purposes.
- Rent for the use of the office parking lot.
You should factor all of these costs are factored in when deciding on the rent you charge tenants.
Rental rates for offices and retail are typically based on floor per area (per m2) per year or month. A commercial accountant can help you with this.
Should I buy or keep renting?
If you’re looking to expand your business, buying an office unit often makes more sense financially than continuing to rent out space.
It makes even more sense if you’re buying in a low interest rate environment and you’re intending on staying in the one location for a while. You’ll also benefit over the long term when inflation is on the rise.
Keep this in mind as well. It’s common for office rent to increase every 18 months in line with the Consumer Price Index (CPI).
On the other hand, commercial office finance allows you to fix your loan for up to 5 years so you can factor in this regular cost into the running of your business. Best of all, you’re working towards paying off the commercial office loan and owning an income-producing asset outright.
Yes, buying is a larger upfront cost but it’s worth calculating how much you outlay each year in rent before you decide to continue renting for yet another year.
Since office rent is based on floor area, choosing the right space to buy requires you to find the sweet spot that will accommodate your business today and in the future.
The office shouldn’t be too large that it leaves you paying for space that you don’t need but not too small that you’ll have to outlay funds again in a couple of years to move to a larger space.
What should I look for in an office?
One of the first things you should do is seek advice from an experienced commercial real estate buyer to find out what the vacancy rates are for the area and the office building.
Be weary of property buyers and office owners that are reluctant to provide vacancy rate details and average rental returns.
Ask yourself: would the office appeal to a wide market of tenants/business owners in need of office space?
- External and internal appearance: In most cases, the office should be modern and to a reasonable standard. This is particularly true of the entrance, which can immediately draw in or put off potential tenants. The office may be well-priced but if you struggle to attract tenants looking for an aesthetically pleasing office environment, it’s probably not worth your time or money.
- Natural light: Workers in your average office building will spend most of their working day indoors. Views and natural light streaming into their space are in high demand.
- Location: Again, close access to public transport including train and bus lines, taxi ranks and free car parks are highly sought after. On top of that, consider offices in close proximity to other offices. Lawyers’ chambers and banks tend to do business with each other!
- Beware of vacant tenancies: Is it going to be difficult to find a tenant? Again, don’t commit to a purchase until you find out the vacancy rates.
What are the risks of buying an office?
Although office leases tend to be longer term than other commercial properties, vacancy rates can be quite high depending on the location and a slowing economy.
In such an environment, business confidence is down so it can not only be difficult to find tenants but it can be difficult for businesses to stay afloat.
Banks are aware of this as well as the fact that offices can sometimes take six months to sell in a high interest rate environment.
Can I buy an office in a trust or an SMSF?
Yes, you can buy an office as a partnership, your company name, a discretionary trust, hybrid trust or even a self managed superannuation fund (SMSF).
In fact, buying an office is a very common commercial investment choice as part of a robust retirement plan.
Unlike residential property, an SMSF can buy business real property from fund members, and fund members (or relatives of fund members) can use that asset if they choose to do so.
Any lease in place must be at market rent and in line with the terms and conditions of a typical commercial lease.
Business real property can also be transferred as a non-cash contribution.
Contributions caps, capital gains tax (CGT), stamp duty and other taxes and fees may apply so it’s essential you speak to qualified account before buying an office for your SMSF or trust.
We’re specialists in getting commercial office loans approved for SMSFs and trusts.
Complete our free assessment form and find out how we can help you today!
Does zoning matter?
Office premises are typically zoned as either commercial or mixed use.
As a general rule:
- Commercial 1 Zone: Combines Business 1 Zone, Business 2 Zone and Business 5 Zone.
Offices in this zone are categorised as mixed use commercial centres for retail, office and other business purposes as well as for residential use. For example, the office could have a shop front on the ground floor and office and residential units on the floors above.
- Commercial 2 Zone: Allows for the development of commercial areas for offices and appropriate manufacturing and industrial and limited retail uses that do not affect the safety and amenity of adjacent, more sensitive uses. Typically requires a 30 metre buffer from industry and warehouse uses and accommodation is prohibited, except for caretaker’s house, motel and residential hotel.
Checking the zoning is crucial.
Firstly, some lenders will only accept certain types of zoning for an office. Lending policy changes regularly as well as depending on their appetite for the office space market.
For example, it can difficult for the bank to sell Commercial 2 Zone office building in a down market.
On that note, it’s often easier to get approved for an office that’s been zoned mixed residential and commercial because there is a wider market of tenants and buyers out there should you be forced to sell your business and/or the premises.
If the office can be used or easily converted back to a residential space, we may be able to get you approved with a residential loan! Of course, it depends on the nature and overall value of the property.
Zoning is also important when inspecting the property.
Have there been renovations and upgrades made to the office you’re buying? Are these upgrades to council building codes and is the building itself adhering to zoning rules?
It can really easy for you to be declined for commercial office finance when the bank completes its valuation of the property.
Zoning changes regularly, and varies from state to state, so it’s essential you speak to your buyers agent or, better yet, the local council for accurate zoning information.
Can I get a loan for an office development?
Funding the development of a brand new office block is not something that we can assist with directly.
However, we do have strong relationships with a number of major lenders and banks and can put you in touch with key decision makers that can properly assess your situation and commercial office plans.
Typically, in developing an entire commercial building, the funding would be sourced from multiple lenders, including those in the private space.
Basically, each funder would take on a share of the loan. With a strong case, it may be possible but this is really only for sophisticated investors.
Get the experts on your side!
Speak with an expert in commercial office loans. We understand commercial finance and can find you a lender that’s right for your commercial investment needs.
Call 1300 889 743 or complete our free assessment form today.