Commercial loans: LVR and valuations explained

What does LVR mean in commercial lending?

LVR stands for loan-to-value ratio. It is the loan amount expressed as a percentage of the value of the property that secures it. If a lender values a building at one figure and lends a portion of that, the portion is the LVR. A lower LVR means the borrower has more equity in the property and the lender has more of a buffer if something goes wrong.

Two details matter. First, the “value” in LVR is the lender’s valuation, not necessarily the price paid or the figure an owner has in mind. Second, the LVR a lender will accept is not fixed by law for most commercial lending. Each lender sets its own limits, and they move with the type of property, the tenants, the location, the borrower and the market.

That is why you will not find a single standard commercial LVR on this page. Ranges differ by lender, and quoting a number would imply a promise no honest broker can make. What can be explained is how the number is built and what moves it.

How do commercial LVRs differ from residential?

Residential lending is more standardised. Houses and units sell often, comparable sales are plentiful and values are easier to estimate. Commercial property is different:

• Fewer comparable sales. Each building is more individual, so valuers have less to compare.
• Income matters. Value often depends on the rent the property earns, which depends on tenants and leases.
• Narrower buyer pool. A specialised building may take longer to sell, which raises the lender’s risk.
• Greater variability. Vacancy, a tenant leaving or a change in the local market can shift value significantly.

For these reasons, lenders tend to be more cautious about how much they lend against commercial property. How cautious depends on the lender and the specific asset, and a well-leased industrial building may be viewed very differently from a vacant specialised one.

How do valuers value commercial property?

Valuers commonly use a mix of methods, giving more weight to whichever suits the property.

Method	How it works	Where it carries most weight
Direct comparison	Compares recent sales of similar properties	Owner-occupied buildings, vacant land
Income capitalisation	Converts net rental income into a value using a market yield	Investment properties with tenants
Discounted cash flow	Projects income over time and discounts it back	Larger or more complex assets
Cost or summation	Adds land value to the cost of rebuilding, less depreciation	Specialised properties with few comparables
Residual (development)	Starts from the finished value and works back, less costs and profit	Development sites

The valuer will inspect the property, review leases and outgoings, check zoning and consider market evidence. A report from a valuer on the lender’s panel is the figure the lender will normally use.

What affects the valuation and the LVR?

Several factors change both the valuation and how much a lender will lend against it.

• Property type. Mainstream types such as industrial and well-located retail are typically easier to lend against than highly specialised ones.
• Location. Prime areas with strong demand help. Remote or thin markets make lenders more careful.
• Tenants and leases. Strong tenants on long leases support value. Short leases, vacancies or weak tenants do the opposite.
• Condition and age. Deferred maintenance or environmental concerns lower the figure.
• Zoning and permitted use. A flexible zoning that allows alternative uses broadens the buyer pool.
• Market conditions. Lenders react to changes in the market, and valuers use recent evidence.
• Borrower strength. Strong income and a clean credit history can improve a lender’s comfort. A weaker profile may reduce the amount offered against the same property.
• Purpose of the loan. Buying, refinancing, releasing equity and short-term bridging can all be assessed differently.

Why can a valuation come in below the contract price?

A valuer is estimating what the property would likely sell for, and a contract price is simply what two parties agreed. They can differ for several reasons:

• The buyer paid a premium for location, timing or strategic reasons.
• The sale was rushed or off-market, so the price did not reflect broader demand.
• The lease income is weaker than the buyer assumed.
• Comparable sales are older or thinner than they appear.
• The valuer takes a conservative view of risk in the current market.

When this happens, the lender lends against the valuation figure, which means the buyer needs more cash to settle. The shortfall is the gap between the price and what the lender will fund against the valuation. Because of this risk, it is sensible to build a finance condition into the contract where possible and to discuss likely valuation outcomes with a broker before committing.

Illustrative example: a valuation that falls short

This is an illustrative scenario only. A buyer agrees to purchase a small office building with two tenants on short leases. The buyer expects to borrow a certain portion of the price. The lender’s valuer, however, notes that one lease expires soon and the local office market has softened, and values the building below the contract price.

The buyer now has choices. They could negotiate the price, provide evidence of renewals or a new tenant to support a revised view, add other property as security, increase the deposit or ask a broker to approach a lender with a different view of the asset. Each option carries trade-offs. None of them is available if the buyer did not see the issue coming, which is why early conversations help. For urgent timing, commercial bridging loans can sometimes fill a gap while longer-term finance is arranged.

What can you do before a valuation to help the outcome?

Borrowers cannot choose the valuer, but they can make the valuer’s job easier.

1. Provide complete lease documents. Current leases, rent schedules and outgoings statements help the income approach.
2. Share recent improvements. Upgrades, new fit-outs and maintenance records support condition.
3. Document tenancy. Evidence of renewals, options and tenant strength matters.
4. Gather comparable evidence. Recent sales of similar properties nearby are useful if your agent or adviser has them.
5. Check approvals. Zoning, permits and compliance certificates reduce uncertainty.
6. Fix visible issues. Minor maintenance can change first impressions during an inspection.

Business.gov.au notes that lenders consider security and often want supporting documents such as lease agreements and financial reports. The more complete the information, the less the valuer has to assume.

What if LVR is the sticking point?

Sometimes the property is fine, the borrower is fine, but the numbers do not quite reach. The usual responses are:

• Add security. A second property, equipment or other assets can lift the combined position. This is often called cross-security.
• Bring more equity. A larger deposit or contribution reduces the LVR.
• Use a second mortgage. A private second mortgage can sit behind the first lender to cover a gap. See second mortgages.
• Try a different lender. Appetite for different property types and LVR levels varies. Our page on commercial loan refinance shows how switching can work.
• Restructure the deal. Staged settlements, vendor finance or a smaller purchase can all change the numbers.
• Improve the asset first. Securing a tenant, extending a lease or completing works can lift value.

Each option has costs and risks. For example, cross-securing properties can reduce flexibility later, and second mortgages generally carry different pricing to first mortgages. A broker should lay out the trade-offs plainly.

How do valuations work for refinancing and equity release?

When refinancing, the lender will still order its own valuation. The result may be higher or lower than what the current lender used, or what the borrower expects. Two points to watch:

• Market movement. Values may have risen or fallen since the original purchase.
• Income changes. A lease renewal, rent review or vacancy changes the income approach.

For equity release, the usable equity is the lender’s maximum lending against the valuation, less what is already owed. If the valuation is lower than hoped, the available equity falls with it. Short-term needs, such as clearing a tax debt or funding a purchase, may be better served by a short-term structure that does not rely on the longest possible term. See short-term commercial loans for how that can work.

What mistakes do borrowers make about LVR and valuation?

• Assuming price equals value. Lenders lend against their valuation.
• Counting on the maximum LVR. Plan a buffer for costs, duty and a lower valuation. Revenue NSW, for example, notes duty is the buyer’s cost on dutiable assets.
• Overlooking tenancy. A strong building with a weak lease can be valued down.
• Not asking about the valuer. Panel valuers can see the market differently, and lenders differ.
• Having no plan B. If the valuation falls short and settlement is close, options narrow quickly.
• Treating a bank’s decline as a valuation of the property. Another lender may take a different view.

How does Ownright help with LVR and valuation issues?

Ownright Custom Finance arranges commercial finance Australia-wide from its Knoxfield, Victoria head office. Director Trevor Scott’s 40-plus years in finance mean the team has seen valuations land in every direction and knows how to respond.

That includes discussing the likely valuation outcome before the contract is final, preparing the information a valuer needs and, if the figure is lower than hoped, exploring structures that bridge the gap, from added security to second mortgages to a different lender entirely. Ownright cannot promise a particular valuation or approval, and each loan is priced on individual circumstances, but it can put the deal in front of lenders whose view of the asset fits.

What is the difference between market value and other valuation bases?

Not every valuation answers the same question. A valuer may be asked for market value, which is the estimated price the property would achieve in a normal sale between willing parties. For a project that is not yet finished, an “as if complete” value estimates what the finished property would be worth, which is the figure a development lender looks at alongside the current “as is” value. A forced-sale or restricted-period value looks at what could be achieved under time pressure, and some lenders consider it as part of their risk assessment for short-term loans.

These differences matter because the figure a lender lends against can be lower than the headline market value. A bridging or short-term lender who worries about how quickly the property could be sold may be more conservative than a long-term lender who is comfortable waiting for the right buyer. When a deal is assessed, it is worth asking which valuation basis the lender relies on.

How do other costs interact with LVR?

LVR only tells part of the story. Even a conservative LVR needs cash for costs around the edges: duty, legal fees, valuation fees and lender charges. Revenue NSW makes the point that the buyer pays duty on dutiable assets, and other states have their own rules. A buyer who calculates borrowing capacity from the LVR alone and forgets the extra costs can find the deposit does not stretch as far as expected.

Interest servicing also matters. A lender may accept a given LVR but still require the income from the property or the business to cover repayments with a comfortable margin. In other words, the LVR gets the loan past one test and the serviceability test is a separate hurdle. Working both out before an offer is made avoids unpleasant surprises.

What should you do next?

If you are weighing a commercial purchase or refinance and are unsure how far the numbers will stretch, start an application with the property details, the price and the funding you are hoping for. We can talk through the likely lender view of the asset. If a valuation has already come in low, talk to us about your situation and we can look at the options before the settlement date.