What Are Commercial Property Loans And How Do They Work?

In 2023, Coles Group announced the opening of multiple new retail locations across Australia, many of which were established on leased commercial properties financed through structured lending. This expansionary move was a strategic investment using property finance to support business growth.

What Are Commercial Property Loans And How Do They Work

While Coles operates on a larger scale, commercial property loans power similar decisions for thousands of small-to-medium businesses and investors across Australia every day.

So, what exactly are commercial property loans, and how do they work in practice?

What Is A Commercial Property Loan?

A commercial property loan is a finance vehicle that is used to purchase real estate intended for business purposes. Unlike a residential loan, which funds a home purchase, a commercial property loan supports the acquisition of income-producing operational assets such as office blocks, industrial facilities, warehouses, or retail spaces.

These loans typically involve larger amounts than residential mortgages and are assessed differently.

In the commercial property finance space, lenders consider the borrower’s creditworthiness along with other factors such as the income potential of the property, the strength of the lease agreement if it's leased, and the overall business strategy.

In contrast to residential lending, which is primarily influenced by credit scores and personal income levels, commercial lending adopts a more intricate, risk-based approach.

Also, the loan-to-value ratios (LVRs) are often lower. While home loans can offer up to 95% LVR, commercial loans might cap at around 75% to 80%.

It’s also worth noting that interest rates for commercial property loans may be slightly higher, while the terms are usually shorter, typically ranging from around 3 to 15 years. Many also have a balloon payment or refinancing requirement attached to the end of the term.

What Kinds of Commercial Properties Can Be Financed?

Commercial property loans can be used for a wide range of real estate types. These typically include:

  • Offices, such as CBD high-rise buildings or suburban business parks.
  • Retail spaces, such as shopping centres, standalone storefronts, or strip malls.
  • Warehouses and industrial sites, such as storage, logistics, and manufacturing facilities.
  • Mixed-use buildings, such as properties that include both commercial and residential elements.
  • Specialist properties, such as churches, medical centres, childcare facilities, and hospitality venues like motels or pubs.

Moreover, lenders will typically categorise commercial properties as either “standard” or “non-standard.”

Standard properties are generally easier to finance and are lower risk, whereas non-standard properties, such as function venues or aged care homes, might involve more scrutiny or attract higher interest rates.

Why These Loans Matter to Investors And Businesses

Since businesses rarely have enough cash on hand to buy a new property outright, commercial property loans are essential tools for building wealth or expanding operations.

For investors, this type of financing offers access to real estate with long-term income potential through leases. This is often more stable and lucrative than residential tenancies because many commercial leases extend for 3 to 10 years with built-in rent reviews, while most residential leases need to be renewed annually.

If you’re a business owner, owning your commercial property can mean having more control over your operating space, future cost certainty, and long-term capital appreciation. With the right loan structure, you can invest in a property that suits your operations and facilitate growth down the line.

Commercial loans also give you more flexibility in how the financing can be structured. Options include interest-only repayments, fixed or variable interest rates, and the ability to use equity from another property.

What to Expect From Commercial Property Loan Terms And Conditions

Commercial property loans usually come with more tailored terms than standard home loans.

A typical structure may include things like:

  • Loan amounts from $250,000 upward, depending on the property value.
  • Terms that typically range between 3 and 15 years
  • Interest rates that may be fixed or variable and are usually higher than residential rates.
  • Repayment types such as interest-only, principal and interest, or balloon payment structures.
  • Security requirements that include the commercial property itself and sometimes additional assets.

Lenders in the commercial property space will usually require a clear business plan, lease agreement, recent financials, and, in some cases, personal guarantees.

It’s also important to note that the approval process can take longer and involve more due diligence than a typical home loan, owing to the higher degree of risk.

Are you looking to secure a commercial property loan for your next business venture or investment? Contact Mortgage Providers today to get expert help finding the right structure for your needs.