Current Interest Rates for Commercial Property

Hi,

I'm beginning to look seriously at purchasing a commercial property. I'd like to gain a greater understanding as to how commercial property is financed. I have residential equity in the form of LOC's and could use this as a deposit at resi rates.

What are current commercial loan rates? Is it possible to take out an interest only loan over say 15-20 yrs without reviews taking place? Or do you need to take out loans that pay themselves down over time (ie p&I).

My intention would be to buy a high yielding commercial property and use the excess income that is generated to offset the shortfall against my residential properties. In time, I may sell down the resi properties to pay out the commercial loan and use the commercial property to fund a substantial amount of my income.

I've found a couple of interesting props that sold on good yields. This is one. High yield obviously due to being in the country - still - cash flow would be very attractive - as well as the long lease.

http://www.investmentportfolioauction.com.au/recent_auction_sales.html

(It is the IGA supermarket in Dungog, NSW)

Appreciated any ideas/comments

Regards Jason.

How much deposit/security would you be using for purchase?

Hi Jason

Much comes down to the property, the borrower and the sales job on the lender

High 7s to high 8s are poss for "term" loans.

Many of the "term" loans offer IO periods.

Bill back loans ( ie 30 or 90 day bank bill + "risk" margin are the way most larger lenders fund larger deals, again you can negotiate some IO term

Be prepared for a full review every year pretty much


ta
rolf

Rolf Latham said:

Hi Jason

Much comes down to the property, the borrower and the sales job on the lender

High 7s to high 8s are poss for "term" loans.

Many of the "term" loans offer IO periods.

Bill back loans ( ie 30 or 90 day bank bill + "risk" margin are the way most larger lenders fund larger deals, again you can negotiate some IO term

Be prepared for a full review every year pretty much


ta
rolf

Click to expand...

Hi Rolf,

Thanks for your reply. It is appreciated. I think the thing that worries me most is the review - especially if it is annually - that seems very often.

Term loans may be a better option - but again, I guess it depends on the property, cashflow etc etc.

Our other option is to buy a less expensive com prop and use our equity on residential rates to fund it. I guess doing this is 'safe' from the point of view of skipping the reviews - but then it may not be possible to buy as high a yielding property.

Regards Jason.

INVSTOR said:

How much deposit/security would you be using for purchase?

Click to expand...

Around 40% deposit is possible. Depending on the price of the property of course.

Does the amount of deposit make a difference to the interest rates?

Regards Jason.

Hi Jason,

Thanks for the post. Ive also done some investigating to pull equity out of residential IP to invest in higher yielding assets.

Current interest rates I see are between 7.4%-8%pa.

Also for non recourse commecial lending a 50% LVR is required!

Aj

I ve got 7.14 - 7.20 at Westpac but their fees are high and you need to use a lot of the available funds to make it worthwhile. That is a 2% point discount. and it is with 60% LVR

buster said:

I ve got 7.14 - 7.20 at Westpac but their fees are high and you need to use a lot of the available funds to make it worthwhile. That is a 2% point discount. and it is with 60% LVR

Click to expand...

Hi Buster,

That sounds attractive, actually. Do you have regular reviews or are you on a fixed term?

Thanks for the info.

Regards Jason.

AJ76 said:

Hi Jason,

Thanks for the post. Ive also done some investigating to pull equity out of residential IP to invest in higher yielding assets.

Current interest rates I see are between 7.4%-8%pa.

Also for non recourse commecial lending a 50% LVR is required!

Aj

Click to expand...

Thanks Aj,

Those interest rates sound ok - LVR is a bit scary though! If I needed to fund that much I'd use resi equity and have to settle for a less expensive com prop. I'd prefer to put in up to 40% deposit so have an LVR of 60%

Regards Jason.

Hi Jason,


If the reviews are your sticking point, then I believe Adelaide Bank offer a product that has something like a 15 year term with no reviews. Of course the down side to that is the interest rate is usually pretty unattractive.....

.....but then if you don't want the pain of them crawling up yer jacksie every year with a fine tooth comb, you need to take the pain in yer hip pocket.....either which way you turn, the Banks will inflict pain.

Count on an absolute minimum of 35% deposit. They'll invariably want you to stump up more....but the days of 70 / 75 or even 80% LVR are long gone.

She's all about income coverage nowadays. I think my last deal, I needed to prove to them that the property had a 2.2 x coverage. That is for example, if the interest you will be paying them is say $ 100 K pa, you'll need to show that the [ property plus you ] can generate at least 220 K pa year in year out before the credit dept will approve it.

Now of course, that 2.2 x coverage figure makes it a tad difficult....just the way they like it, cos if you want to keep yourself out of it, the property has to do 220 K pa by itself. On a 9% nett yield, that means the purchase price will be 2.4m.

So, how do you buy a property worth 2.4m, and keep the interest payments to only 100 K pa ??

Well, you either negotiate with the Bank an all up rate of only 4.1% pa.....or.....to get over the Bank's ridiculously conservative hurdle, they only grant you a loan of say 1.15m and pay 8.5% on it = 98 K pa.

If that is the case, you'll need to come up with the remainder of 1.25m plus acquisition costs...probably another 100K with stamps and legals.

So, in my made up example, you'll need 1.35m in cash or LOC to play their sordid little game.

What the Banks most definitely will not let you do is ;

Borrow the full 2.4m, pay 8.5% interest on it which is 204 K pa, receive 220 K pa nett rent off the Tenant and you pocket the 16 K pa cash every year as profit.

Unfortunately Jason, they reject proposals like that from investors every day of the week.

The credit squirrels favourite terms nowadays are ;

• "How much hurt money can we squeeze out of him"....they make it hurt, and
• "No"

I'm at the smaller end of town that Dazz admittedly, but use Adelaide Bank for our two CIPs.

Variable 9.35% or fixed 1 year 8.65% is what the currently offer for Smartsuite Commercial products.

http://www.brokers.adelaidebank.com.au/commercial_ss.html

I borrowed 75% LVR, 25 year term, with 3 year IO. No annual reviews, and take our salaries as either borrowers or guarantors to the trust when factoring DSCR. So the deals can stack up very easily. Biggest win through is no reviews.

If you borrow less than 75% LVR the IO periods can be longer and the rates slightly lower.

Very easy to deal with, and highly recommend ADL.

SANF very high too. Happy camper.

Slowly recycling debt from resi loans to CIP loans to drop from 9.35% to 6.8% but not worth going a cheaper CIP with annual reviews in my opinion - false economy.

Hi Dazz,

Thank you for the time you have put into this post and for answering my questions. You have given me invaluable information that I didn't know.


It seems that I'd need to put in a deposit of at least 40% - if not higher as others have also mentioned.

I have a decent amount of equity to put into the deal - but obviously the less used, the better.

Thanks for the information on the annual reviews and the possibility of taking out loans over longer periods of time with no reviews - sounds like a plausible option.

If I can overcome these hurdles, I still think that finding an appropriate com property on a long lease with a decent yield will trump the return available through resi and will be worth the effort in the long term.

Thanks for your help, Dazz,

Greatly appreciated.

Regards Jason.

Trogdor said:

I'm at the smaller end of town that Dazz admittedly, but use Adelaide Bank for our two CIPs.

Variable 9.35% or fixed 1 year 8.65% is what the currently offer for Smartsuite Commercial products.

http://www.brokers.adelaidebank.com.au/commercial_ss.html

I borrowed 75% LVR, 25 year term, with 3 year IO. No annual reviews, and take our salaries as either borrowers or guarantors to the trust when factoring DSCR. So the deals can stack up very easily. Biggest win through is no reviews.

If you borrow less than 75% LVR the IO periods can be longer and the rates slightly lower.

Very easy to deal with, and highly recommend ADL.

SANF very high too. Happy camper.

Slowly recycling debt from resi loans to CIP loans to drop from 9.35% to 6.8% but not worth going a cheaper CIP with annual reviews in my opinion - false economy.

Click to expand...

Thanks Trogdor - great information and very helpful.

Regards Jason.

Trogdor said:

I'm at the smaller end of town that Dazz admittedly, but use Adelaide Bank for our two CIPs.

Variable 9.35% or fixed 1 year 8.65% is what the currently offer for Smartsuite Commercial products.

http://www.brokers.adelaidebank.com.au/commercial_ss.html

I borrowed 75% LVR, 25 year term, with 3 year IO. No annual reviews, and take our salaries as either borrowers or guarantors to the trust when factoring DSCR. So the deals can stack up very easily. Biggest win through is no reviews.

If you borrow less than 75% LVR the IO periods can be longer and the rates slightly lower.

Very easy to deal with, and highly recommend ADL.

SANF very high too. Happy camper.

Slowly recycling debt from resi loans to CIP loans to drop from 9.35% to 6.8% but not worth going a cheaper CIP with annual reviews in my opinion - false economy.

Click to expand...

We do a bit with Beendelayed, IMB , and ING et al and the smaller second tier lenders.

While they have some pros, they arent a cure all. They arent much chop for smaller regoinals, country towns and specialised securities, or larger lends

ta
rolf

Rolf Latham said:

We do a bit with Beendelayed, IMB , and ING et al and the smaller second tier lenders.

While they have some pros, they arent a cure all. They arent much chop for smaller regoinals, country towns and specialised securities, or larger lends

ta
rolf

Click to expand...

Sure, but if you are buying a mainstream retail, office or industrial in a metro area, with a < $3m lend, you would be nuts not to seriously consider ADL.

Funny you say delayed - I had to tap ANZ for deposit for both CIPs - they were delayed a month each time (despite approval being painless) due to Indian offshoring whereas ADL delivered the goods on time every time.

ADL also has a full redraw with ability to repay early as much as you like early (as long as you dont fully repay) and redraw out - for variable loans. Great feature together with no reviews.

Not arguing with you Trog

They pay their comms in less than 4 to 6 mths which is the average time ONE big lender takes for bank bill products : (

ta

rolf

Wow.

Rolf - btw - what are ING offering these days as variable CIP rates, and on what sort of terms?

under 8 for variable

and under 7 fr 1 and 2 year fixed

generally term based, dont like stuff over 2 mill loans,

For lower loan amounts and LVRs lease doc loans the above rates apply

Full doc IO to 70 % lvr


ta

rolf

Rolf Latham said:

under 8 for variable

and under 7 fr 1 and 2 year fixed

generally term based, dont like stuff over 2 mill loans,

For lower loan amounts and LVRs lease doc loans the above rates apply

Full doc IO to 70 % lvr


ta

rolf

Click to expand...

Cool, thx Rolf. Not bad rates. What is the longest term loan they offer at those rates? Any reviews within the term?

Dazz said:

Count on an absolute minimum of 35% deposit. They'll invariably want you to stump up more....but the days of 70 / 75 or even 80% LVR are long gone.

She's all about income coverage nowadays. I think my last deal, I needed to prove to them that the property had a 2.2 x coverage. That is for example, if the interest you will be paying them is say $ 100 K pa, you'll need to show that the [ property plus you ] can generate at least 220 K pa year in year out before the credit dept will approve it.

Click to expand...

Thanks for the insight Dazz.

Certainly reigns in the calculations significantly working off your last coverage multiple.

On that premise, you either need to stump up a significant deposit (50% LVR), bag a screamer of a yield or low your sights significantly regarding the purchase price.

The problem with lowering the sights is that it generally means that the yield comes along for the ride down too.

From your experience is that income multiple increased due to the scale and size of the deal or just a greater emphasis on lending conservatism by the banks?

Cheers