Second mortgages on commercial property: what lenders look at

Why is commercial property assessed more conservatively?

Commercial property is valuable, but it’s less liquid than a home. The pool of buyers is smaller, sale campaigns run longer, and value depends heavily on factors that can change: the tenant, the lease, zoning and the local economy. A second lender sitting behind a first commercial loan is exposed to all of that, so it lends to a lower combined LVR, which is another way of asking for a thicker equity buffer.

That doesn’t make commercial property second-rate security. For owners whose equity is concentrated in their premises or an investment building, it’s often the natural choice.

Which commercial properties work best?

Property	Typical lender view
Industrial and warehouse units in established estates	Popular: steady demand and many comparable sales
Strata offices in metro and major regional centres	Generally acceptable; depends on vacancy in the area
Retail shops on busy strips	Depends on the strip’s health and the lease
Mixed-use (shop with residence)	Often straightforward; valued on both components
Purpose-built facilities (childcare, service stations, medical)	Specialised; more conservative
Vacant land and development sites	Case by case, usually lower LVR

How do leases change the value?

For leased commercial property, the valuer looks at the income as well as comparable sales. The main questions:

• Who’s the tenant? A national business on a long lease supports value; a new small tenant less so.
• How long is left? A lease with years to run is worth more than one expiring soon.
• Who pays outgoings? Net leases, where the tenant pays outgoings, make the income more reliable.
• Is the tenant related to you? If your own company leases the building, the lender knows the lease depends on your business, and may value the property closer to vacant possession.

Provide a full copy of every lease early. It’s one of the few documents that can lift a commercial valuation. More on this in second mortgage valuations.

How much can you borrow on commercial security?

The formula is the same as residential: combined LVR equals first loan plus second loan divided by value. The bands are lower. For planning only, our calculator treats up to 55% as comfortable, 55% to 65% as workable and 65% to 70% as a stretch for commercial property. Try your figures in the equity and LVR calculator with the property type set to commercial.

If commercial security alone doesn’t stretch far enough, adding a residential property can help. See second mortgages over two properties.

Have premises with equity? Send us the details and a specialist will tell you where it lands.

Who owns the building?

Commercial property is often held in a company, a family trust or a self-managed super fund. Companies and trusts can generally give security, with director or trustee signatures and guarantees; our page on trust or company property explains the paperwork. Property in an SMSF is a different matter: super law generally stops fund assets being used as security for a member’s business borrowing, so talk to your SMSF adviser before assuming it’s available.

How long does a commercial file take?

Full valuations are standard on commercial property, and they’re usually the longest step. Clean title, leases supplied upfront, clear access for the valuer and a straightforward ownership structure all shorten the process. Up to $5,000,000 is possible within 24 to 48 hours on strong security, but commercial files more often need a little longer, and it helps to plan for that.

Illustrative example: equity in the factory funds the next contract

An engineering firm owns its factory through a company. It’s valued at about $2,200,000 with $900,000 owing to the bank. The firm needs $400,000 for steel and labour on a mining services contract. A second mortgage takes combined LVR to about 59%, at the workable end for commercial property. The director guarantees the loan, the lease is to the operating company, and the exit is contract income plus a planned bank refinance. All figures are illustrative.

What if you plan to sell the building later?

Selling commercial property can be a strong exit, but factor in the sale timeline and tax. Capital gains tax may apply to a sale, and the rules differ between companies, trusts and individuals; the ATO’s CGT pages explain the basics and your accountant can estimate the effect. Our guide on selling versus borrowing against a property covers the decision in more detail.

Does GST or land tax affect a commercial second mortgage?

Borrowing against a building doesn’t trigger GST, but a lender will want to know that land tax, council rates and any strata levies are paid, because unpaid statutory charges can affect the title. Commercial owners with several properties can face significant land tax bills, and some owners use a second mortgage to clear exactly that kind of arrears. Bring your latest land tax and rates notices to the conversation so nothing on the title comes as a surprise.

What about strata commercial units?

Strata industrial and office units are among the easiest commercial properties to lend against, because there are many comparable sales in established estates. The lender will want the strata details: levies, any special levies raised, and whether there are building defects or major works planned that could affect value. A copy of the latest levy notice and recent committee minutes answers most of those questions quickly.

Equity locked in your premises? Let’s put it to work

A specialist can tell you quickly how a lender would likely view your building, its leases and its ownership structure. Enquiring takes about 60 seconds, and there’s no credit check when you first enquire.

We don’t hand your details to a line of lenders. One specialist reviews the property and the purpose and calls you back with realistic options. Please include the property type, the lease position and who owns the title; accurate details let us give you a number you can rely on.

Check my commercial property →