MPA takes an in-depth look at how to find and market to commercial property clients.
For those who may be considering delving into the realms of commercial property lending, this guide will give you an insight into how it differs from residential lending, and how to find and market to commercial property clients. It also provides expert commentary from some of the leading lenders in the commercial space.
Commercial property finance may be sought after by those looking to develop commercial property or those buying existing commercial property. It is a natural fit for most brokers, and a natural gateway to the commercial space.
There are many benefits of going into commercial property finance, and the complex scenarios always keep it challenging, but it’s important to know whether the commercial track is the right one to take for you and your brokerage.
This article is intended for brokers who may be looking at diversifying into the commercial space but would like to find out more about the different types of clients and scenarios it would involve and how different lenders can help.
If you are also thinking of looking at debtor, equipment and asset finance or providing lending solutions to self-employed clients, features on each of these areas can be found in this supplement.
Finding commercial property clients
In turning your sights to commercial clients, one of the first things that probably popped into mind was where do you find them? The good news is: borrowers for commercial property can be found across a broad spectrum of industries.
“The need for commercial premises genuinely does spring from all types of business right across the universe of manufacturing and services,” points out Thinktank Commercial Finance head of sales and distribution Peter Vala. “But in the market up to $5m in loan size, we see strong and consistent demand from clients such as those in auto-related services, building and construction, education, engineering, finance, food, health, IT, legal, printing, professional services, retail, sport and leisure, transport and wholesaling, among most others you can think of.”
Self-employed clients or those operating small to medium-sized businesses are likely to be either current or potential users of commercial property finance, Vala explains. “But it is not all confined to owner-occupiers – almost half our loan book is to investors, with a sizeable proportion of those being PAYG income earners strategically building out property portfolios.”
Cory Bannister, vice president and chief lending officer at La Trobe Financial, also notes it’s not just owner-occupiers who are interested in commercial properties. “We are seeing a significant increase in the number of investors looking to purchase commercial property, attracted to the superior yields on offer to other asset classes.
“As for the owner-occupiers, we are seeing an increase in retailers, but not for the purchase of retail property, but instead light industrial warehouses used for storing stock that is now often sold online – these are online retailers which we expect will change the commercial landscape slightly over time.”
Private local syndicators backed by high net worth individuals and property consultants are also part of the commercial client spectrum, Westpac national head of commercial introducers Janelle Pearce explains.
“Westpac invests in the capabilities of our specialist bankers who are dedicated to their chosen industry, whether in property, agriculture, healthcare, working capital cash flow or education. Our bankers are well supported with either sector or industry policies across a number of related business types.”
But when targeting commercial property clients, the stage a business is at in its life cycle is as important as the industry they are from, says ING Direct national partnership manager for commercial John Kolyvas.
CASE STUDY: REFINANCING SIX DIFFERENT PROPERTIES
Thinktank recently completed a refinance for a business group, involving six commercial properties across multiple locations in Southeast Queensland. The applicants had been clients of a major bank for a number of years, with a combination of commercial term loans, an overdraft and an invoice discounting facility.
A family-owned business in the trades, their broker presented them with an option to refinance into more flexible longer-term arrangements without the hassle of time-consuming annual reviews and costly property revaluations every two to three years, which had been giving rise to constant frustration. The broker worked with Thinktank senior relationship manager Adam Hutcheson to restructure the client’s business debt, reduce their monthly payments and provide extra drawing capacity for come-and-go working capital needs.
They now have set-and-forget finance in place without any of those annual reviews or property revaluations, yet with all the flexibility they need to quickly and easily sell, renovate, change tenants or acquire more properties within their portfolio.
CASE STUDY: PURCHASING COMMERCIAL PROPERTY VIA SMSF
Self-employed clients of La Trobe Financial had been operating their business for eight years and had recently signed a contract of sale to purchase the business premises for $1,200,000 via their SMSF.
The applicants were looking to raise 70% LVR via a commercial SMSF loan but encountered two challenges following lodgement of the application with a major bank:
1 One of the applicants had three ‘paid’ trade-related defaults totalling $48,000 on their credit report.
2 The SMSF would only have net assets of $250,000 following completion of the purchase – $50,000 below the minimum threshold imposed by the bank.
Due to the defaults and the SMSF’s net asset position falling below the bank’s minimum threshold, the application was declined after four weeks in the system.
To solve the first challenge, a La Trobe credit analyst spoke to the introducing broker about the trade-related defaults and found that the defaults had been incurred five years previously due to a major client failing to pay them for a six-month period. All defaults had been subsequently paid and each of the creditors still dealt with the client. This was treated as one ‘credit event’, which is acceptable under La Trobe’s commercial SMSF product.
The second challenge related to net asset threshold wasn’t a challenge for La Trobe as it did not have a minimum net asset threshold on any of its SMSF loan products.
The transaction was completed for the applicants at 70% LVR as requested.
“There is a huge opportunity in the sub-$1.5m commercial property loan market, and this cuts right across segments. For example, independent professionals – those who are selling their own professional services – regardless of industry, are highly likely to engage a broker as a specialist who can bring their expertise to the table and guide them through what can be a complex process.”
But once you know where to look to find commercial clients, how do you get them to choose you as a broker?
“A great place to start for brokers is to review their existing network for self-employed clients who are trading from leased or owner-occupied premises,” suggests Thinktank’s Vala. “By offering to conduct a financial health check of their client’s personal and business circumstances, you can show clients how it is possible to reshape their commitments to create capacity to acquire or trade up their own commercial property, consolidate liabilities to reduce monthly commitments or move to a much better set of loan arrangements, perhaps without annual reviews and recurring fees and costs. Schedule regular catch-ups with these clients and ask for introductions to their accountant, financial planner and colleagues in the same industry to widen your referral network.”
Kolyvas of ING Direct recommends making use of your already-established relationships with existing clients. “Make sure to be alert to their broader borrowing needs, and let them know that you have capabilities to support them beyond residential.”
Liberty Financial national sales manager John Mohnacheff says it makes sense for brokers to have strong relationships with commercial real estate agents, property managers and valuers. “However, the key for any broker is finding a way to stand out and offer points of difference. Brokers who are able to facilitate not only traditional commercial loans but also self-servicing lease loans, commercial SMSF loans, and asset lends that don’t require traditional income verification are the most attractive to these business partners.”
Partnering with accounting or financial planning businesses can also be a great source of referrals for commercial business, says La Trobe’s Bannister.
“They have a great understanding of the client’s position and strategy and can be a good fit for brokers new to this space. By partnering with other professional services such as real estate agents, brokers can target local small businesses by running seminars which may include topics such as purchasing your business premises through your SMSF, consolidating business debt through refinancing, managing ATO obligations and business expansion strategies.”
Arch Finance is a non-bank commercial property lender catering to all mainstream industry groups, with the exception of highly specialised security property. CEO Russell Brennan says brokers should make sure to create as much face-to-face activity as possible, not just marketing via emails or phone calls. “Set realistic expectations and be clear with your client what is deliverable from the outset,” he advises.
The loan process
When it comes to the loan process, the many varying aspects of commercial loans can create complex, lengthy scenarios. What documents are needed and how can you ensure the client experiences a smooth jour-ney from application to approval in the shortest timeframe?
“Brokers must ensure that they provide sufficient information about their client to make an informed credit assessment,” says Westpac’s Pearce. “Specifically this includes valuation reports, quantity surveyor reports and development feasibility.”
Vala adds: “Understanding the property, the LVR required, the ICR [interest cover ratio] on a stand-alone and group basis, and having a good knowledge of the customer’s background will definitely help pave the way towards a faster and smoother-running transaction.” The required documentation is usually dependent on the type of loan product that is best suited to the client’s circumstances.
Arch says that in its loan approval process, after acceptance of the indicative loan terms a more comprehensive loan analysis is undertaken, in conjunction with a lender-instructed valuation. The typical documentation requested for a straight-forward investment or owner-occupied commercial property loan includes details of the proposed borrowing company, such as shareholding structure, ACN, directors’ names; borrowers or guarantors’ financial statements; latest tax returns and/or BAS (lenders prefer at least two years’ history) – but lenders can sometimes consider less if there is strong rental or business income and also asset and liability statements of borrowers, directors or shareholders.
Also, you should get details of the existing lenders and the mortgage, and information about the security property/properties, such as copies of any existing valuations and copies of the council rates notices.
If a new property is being purchased, then provide a copy of the contact for sale or option agreement, rental details and a copy of the existing lease(s). If requesting the refinancing of an existing loan, then provide a copy of the last six months’ loan statements or a letter from the lender confirming the loan payout figure.
When it comes to saving time and speeding up the application process, Mohnacheff of Liberty says remember to understand the client and their goals thoroughly. “By taking the time to understand what the client wants and how Liberty can tailor a solution, brokers can massively reduce the application time.
“Also, packaging a loan with all the necessary attachments and documentation will ensure very speedy turnaround times. Most application delays occur because they’re sent without the necessary documentation.”
As a rule of thumb, the more information you have for a commercial application the better, says Kolyvas of ING Direct. “Commercial applicants usually have more complex structures, so be prepared to ask for more information than you would ask for a home loan. ING Direct has a discussion paper process which lets you lodge a scenario without lodging a formal application.”
Apart from the most common documentation needed, such as commercial leases and tax returns, Kolyvas reminds brokers that if the applicant has a complex structure and a number of entities, financials may be required for all of them.
“If you’re not sure how much information you should ask for, talk to your BDM before lodging. ING Direct has expanded their commercial offering to now include a dedicated commercial coaching team which helps brokers structure their applications.”
CASE STUDY: REFINANCING OUT OF A BANK-APPOINTED RECEIVERSHIP
A client of Arch Finance owned a mixed-use retail and residential property that included a council-approved boarding house in one of Sydney’s most popular inner-city suburbs.
Following one of the retail tenants falling behind in the rent, the client was faced with a short-term cash flow deficit, and despite the client voluntarily selling a Sydney CBD residential property asset to reduce debt and inject liquidity, the bank hastily appointed a receiver.
Due to accruing receiver costs and a breakdown in the banking relationship the client sought the help of Arch Finance to refinance the bank debt and assist in retiring the receiver.
Arch provided a refinance and cash-out solution which assisted the broker and borrower in negotiating with the receiver and bank for a payout involving some debt forgiveness by the bank.
Arch was able to look past the receivership and the past banking relationship situation. It focused at the circumstances of how the receivership occurred and provided a solution to the borrower by recognising a desirable property with a strong existing and ongoing future rental profile. It put forward a committed refinancing offer, then worked closely with the receiver and bank lender to get a refinance completed to stave off any potential forced property sale.
Arch worked quickly to provide a $3m senior debt first mortgage solution on attractive terms and a 65% lender valuation with a valuer who could also see the potential of the property. This resulted in the borrower retaining the property asset and avoiding a forced sale which might have resulted in a potential $1m–$2m loss in equity value.
Commercial vs residential lending
Lending for commercial property is quite a different ball game to the residential space in terms of complexity and timeframe, but it is not materially different from other forms of property lending, says Brennan of Arch Finance. “However, each loan can be tricky for inexperienced brokers who do not have a sound knowledge of the key drivers of commercial property. A good understanding of valuation principles, property rental profile analysis, potential environmental risks or zoning/use restrictions is important.”
Brennan adds that approval and loan settlement timeframes for commercial deals can have longer timelines due to valuation completion taking up to 10 working days.
The variation in the types of transactions being assessed for commercial loans, such as through customer history, business type, risk profi le and fi nancial analysis, is what brings the complexity to commercial lending, says Westpac’s Pearce. “Westpac has market-leading financial analysis, which gives our specialist bankers the ability to benchmark a customer’s financial performance comparatively against their local and global peers. This provides customers with invaluable and up-to-the-minute information about their business.”
Essentially, while commercial property finance transactions still incorporate many of the same fundamentals as residential finance, differences do commonly arise in a few notable ways. There is a lot of initial focus on the nature of the underlying security property and whether it will be suitable to a lender, and this tends to vary between lenders, including the banks.
Property values and the associated loans can be a lot larger in both average and maximum sizes, so close attention is paid to the supporting serviceability and the tenancy profile on investment properties. Commercial valuation reports are considerably more detailed, typically taking 10–15 working days to produce, and are more expensive than residential valuation reports.
Finally, it is the norm for the customer to pay an establishment fee, the valuation fee and legal fees prior to settlement, which can sometimes be a surprise to brokers and borrowers new to commercial.
The potential complexities of commercial loans can and do impact on the certainty of the scenario answer, notes Mohnacheff, and so Liberty encourages brokers to get the full application in with all the information as soon as possible. “For example, securities are more differentiated in the commercial lending space, and Liberty considers a wide variety of property types for these loans. It can be difficult to come up with a reliable valuation at scenario stage for office blocks, petrol stations, factories or even childcare centres, for example. But once we have the application we can get the valuation organised and keep things moving.”
Bannister says that for brokers starting out in commercial lending, La Trobe’s products have been designed to look and feel like standard residential transactions with similar response times. “We keep the process very simple, in that if a broker can write a residential loan with us then they can write our commercial loans also; and our credit analysts and sales staff are keen to help brokers unfamiliar with commercial, adopting an educative approach, so there is not a lot brokers need to know in order to write a commercial transaction with us.
“Where we see that issues can occur is when brokers attempt very large, complex transactions, such as development finance, before they have gained the necessary experience to deal with such transactions. We suggest brokers new to commercial lending start slowly, with non-complex transactions, and build up to the larger ones over time.”
Kolyvas of ING Direct says that where residential lending has a more ‘one size fits all’ approach, commercial lending is a much more involved process. “Lenders will expect a discussion about the application and the business, highlighting both strengths and weaknesses. One of the biggest challenges for residential brokers is in understanding the ownership structure of the business and how that affects the security. Lenders also have more of a say in the loan term and structure based on the risks associated with the transaction.”
Next steps
First, look for the clients in your residential database who run businesses, particularly where they own or are looking to acquire commercial property. Meanwhile, build up links with commercial referral partners and remind existing referral partners that you now offer commercial finance. Then talk to a bank and potentially also your aggregator BDM before lodging the deal, to make sure you have all the required documentation in place.
To find out more about targeting self-employed clients, or the additional asset finance and debtor finance you can offer to your new commercial property finance customers, read the rest of this supplement.
Commercial property finance may be sought after by those looking to develop commercial property or those buying existing commercial property. It is a natural fit for most brokers, and a natural gateway to the commercial space.
There are many benefits of going into commercial property finance, and the complex scenarios always keep it challenging, but it’s important to know whether the commercial track is the right one to take for you and your brokerage.
This article is intended for brokers who may be looking at diversifying into the commercial space but would like to find out more about the different types of clients and scenarios it would involve and how different lenders can help.
If you are also thinking of looking at debtor, equipment and asset finance or providing lending solutions to self-employed clients, features on each of these areas can be found in this supplement.
Finding commercial property clients
In turning your sights to commercial clients, one of the first things that probably popped into mind was where do you find them? The good news is: borrowers for commercial property can be found across a broad spectrum of industries.
“The need for commercial premises genuinely does spring from all types of business right across the universe of manufacturing and services,” points out Thinktank Commercial Finance head of sales and distribution Peter Vala. “But in the market up to $5m in loan size, we see strong and consistent demand from clients such as those in auto-related services, building and construction, education, engineering, finance, food, health, IT, legal, printing, professional services, retail, sport and leisure, transport and wholesaling, among most others you can think of.”
Self-employed clients or those operating small to medium-sized businesses are likely to be either current or potential users of commercial property finance, Vala explains. “But it is not all confined to owner-occupiers – almost half our loan book is to investors, with a sizeable proportion of those being PAYG income earners strategically building out property portfolios.”
Cory Bannister, vice president and chief lending officer at La Trobe Financial, also notes it’s not just owner-occupiers who are interested in commercial properties. “We are seeing a significant increase in the number of investors looking to purchase commercial property, attracted to the superior yields on offer to other asset classes.
“As for the owner-occupiers, we are seeing an increase in retailers, but not for the purchase of retail property, but instead light industrial warehouses used for storing stock that is now often sold online – these are online retailers which we expect will change the commercial landscape slightly over time.”
Private local syndicators backed by high net worth individuals and property consultants are also part of the commercial client spectrum, Westpac national head of commercial introducers Janelle Pearce explains.
“Westpac invests in the capabilities of our specialist bankers who are dedicated to their chosen industry, whether in property, agriculture, healthcare, working capital cash flow or education. Our bankers are well supported with either sector or industry policies across a number of related business types.”
But when targeting commercial property clients, the stage a business is at in its life cycle is as important as the industry they are from, says ING Direct national partnership manager for commercial John Kolyvas.
CASE STUDY: REFINANCING SIX DIFFERENT PROPERTIESThinktank recently completed a refinance for a business group, involving six commercial properties across multiple locations in Southeast Queensland. The applicants had been clients of a major bank for a number of years, with a combination of commercial term loans, an overdraft and an invoice discounting facility.
A family-owned business in the trades, their broker presented them with an option to refinance into more flexible longer-term arrangements without the hassle of time-consuming annual reviews and costly property revaluations every two to three years, which had been giving rise to constant frustration. The broker worked with Thinktank senior relationship manager Adam Hutcheson to restructure the client’s business debt, reduce their monthly payments and provide extra drawing capacity for come-and-go working capital needs.
They now have set-and-forget finance in place without any of those annual reviews or property revaluations, yet with all the flexibility they need to quickly and easily sell, renovate, change tenants or acquire more properties within their portfolio.
CASE STUDY: PURCHASING COMMERCIAL PROPERTY VIA SMSFSelf-employed clients of La Trobe Financial had been operating their business for eight years and had recently signed a contract of sale to purchase the business premises for $1,200,000 via their SMSF.
The applicants were looking to raise 70% LVR via a commercial SMSF loan but encountered two challenges following lodgement of the application with a major bank:
1 One of the applicants had three ‘paid’ trade-related defaults totalling $48,000 on their credit report.
2 The SMSF would only have net assets of $250,000 following completion of the purchase – $50,000 below the minimum threshold imposed by the bank.
Due to the defaults and the SMSF’s net asset position falling below the bank’s minimum threshold, the application was declined after four weeks in the system.
To solve the first challenge, a La Trobe credit analyst spoke to the introducing broker about the trade-related defaults and found that the defaults had been incurred five years previously due to a major client failing to pay them for a six-month period. All defaults had been subsequently paid and each of the creditors still dealt with the client. This was treated as one ‘credit event’, which is acceptable under La Trobe’s commercial SMSF product.
The second challenge related to net asset threshold wasn’t a challenge for La Trobe as it did not have a minimum net asset threshold on any of its SMSF loan products.
The transaction was completed for the applicants at 70% LVR as requested.
“There is a huge opportunity in the sub-$1.5m commercial property loan market, and this cuts right across segments. For example, independent professionals – those who are selling their own professional services – regardless of industry, are highly likely to engage a broker as a specialist who can bring their expertise to the table and guide them through what can be a complex process.”
But once you know where to look to find commercial clients, how do you get them to choose you as a broker?
“A great place to start for brokers is to review their existing network for self-employed clients who are trading from leased or owner-occupied premises,” suggests Thinktank’s Vala. “By offering to conduct a financial health check of their client’s personal and business circumstances, you can show clients how it is possible to reshape their commitments to create capacity to acquire or trade up their own commercial property, consolidate liabilities to reduce monthly commitments or move to a much better set of loan arrangements, perhaps without annual reviews and recurring fees and costs. Schedule regular catch-ups with these clients and ask for introductions to their accountant, financial planner and colleagues in the same industry to widen your referral network.”
Kolyvas of ING Direct recommends making use of your already-established relationships with existing clients. “Make sure to be alert to their broader borrowing needs, and let them know that you have capabilities to support them beyond residential.”
Liberty Financial national sales manager John Mohnacheff says it makes sense for brokers to have strong relationships with commercial real estate agents, property managers and valuers. “However, the key for any broker is finding a way to stand out and offer points of difference. Brokers who are able to facilitate not only traditional commercial loans but also self-servicing lease loans, commercial SMSF loans, and asset lends that don’t require traditional income verification are the most attractive to these business partners.”
Partnering with accounting or financial planning businesses can also be a great source of referrals for commercial business, says La Trobe’s Bannister.
“They have a great understanding of the client’s position and strategy and can be a good fit for brokers new to this space. By partnering with other professional services such as real estate agents, brokers can target local small businesses by running seminars which may include topics such as purchasing your business premises through your SMSF, consolidating business debt through refinancing, managing ATO obligations and business expansion strategies.”
Arch Finance is a non-bank commercial property lender catering to all mainstream industry groups, with the exception of highly specialised security property. CEO Russell Brennan says brokers should make sure to create as much face-to-face activity as possible, not just marketing via emails or phone calls. “Set realistic expectations and be clear with your client what is deliverable from the outset,” he advises.
The loan process
When it comes to the loan process, the many varying aspects of commercial loans can create complex, lengthy scenarios. What documents are needed and how can you ensure the client experiences a smooth jour-ney from application to approval in the shortest timeframe?
“Brokers must ensure that they provide sufficient information about their client to make an informed credit assessment,” says Westpac’s Pearce. “Specifically this includes valuation reports, quantity surveyor reports and development feasibility.”
Vala adds: “Understanding the property, the LVR required, the ICR [interest cover ratio] on a stand-alone and group basis, and having a good knowledge of the customer’s background will definitely help pave the way towards a faster and smoother-running transaction.” The required documentation is usually dependent on the type of loan product that is best suited to the client’s circumstances.
Arch says that in its loan approval process, after acceptance of the indicative loan terms a more comprehensive loan analysis is undertaken, in conjunction with a lender-instructed valuation. The typical documentation requested for a straight-forward investment or owner-occupied commercial property loan includes details of the proposed borrowing company, such as shareholding structure, ACN, directors’ names; borrowers or guarantors’ financial statements; latest tax returns and/or BAS (lenders prefer at least two years’ history) – but lenders can sometimes consider less if there is strong rental or business income and also asset and liability statements of borrowers, directors or shareholders.
Also, you should get details of the existing lenders and the mortgage, and information about the security property/properties, such as copies of any existing valuations and copies of the council rates notices.
If a new property is being purchased, then provide a copy of the contact for sale or option agreement, rental details and a copy of the existing lease(s). If requesting the refinancing of an existing loan, then provide a copy of the last six months’ loan statements or a letter from the lender confirming the loan payout figure.
When it comes to saving time and speeding up the application process, Mohnacheff of Liberty says remember to understand the client and their goals thoroughly. “By taking the time to understand what the client wants and how Liberty can tailor a solution, brokers can massively reduce the application time.
“Also, packaging a loan with all the necessary attachments and documentation will ensure very speedy turnaround times. Most application delays occur because they’re sent without the necessary documentation.”
As a rule of thumb, the more information you have for a commercial application the better, says Kolyvas of ING Direct. “Commercial applicants usually have more complex structures, so be prepared to ask for more information than you would ask for a home loan. ING Direct has a discussion paper process which lets you lodge a scenario without lodging a formal application.”
Apart from the most common documentation needed, such as commercial leases and tax returns, Kolyvas reminds brokers that if the applicant has a complex structure and a number of entities, financials may be required for all of them.
“If you’re not sure how much information you should ask for, talk to your BDM before lodging. ING Direct has expanded their commercial offering to now include a dedicated commercial coaching team which helps brokers structure their applications.”
CASE STUDY: REFINANCING OUT OF A BANK-APPOINTED RECEIVERSHIP A client of Arch Finance owned a mixed-use retail and residential property that included a council-approved boarding house in one of Sydney’s most popular inner-city suburbs.
Following one of the retail tenants falling behind in the rent, the client was faced with a short-term cash flow deficit, and despite the client voluntarily selling a Sydney CBD residential property asset to reduce debt and inject liquidity, the bank hastily appointed a receiver.
Due to accruing receiver costs and a breakdown in the banking relationship the client sought the help of Arch Finance to refinance the bank debt and assist in retiring the receiver.
Arch provided a refinance and cash-out solution which assisted the broker and borrower in negotiating with the receiver and bank for a payout involving some debt forgiveness by the bank.
Arch was able to look past the receivership and the past banking relationship situation. It focused at the circumstances of how the receivership occurred and provided a solution to the borrower by recognising a desirable property with a strong existing and ongoing future rental profile. It put forward a committed refinancing offer, then worked closely with the receiver and bank lender to get a refinance completed to stave off any potential forced property sale.
Arch worked quickly to provide a $3m senior debt first mortgage solution on attractive terms and a 65% lender valuation with a valuer who could also see the potential of the property. This resulted in the borrower retaining the property asset and avoiding a forced sale which might have resulted in a potential $1m–$2m loss in equity value.
Commercial vs residential lendingLending for commercial property is quite a different ball game to the residential space in terms of complexity and timeframe, but it is not materially different from other forms of property lending, says Brennan of Arch Finance. “However, each loan can be tricky for inexperienced brokers who do not have a sound knowledge of the key drivers of commercial property. A good understanding of valuation principles, property rental profile analysis, potential environmental risks or zoning/use restrictions is important.”
Brennan adds that approval and loan settlement timeframes for commercial deals can have longer timelines due to valuation completion taking up to 10 working days.
The variation in the types of transactions being assessed for commercial loans, such as through customer history, business type, risk profi le and fi nancial analysis, is what brings the complexity to commercial lending, says Westpac’s Pearce. “Westpac has market-leading financial analysis, which gives our specialist bankers the ability to benchmark a customer’s financial performance comparatively against their local and global peers. This provides customers with invaluable and up-to-the-minute information about their business.”
Essentially, while commercial property finance transactions still incorporate many of the same fundamentals as residential finance, differences do commonly arise in a few notable ways. There is a lot of initial focus on the nature of the underlying security property and whether it will be suitable to a lender, and this tends to vary between lenders, including the banks.
Property values and the associated loans can be a lot larger in both average and maximum sizes, so close attention is paid to the supporting serviceability and the tenancy profile on investment properties. Commercial valuation reports are considerably more detailed, typically taking 10–15 working days to produce, and are more expensive than residential valuation reports.
Finally, it is the norm for the customer to pay an establishment fee, the valuation fee and legal fees prior to settlement, which can sometimes be a surprise to brokers and borrowers new to commercial.
The potential complexities of commercial loans can and do impact on the certainty of the scenario answer, notes Mohnacheff, and so Liberty encourages brokers to get the full application in with all the information as soon as possible. “For example, securities are more differentiated in the commercial lending space, and Liberty considers a wide variety of property types for these loans. It can be difficult to come up with a reliable valuation at scenario stage for office blocks, petrol stations, factories or even childcare centres, for example. But once we have the application we can get the valuation organised and keep things moving.”
Bannister says that for brokers starting out in commercial lending, La Trobe’s products have been designed to look and feel like standard residential transactions with similar response times. “We keep the process very simple, in that if a broker can write a residential loan with us then they can write our commercial loans also; and our credit analysts and sales staff are keen to help brokers unfamiliar with commercial, adopting an educative approach, so there is not a lot brokers need to know in order to write a commercial transaction with us.
“Where we see that issues can occur is when brokers attempt very large, complex transactions, such as development finance, before they have gained the necessary experience to deal with such transactions. We suggest brokers new to commercial lending start slowly, with non-complex transactions, and build up to the larger ones over time.”
Kolyvas of ING Direct says that where residential lending has a more ‘one size fits all’ approach, commercial lending is a much more involved process. “Lenders will expect a discussion about the application and the business, highlighting both strengths and weaknesses. One of the biggest challenges for residential brokers is in understanding the ownership structure of the business and how that affects the security. Lenders also have more of a say in the loan term and structure based on the risks associated with the transaction.”
Next steps
First, look for the clients in your residential database who run businesses, particularly where they own or are looking to acquire commercial property. Meanwhile, build up links with commercial referral partners and remind existing referral partners that you now offer commercial finance. Then talk to a bank and potentially also your aggregator BDM before lodging the deal, to make sure you have all the required documentation in place.
To find out more about targeting self-employed clients, or the additional asset finance and debtor finance you can offer to your new commercial property finance customers, read the rest of this supplement.
