By the time they raise it with you, they have usually decided they want to do it. What they have not worked out is whether it can actually be financed, and that is where the conversation tends to come unstuck.
I arrange SMSF commercial property loans most weeks, and the gap between what clients assume and what lenders will do is consistent enough that it is worth setting out for the finance professionals who see these clients first.
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The first thing worth knowing is that the lender panel shrinks. Borrowing inside an SMSF uses a limited recourse borrowing arrangement, and not every lender offers them. The ones that do apply stricter terms than they would on the same property held in a company or trust. Lower maximum loan-to-value ratios, larger liquidity buffers required to remain in the fund after settlement, and closer scrutiny of the fund’s ability to service the loan from contributions and rent combined.
For your client, that means the deposit needed can be larger than they expect. A commercial property that might be financed at 70 per cent in a trust can sit closer to 65, sometimes lower, inside super. The difference has to come from somewhere, and if the fund does not hold it, the purchase stalls. This is the single most common reason an SMSF commercial purchase falls over after contracts are signed, and it is entirely avoidable with an early read on the numbers.
The rent figure is doing double duty
Where the fund leases the property back to the member’s own business, you are already pricing that lease at market for the auditor. What is less visible from the compliance side is that the lender underwrites against the same figure. The arm’s-length rent that keeps the fund compliant is also the income the loan is serviced against, which means the two tests are far more connected than they look.
It matters in practice when a client is tempted to set a related-party rent below market to help the business through a lean patch. That can create a serviceability problem on the finance side even when the fund’s intentions are sound, and it is worth a client understanding early that the rent figure has to satisfy both tests at once.
Structure decided for tax can meet a financing wall
This is the one I would most want raised before anything is locked. You advise your clients on the tax consequences of holding the purchase within different structures. But this decision also impacts which lenders will look at the deal, and how they assess it, and the way commercial property finance is assessed varies more than most clients expect. An arrangement that is clean on the tax side can narrow the lender panel or shift the serviceability test, and that surfaces only after the structure is set, when unwinding it is expensive.
The clients whose purchases go smoothly are almost always the ones whose accountant and finance broker compared notes before the structure was locked. Often the tax-optimal answer and the financeable answer are the same. But when they are not, it is far better to know before the client has committed.
The finance takes longer than the contract allows
The last one is about time, and it catches people who are otherwise well organised. Arranging finance inside an SMSF takes longer than a standard commercial loan, and clients rarely build that into their thinking. The lender panel is smaller, so there is less room to move if the first choice declines. The documentation is heavier. There is usually a bare trust to establish, and the fund’s own paperwork has to be in order before a lender will look at it seriously. Commercial valuations add their own lead time, and in my experience six weeks is now the norm rather than the exception.
Where this bites is the contract. A client who signs with a settlement period suited to a residential purchase, or to a straightforward commercial deal held in a company, can find the finance simply cannot be arranged inside the timeframe. The purchase is sound and the fund is eligible, but the clock runs out. If a client is weighing an SMSF purchase, the settlement period is worth a conversation before they sign, not after.
Where you come in
The through-line in all of this is timing. A client who understands the finance constraints before choosing a property, a structure and a deposit figure keeps their options open. One who works it out afterward is often paying to undo a decision.
If it is ever useful, I am happy to give any of your clients an indicative read on how a particular deal would actually be assessed inside super, before the structure is set. We are frequently working with the same clients, and the purchases that go well are the ones where the tax and the finance pointed the same way from the start.
Nadine Connell is 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.
