Lenders give loans against assets. As a borrower you are effectively asking the lender to give you money to buy the property (often referred to as the ‘security’ for the loan) and agreeing that if something happens so that you cannot pay the lender back, they can sell the property.
While some commercial assets are acceptable to all lenders, like a small retail property in a busy high street, some properties are only acceptable to specific lenders. This is because lenders like property that is lower risk, which means that it is easier to lease out and easier to sell if required. For this reason lenders like commercial properties that can be leased to a whole range of businesses because they have wide appeal so there will always be plenty of people wanting to lease them.
Properties that have a dedicated purpose only appeal to a specific group of businesses and so they may be more difficult to let or sell. Lenders see these properties as higher risk. They can include:
- child care centres,
- retirement villages,
- service stations,
- smash repairer (or anything that could cause land contamination),
- holiday resorts,
- serviced apartments,
- student accommodation,
- Bed & Breakfast accommodation,
- heritage listed properties
- vacant land and
- property development.
If the property is perceived as higher risk by a lender it can have a big impact on how much you can borrow against it. Some lenders simply won’t give you a loan against these properties. Other lenders will make an assessment of the risk on the type of property to determine how much they will lend. If they perceive the property to be higher risk then they will reduce the amount they will lend, and this means that you will need to inject more funds into the purchase than if it was a non-specialised property. For example, while they might normally lend 70% of the purchase price for a commercial property, if they consider the property to be high risk they may offer to lend only 50% of the purchase price. This means you need to find 50% of the purchase price from somewhere else, as well as the purchase costs. A specialised property can thus use up funds that you could put towards other investments, and is a reason why investors may choose to stick with low risk commercial properties.
For a higher risk property, the lender may also increase the interest rate above what they would charge for a non-specialised security. So a specialised property can use up more of your available funds for the purchase AND cost you more in interest payments each month.
If you are considering buying a specialised security, we can advise you on which lenders will lend against it, and who will lend the most. If you have talked to your bank about buying a particular commercial property and they declined the application, it could well be because they don’t have an appetite for that risk. There may be other lenders that will lend against it and it will take some ‘shopping around’ to find the best lender for your loan. This is something we can do for you and it can be well worth the effort, particularly if they will lend more against the property and/or at a lower interest rate.