3 things to flag before your client buys their first commercial property

The asset they can finance is not the asset they think they can afford

The trouble starts with a residential habit. A residential investor is used to the loan being sized against their personal income, so they set a budget and assume it travels with them to whatever property they like. As you know, commercial lending does not work that way. The lender assesses the lease as the asset, the tenant covenant, the remaining term, the rent review structure, the debt service coverage, and the borrower's own income becomes secondary.

What that means for a client is that two properties at the same price and the same headline yield can attract very different funding, and the borrowing capacity they assumed when setting their budget can shift sharply once a specific property is assessed. By the time it surfaces, they have often committed to a deposit figure and a holding structure built on the wrong number, and any return modelling done on that basis no longer holds.

The fix is the cheapest part of the whole process, and the one most often skipped. If your client is in this position, I can provide an indicative read on how a particular property will actually be financed and what the lease and tenant covenants will support, so everyone is working from a real number rather than a residential assumption.

The deposit is a range, not a number

First-timers tend to budget on a single loan-to-value ratio, usually 70 per cent. In commercial, it moves with the asset. A strong industrial property with a quality tenant on a long lease can sit at the top of the LVR range; a specialised building, a regional location, or a short or uncertain lease can pull it well below.

For a client, the consequence is that the capital they need to commit is asset-specific and often larger than they planned, and a late-discovered deposit gap can stall or sink a purchase. If you have clients at this stage, I can establish the likely range for the kind of asset they are chasing before they are committed to a particular property, or to setting up a purchase structure, not after.

A structure built for tax can meet a financial wall

This is the one I would most want raised early. How a client holds the purchase (in their own name, in a trust, in a company, or in a self-managed super fund) matters. And it not only carries tax consequences, it also changes how a lender assesses the deal. An arrangement that is clean on the tax side can narrow the lender panel or shift the serviceability test, and that tends to surface only after contracts are signed, when it is expensive to unwind. Self-managed super funds are a good example. Holding commercial property in this way is common among both investors and owner-occupiers, but borrowing through a self-managed super fund is available from a much shorter list of lenders and under a different set of rules.

The way to keep your client from being caught between two good pieces of advice is a short conversation before the structure is locked. More often than not the tax-optimal answer and the financeable answer are the same, and where they are not, it is far better to know before the client has committed.

The thread running through all three is timing. The first-time buyers who have the smoothest experience are not the most sophisticated or the best capitalised. They are the ones whose accountant and finance broker compared notes before anything was signed, so the structure, the funding, and the tax position all pointed in the same direction. The ones who struggle are usually the ones who settled on one side in isolation and found out about the other too late to change it cheaply.

If it is ever useful, I am happy to be a sounding board for any of your clients considering a commercial purchase before the structure is set. We are often working with the same clients, and the purchases that go well are almost always the ones where the tax, structure and finance components were lined up early.

Nadine Connell is the co-founder and director of Smart Business Plans, a specialist commercial finance brokerage, and author of The Premise Effect. Since 2009, she has helped more than 3,300 Australian business owners and investors arrange in excess of $550 million in commercial funding.