Smells Like A Deal: A Recipe for Commercial Property Success.

Are you curious about what makes a commercial property deal as sweet as cake? Let’s break down the key ingredients:

• Asset Grade

Grade A assets are the crème de la crème. Location, location, location!

Office properties are still recovering post-pandemic, retail assets focused on essential services are performing well, but the industrial property sector remains the sought-after asset class.

A prime spot with easy access is the perfect base

• Tenant Profile

An existing successful tenant schedule is desirable, as it’s guaranteed income. If retailers, top brands are highly attractive. In-demand services like a mechanic will attract local business.

Government contracts are nirvana! High occupancy, strong foot traffic, long-term leases, and annual rental increases are the finishing touches.

• Experienced Borrower

A borrower with a solid track record of buying and repaying commercial property. That’s the icing on the cake.

• Diverse Cash Flows

Multiple income streams are like different layers in your cake—if one falters, the others keep the structure strong.

• Sound Historical Loan Conduct

Timely payments? Check. A borrower with a clean slate keeps the cake from crumbling.

• Loan-to-Value Ratio

Generally, the lower the better, with earnings that cover twice the interest expenses (ICR). Using personal cash for some acquisition costs ensures equity from the start, adding the perfect balance of sweetness and stability.

• Loan-to-Value Ratio (LVR) Flexibility: The Icing on the Cake

When it comes to LVR, it’s not always a hard no if you find yourself slightly overleveraged initially.

Think of it as having too much icing on a cake—you can scrape some off and tidy up the presentation before serving. If a banker or broker can incorporate structured amortisation into your purchase and you can meet the bank’s LVR requirements within the initial loan term (usually 2 or 3 years), borrowing 70% against an asset normally capped at 65% may be feasible.

This flexibility allows you to sweeten the deal without compromising your financial health.

• Succession Plan

Mitigating key person risk is like having a recipe backup—ensuring business continuity even with changes in key players.

• Zoning and Demographics

Check the current and future zoning of the property and understand the demographics of the area. This will help assess long-term value and growth potential.

• History with the Lender

A strong relationship with the lender is the cherry on top. If it’s the first deal, make sure the optics are spot-on to build long-term trust. Banks value enduring partnerships!

• Speak the Language

Securing funding isn’t just about ticking boxes; it’s about being transparent with the narrative you present to your banker, who then presents it to credit.

While the ability to repay and maintain loan conduct are essential, they are only part of the formula.

• Diversification: The Perfect Blend of Ingredients

Just like a well-baked cake requires the perfect blend of ingredients, a successful commercial property portfolio needs diversification. Diversification is a key strategy for mitigating risk and maximising returns. Imagine baking a cake with just flour—it wouldn’t turn out very well.

Similarly, by investing in various property types, such as office buildings, retail spaces, industrial properties, and mixed-use developments, you spread risk across multiple sectors and reduce vulnerability to market fluctuations.

This approach ensures your investment “cake” rises beautifully, offering different income streams and market opportunities.

• Expert Advice: Your Baking Mentor

Even the best bakers seek advice and learn from others. Commercial property investment is a long-term endeavour, and seeking advice from experts can provide valuable insights that contribute to your success as a savvy investor.

Think of these experts as your baking mentors, guiding you through market trends, property valuations, and investment strategies.

Their insights help you avoid common pitfalls and make informed decisions, ensuring your investment “cake” turns out perfectly every time.

And, whether it’s a $2M or $200M deal, the metrics remain consistent. The higher the exposure, the more ?? are on the deal, scrutinising every detail.

Sharing this to offer insight into how banks evaluate deals.

What ingredients do you consider essential for a sweet property deal? Comment below.