Finance for renovating business premises

Do you own the building, or does someone else? That one question shapes almost everything about financing a renovation. An owner has an asset that lenders understand and can lend against for years. A tenant is improving someone else’s asset, so the lender has to rely on the business itself. Both can get the work funded. They just take different routes.

Owner or tenant: what changes?

	You own the premises	You lease the premises
Main security	The property itself	Business cash flow, movable equipment, or other property you own
Typical finance	Loan increase, second mortgage, refinance or construction finance	Term loan, unsecured loan, equipment finance, landlord contribution
Typical term	Long, often matched to the property loan	Short to medium, inside the remaining lease
Who benefits from the works long term	You, through the property value	Largely the landlord, once you leave
Watch out for	Over-capitalising beyond what the market will pay	Make-good clauses and paying off works after you’ve moved

If you own the building through a company, trust or self-managed super fund, the ownership structure also matters. SMSF borrowing in particular has strict rules about improvements, so talk to your accountant before any work starts on a fund-owned property.

Finance options when you own the building

Increase your existing loan. If your current lender has room within its limits and your figures support the higher repayments, a top-up is often the simplest and cheapest path. Banks are very good at this for established, profitable owners, so ask them first.

Add a second mortgage. Where the first lender won’t increase, a second mortgage behind it can release equity without refinancing the whole debt. It usually costs more per dollar but avoids break costs and a full refinance.

Refinance with a cash-out. Moving the whole loan to a new lender can release equity for the works in one go, which can suit owners whose current lender is too conservative.

Construction finance. For larger structural jobs, a construction and development loan pays the builder in stages as work is verified. Interest only runs on the amount drawn, which keeps early costs down. Lenders will want a fixed-price contract, plans, approvals and a builder they’re comfortable with.

Start with our property equity calculator to see roughly how much usable equity the building has. Owners who need a fast, property-backed loan while a bank works through a longer approval sometimes use a private lender such as HomeSec Business Finance, one of our own brands, to keep the job moving.

Finance options when you’re a tenant

Tenants have less to offer as security, but there are still good routes:

• Landlord contribution. If the works improve the building, such as new amenities, a lift upgrade or a better shopfront, the landlord may share the cost, particularly if you’re extending the lease.
• Business term loans and unsecured loans, sized on turnover and bank statements. These work best for modest works and businesses with a strong trading record.
• Equipment finance for anything movable, from air-conditioning split systems to signage and lighting. The term should match the life of the item.
• A property-secured loan against your home or another property, which brings longer terms and lower repayments but puts that property behind a business decision.

Whichever you choose, keep the term inside the lease. A ten-year loan on a five-year lease means the renovation could outlast your time in the building.

Not sure which route your renovation suits? Tell us about the works. It’s about a minute of typing and enquiring won’t affect your credit score.

The costs that don’t appear on the builder’s quote

Renovations of business premises carry costs that homeowners rarely meet. Four to plan for:

1. Approvals and certification. Building surveyor fees, permits, planning approval if the use or external appearance changes, and fire safety sign-off.
2. Accessibility upgrades. Under the federal Disability (Access to Premises — Buildings) Standards 2010, work on an existing building that needs building approval can bring in the “affected part” of the building, broadly the path of travel from the principal pedestrian entrance to the new work. That can mean ramps, door widths or an accessible toilet that weren’t in your original plans. A building surveyor can confirm what applies.
3. Asbestos. Australia banned asbestos at the end of 2003, so older commercial buildings may contain it. WorkSafe Victoria’s guidance is to assume suspect material is asbestos until tested, keep an asbestos register for the workplace and use a licensed removalist. Testing before demolition avoids a stalled job.
4. Lost or reduced trading. If the shop, clinic or warehouse closes or runs at half capacity during the works, the shortfall needs funding. For many businesses this is bigger than the professional fees combined.

How does tax treat the spending?

The ATO draws a line between repairs and improvements. A genuine repair, such as fixing a damaged roof section with like-for-like materials, can generally be deducted in the year it’s paid, as long as it can be separated from any improvement work. Improvements and alterations, including leasehold improvements by a tenant, are generally capital works claimed at a fixed statutory rate (2.5 or 4 per cent of the cost each year, depending on the works).

Keeping separate invoices for repair and improvement work makes your accountant’s job easier and may bring part of the tax benefit forward, which helps cash flow while you’re repaying the loan.

Worked example: an owner-occupied showroom

An illustration only. A family-owned flooring business owns its 600 square metre showroom and warehouse on the edge of a regional city, worth about $1.6m with $520k owing to the bank. The owners want to refresh the showroom, add customer amenities and upgrade the warehouse lighting and roller doors.

Item	Amount
Showroom refurbishment and new shopfront	$185k
Accessible toilet, ramp and widened entry (triggered by approval)	$48k
Warehouse LED lighting and two new roller doors	$42k
Asbestos testing and removal of old eaves lining	$16k
Surveyor, permits and fire safety sign-off	$19k
Contingency	$30k
Reduced trading during six weeks of works	$40k
Total	$380k

Their bank increases the existing loan by $300k against the property, with repayments the business can comfortably meet from current profit. The owners cover the remaining $80k from cash and a short-term line of credit drawn only during the slower trading weeks. Because the showroom work is staged, they pay the builder progressively and never hold idle borrowed money.

If the bank had declined the increase, a second mortgage behind the existing loan would have been the next option, given the substantial equity.

Ready to plan the renovation?

A renovation done well pays you back in better trading, happier staff and, for owners, a stronger asset. What turns a good idea into a funded project is a clear budget, an honest view of approvals and finance that suits whether you own or lease.

Our enquiry form is quick: allow about a minute, and know that your credit file stays untouched while you’re just asking. We won’t forward your enquiry to a long list of lenders. A real person reads the details of your premises and phones you. The more accurate your figures on the property, the lease and the quotes, the sooner we can land on the right option.

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