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:
LVR=(Loan Amount / Property Value)×100
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 |
|
Income Capitalisation
|
65% LVR Limit
|
Settlement Confirmed
Validates that the purchase price matches fair market value, allowing credit committee approval. |
| 2. Equity Extraction Refinancing |
|
Capitalisation & DCF
|
65% LVR Limit
|
$1,625,000 Released
Extracts unencumbered liquidity from asset appreciation to fund subsequent acquisitions. |
| 3. Campus Expansion Construction Finance |
|
Dual Stage Assessment
|
50% LVR (Special Purpose)
|
Development Funded
Confirms project value uplift, enabling progressive drawdowns for the $10,000,000 build. |
| 4. Risk Monitoring Covenant Review |
|
Direct Capitalisation
|
65% Max Covenant LVR
|
Covenant Breach
Lender requires an immediate $1,125,000 principal reduction or supplementary security. |
| 5. Adaptive Reuse Conversion & Repurposing |
|
“As Complete” Capitalisation
|
60% LVR Limit
|
100% Works Financed
Strong lease covenant drives end value, covering the entire $2,200,000 construction budget. |
| 6. Downside Protection Pre-Settlement Shift |
|
Direct Comparison
|
70% LVR Limit
|
$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
Mel Evans – Valuations Consultant
0419 722 134
For a complete list of weekly commercial transactions in Queensland, visit McGees Wrap Up | McGees Property Brisbane
Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal, financial, or professional advice. While we strive for accuracy, we make no guarantees regarding the completeness or timeliness of the content. Always seek independent advice before making any financial or real estate decisions. We are not liable for any loss or damages arising from your reliance on the information provided.
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