Commercial Property Valuations: 6 Bank Financing Scenarios

How Certified Practising Valuers Support Commercial Property Lending Decisions

Commercial property lending is not assessed on purchase price alone. Financiers usually rely on independent valuation advice to determine market value, test income sustainability, size the loan facility and monitor ongoing credit risk. 
 
The examples below show how valuation methodology can influence borrowing capacity across different commercial property scenarios.

Scenario Reference Table 
The table summarises six common lending scenarios and explains how asset type, lease profile, valuation approach and lender risk settings can affect the final facility amount. 

An educational reference on how Certified Practising Valuers determine borrowing capacity, loan-to-value limits, and credit risk.

1. Borrowing capacity

This means how much money the bank is willing to lend you.

For a commercial property, the bank looks at things like:

how much the property is worth
how much rent it earns
whether the tenant is reliable
whether you can afford the repayments
how risky the property is

Example:
If a property is worth $4 million, the bank may not lend the full $4 million. It might only lend $2.6 million, depending on its rules. Refer to the below table for more detail

2. Loan to Value Ratio — LVR

LVR means the loan amount compared to the property value.

Formula:

Example:
Property value = $1,000,000
Loan = $700,000

LVR = 70%

That means the bank is lending 70% of the property value, and the borrower needs to contribute the other 30%.

Lower LVR = safer for the bank
Higher LVR = riskier for the bank

3. Credit risk

Credit risk means the chance that the borrower may not be able to repay the loan.

The bank asks:

Can the borrower afford repayments?
Is the property producing reliable income?
Could the property value fall?
Could the tenant leave?
Would the bank recover its money if things go wrong?

Example:
A fully leased property with a long-term tenant is usually lower risk.
A vacant property or unstable tenant income is higher risk.

Scenario & Objective	Asset Class & Background	Valuation Methodology	LVR & Facility Cap	Outcome & Strategic Impact
1. Acquisition Finance Purchase Security	Freestanding industrial warehouse Contract Price: $4,000,000 Passing Net Rent: $240,000 p.a.	Income Capitalisation Adopted Yield: 6.00% Market Value: $4,000,000	65% LVR Limit Max Loan: $2,600,000 Deposit: $1,400,000	Settlement Confirmed Validates that the purchase price matches fair market value, allowing credit committee approval.
2. Equity Extraction Refinancing	Neighbourhood retail strip Historical Cost: $6,000,000 Existing Debt: $3,900,000 Extended WALE & new leases	Capitalisation & DCF Higher rental cash flow Updated Value: $8,500,000	65% LVR Limit New Facility: $5,525,000 Debt to Pay: $3,900,000	$1,625,000 Released Extracts unencumbered liquidity from asset appreciation to fund subsequent acquisitions.
3. Campus Expansion Construction Finance	Private independent school Freehold campus grounds New Sports Centre Cost: $10,000,000	Dual Stage Assessment "As Is" Value: $35,000,000 "As If Complete": $43,000,000	50% LVR (Special Purpose) Max Facility: $21,500,000 Existing Debt: $5,000,000	Development Funded Confirms project value uplift, enabling progressive drawdowns for the $10,000,000 build.
4. Risk Monitoring Covenant Review	Suburban commercial office Existing Facility: $6,000,000 Anchor tenant vacates premises	Direct Capitalisation Income dropped 40% Softened cap rate New Value: $7,500,000	65% Max Covenant LVR Actual LVR: 80.0% Covenant Cap: $4,875,000	Covenant Breach Lender requires an immediate $1,125,000 principal reduction or supplementary security.
5. Adaptive Reuse Conversion & Repurposing	Vacant automotive showroom Land Cost: $2,800,000 Conversion Cost: $2,200,000 Pre-leased childcare (15 years)	"As Complete" Capitalisation Net Rent: $360,000 p.a. Cap Rate: 5.75% End Value: $6,260,000	60% LVR Limit Approved Facility: $3,756,000	100% Works Financed Strong lease covenant drives end value, covering the entire $2,200,000 construction budget.
6. Downside Protection Pre-Settlement Shift	Off-the-plan strata industrial Contract Price: $1,200,000 10% Deposit Paid: $120,000	Direct Comparison Sub-market strata oversupply Assessed Value: $1,050,000	70% LVR Limit Approved Debt: $735,000 (Targeted: $840,000)	$345,000 Cash Shortfall Insulates the lender against negative equity; forces the buyer to bridge the remaining equity gap.

Summary

Valuation Governs Loan Sizing: Banks calculate loan facilities against the Certified Practising Valuation, not the contract price or internal project budgets.
Lease Quality Drives Value: Long-term weighted average lease expiry (WALE) and strong tenant covenants compress capitalisation rates and expand equity.
Ongoing Balance Sheet Risk: Periodic revaluations protect financiers against tenant loss and market contractions, directly triggering covenant remedies when LVR limits are exceeded.

Need Valuation Advice? 
If you are buying, refinancing, developing or reviewing a commercial property, McGees Valuation service can provide independent valuation advice to help you understand market value, borrowing capacity and lending risk. Contact McGees today to discuss your valuation requirements and obtain professional guidance tailored to your property. 
 
Michael Walsh – Head of Valuation and Professional Services (Associate Director)
0402 810 425
MWalsh@bne.mcgees.com.au
Mel Evans – Valuations Consultant
0419 722 134
 
MEvans@bne.mcgees.com.au

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