Retail Property Finance Erina and Central Coast: 8 Tips for Buyers

Retail property finance can help you purchase a shop, café, showroom, consulting space or other commercial premises with a retail component.

Erina is one of the Central Coast’s major retail and commercial locations, with properties ranging from smaller strata-titled premises to larger-format retail and mixed commercial spaces surrounding Erina Fair and Terrigal Drive. Erina Fair itself is the Central Coast’s largest shopping centre, with more than 300 specialty stores.

However, obtaining finance for a retail property is different from arranging a residential home loan. The lender will want to understand the property, the proposed use, the borrower’s financial strength and—where the premises is leased—the reliability of its rental income.

Here are eight important considerations when financing retail property in Erina.

1. Decide whether the property will be owner-occupied or leased

The first question is whether you intend to operate your own business from the premises or hold it as an investment.

For an owner-occupied retail property, the lender will generally focus on the financial strength of your business. This may include:

• How long the business has operated
• Historical revenue and profitability
• Current business debts and commitments
• Cash flow after the proposed loan repayments
• Your experience in the industry
• The amount of cash or equity you are contributing

For an investment retail property, the lender will also closely examine the lease, rental income, tenant and future marketability of the premises.

The same retail unit can therefore produce a very different finance outcome depending on who will occupy it and how the loan will be repaid.

2. Understand what the lender is really assessing

It is misleading to say that retail property finance is assessed only on rental income.

Under a standard commercial property application, lenders may assess:

• The borrower’s income and financial position
• Business cash flow and existing commitments
• The property valuation
• The proposed loan-to-value ratio
• Rental income and lease terms
• The tenant’s financial strength
• The property’s location, condition and alternative uses
• The borrower’s deposit or equity contribution

Some lenders also offer lease-doc facilities that rely predominantly on rental income rather than the borrower’s personal or business income. However, these products generally have specific requirements involving the borrowing entity, lease, interest coverage, LVR and remaining lease term.

A lease-doc loan should not be assumed to be available simply because a property has a tenant.

3. Review the lease before making an offer

For an investment property, the lease can materially affect how much a lender is prepared to advance.

Important points include:

• Remaining lease term
• Options to renew
• Rent-review method
• Whether the lease is registered
• Rental arrears or concessions
• Who pays council rates, strata levies and other outgoings
• Permitted use of the premises
• Make-good and refurbishment obligations
• Whether the lease is between independent parties

A longer lease to an established tenant can provide greater income certainty. However, the tenant’s identity alone does not determine the outcome. Lenders also consider the rent being paid, whether it is sustainable, the condition of the premises and how easily the property could be re-leased.

For retail leases covered by the Retail Leases Act 1994 (NSW), disclosure documents contain important information about rent, lease options, fit-out responsibilities and outgoings. Buyers should have the lease and disclosure material reviewed by a commercial property solicitor.

4. Allow for a realistic deposit and LVR

The loan-to-value ratio, or LVR, compares the proposed loan with the lender’s valuation of the property.

For example, a $650,000 loan secured against a property valued at $1 million represents a 65% LVR.

Many retail property applications begin with an expected LVR somewhere around 60% to 70%. However, this is a general guide rather than an industry-wide rule.

The lender may offer a lower or higher LVR depending on:

• Whether the property is owner-occupied or leased
• The remaining lease term
• The strength and diversity of the tenancy
• Whether the premises has a specialised fit-out
• The property’s size, zoning and marketability
• Your business’s repayment capacity
• Additional residential or commercial security
• The total loan amount

A short lease, vacant premises or highly specialised property can result in a lower valuation or a larger deposit requirement.

It is therefore important to assess the likely finance position before exchanging an unconditional contract.

5. Do not assume every commercial loan runs for 30 years

Commercial property loan terms vary considerably between lenders and products.

Some property-secured business loans may offer longer terms for eligible borrowers, while other commercial facilities have significantly shorter terms. Publicly advertised products currently range from lease-doc facilities limited to five years or lease expiry through to certain secured business loans offering terms of up to 30 years.

It is also important to distinguish between:

Facility term: How long the lender agrees to provide the loan before it expires, renews or is reviewed.

Amortisation period: The period used to calculate principal and interest repayments.

A loan could have repayments calculated over a longer period while still having a shorter facility term. The lender may review the financial position, valuation and lease before renewing the facility.

Available repayment structures may include:

• Principal and interest
• Interest-only for an approved period
• Variable interest
• Fixed interest
• Market or bank-bill-linked pricing
• Split fixed and variable facilities

Redraw and unrestricted additional repayments should not be assumed. These features depend on the selected commercial loan product.

6. Budget for more than the deposit

Your contribution will generally need to cover more than the gap between the purchase price and the loan.

Other costs can include:

• NSW transfer duty
• Legal and conveyancing costs
• Commercial valuation fees
• Building, pest and environmental reports
• Strata searches
• Loan establishment and documentation fees
• Accountant and structuring advice
• Fit-out or renovation expenses
• Working capital for the business
• Potential GST implications

Transfer duty applies to purchases of commercial and industrial property in NSW and is generally calculated on the higher of the purchase price or market value.

The GST treatment of commercial property can vary depending on the vendor, contract and whether the property is being sold as a going concern. Obtain accounting and legal advice before signing the contract, particularly where the advertised price is stated as being plus GST.

A finance assessment should include the total transaction cost—not only the purchase price.

7. Prepare the application documents early

A well-prepared commercial property application is easier for a lender to assess and can reduce delays once a suitable property is found.

Depending on the transaction, the lender may request:

• Contract of sale
• Current lease and any variations
• Rental ledger or tenancy schedule
• Council rates and strata information
• Business and personal tax returns
• Business financial statements
• Recent business activity statements
• Business bank statements
• Details of existing debts
• Statement of assets and liabilities
• Trust deeds or company documents
• Business plan and cash-flow projections
• Evidence of the deposit and purchase costs

Tenant financial information may sometimes be requested, particularly where the tenant is privately owned, newly established or central to the lender’s reliance on rental income. However, it is not a standard requirement in every application.

For a new business purchasing its first premises, projections alone may not be enough. The lender may also want evidence of relevant experience, available working capital, additional security or a larger cash contribution.

8. Consider how easily the property could be sold or re-leased

A commercial valuation is not based only on the building’s size or purchase price.

The valuer and lender may consider:

• Location and passing traffic
• Access and parking
• Visibility and street frontage
• Internal layout
• Condition and required capital works
• Zoning and permitted use
• Vacancy levels and comparable rents
• Comparable sales
• Remaining lease term
• Whether the property suits multiple types of occupier

A well-located Erina premises with practical access, parking and a flexible internal layout may appeal to a broader range of future tenants or buyers.

By contrast, a property designed for one highly specialised use may have a smaller resale or leasing market. That does not necessarily prevent finance, but it may influence the valuation, LVR or lender selection.

Can bridging or renovation finance be used?

Short-term bridging finance may be considered when a buyer needs to settle a new commercial property before selling another asset.

Commercial bridging facilities are individually assessed and normally require a clear exit strategy. This may include an unconditional sale, refinance into a longer-term facility or another identifiable source of repayment.

Where substantial renovation or construction is required, a progressively drawn commercial facility may also be appropriate. Funds are released in stages as work is completed, usually subject to valuation, invoices, inspections and the lender’s construction requirements. Major banks advertise bridge, acquisition, development and progressive-draw facilities, but availability depends on the borrower and transaction.

When should you refinance retail property finance?

Refinancing may be worth reviewing when:

• The property value has increased
• A stronger or longer lease has been negotiated
• The business’s profitability has improved
• An interest-only period is ending
• The current facility is approaching expiry
• You want to fund another property, fit-out or business expansion
• The current lender’s pricing or conditions are no longer competitive

Equity may be available for another business purpose, but the lender will still assess the proposed use of funds, repayment capacity and resulting LVR.

Funding equipment or fit-out costs against commercial property can sometimes be more cost-effective than unsecured borrowing. However, extending short-life business expenses over a long property loan term can increase the total interest paid, so the repayment strategy should match the purpose of the funds.

Speak with CoastFin about retail property finance in Erina

Retail property loans are rarely one-size-fits-all.

A strong application brings together the borrower’s financial position, the property valuation, the lease, the tenant profile and an appropriate loan structure.

Before you make an offer, CoastFin can help you:

• Estimate the likely deposit and purchasing costs
• Review the proposed lease from a finance perspective
• Compare owner-occupied and investment loan options
• Identify lenders suited to the property and borrower
• Structure the repayments around your business or investment plans
• Prepare the financial information required by the lender

Call the CoastFin team or book an appointment to discuss retail property finance in Erina and across the Central Coast.

This article contains general information only and does not take into account your objectives, financial situation or needs. Finance applications are subject to lender credit assessment, eligibility criteria, fees, charges and terms and conditions. Obtain independent legal, taxation and financial advice before purchasing commercial property.