How Your Tenant Decides What You Can Borrow on Commercial Property
Property Lending
Tenant covenant · Valuation basis · Loan term
A stronger tenant can increase what you can borrow without increasing the lender's published LVR. The effect runs through the value the percentage is applied to, the rent your cover test relies on, the lease term your lender is prepared to match and the evidence behind the income. This guide follows the customer journey from checking the legal tenant and effective rent before exchange, through valuation and lender assessment, to what happens when the number comes back short or the tenant weakens.
Quick Answer
A strong tenant can increase how much you can borrow without increasing the lender's published LVR. Tenant covenant affects the reliability of the rent, the capitalisation rate and therefore the valuation; the lender then applies its own LVR policy and cover test to that value and income. The lease term, incentives, legal tenant entity, payment history and guarantees can also change the term, conditions and evidence your commercial property lender asks for.
Also called: tenant covenant, tenant quality, lease covenant.
Start where you actually are
- You are about to make an offer on a tenanted property and want to know what to ask for before you rely on the rent. Go to the pre-offer checks.
- You are looking at a tenanted property and want to know what the tenant does to your borrowing. Go to the valuation effect.
- You think the tenant is strong but the lender is still short or saying no. Go to the other tests that can still stop the deal.
- The valuation has come back and the number is short. Go to what you can actually do about it.
- The tenant is your own business, or you are the tenant rather than the landlord. Go to the related party question.
- You have read a maximum LVR figure somewhere and want to know if it applies to you. Go to what lenders actually publish.
- Your broker keeps talking about cover ratios rather than the percentage. Go to which number actually caps your loan.
- Your broker or lender has asked for tenant documents you do not have. Go to the evidence file.
- Your tenant is in trouble, has asked for a rent reduction, or has stopped paying. Go to what happens to your loan.
What is a tenant covenant, and what is it not?
A tenant covenant is the tenant's financial ability to keep paying rent for the life of the lease, and lenders and valuers treat it as a measure of how reliable that rental income is. It is a judgement about the payer, not about the building. The industry shorthand for it borrows the word covenant, and that creates more confusion than it settles, because three different things in a commercial property deal share that word.
In practice the assessment runs down a rough hierarchy, but the hierarchy follows the legal payer and the evidence behind it rather than the logo over the door. Government departments and their agencies are highly verifiable. Listed and major national companies are also easier to assess because public accounts and corporate records exist. A franchise can sit anywhere in that range depending on whether the franchisor, a local franchisee or a special purpose entity actually signed the lease and whether anyone stronger guarantees it. A small private business is not automatically a weak tenant, but a lender and valuer have less independent evidence to test its capacity to keep paying in year four of a five year lease.
Australian due diligence guidance published by the Property Council of Australia on 21 March 2019 puts the question to buyers in its own words, asking "What is the quality of the tenant's covenant?" alongside "Is the asset fully leased?" and "What is the WALE?". That is guidance to buyers about what to investigate before exchange. It is not a lending rule and it should never be read as one. The same body's leasing paper of 23 April 2019 frames the covenant as the financial strength sitting behind the income stream, and pairs it with the length of the lease, which is the pairing that matters to a lender.
Is this the same as a loan covenant?
No, and the confusion is expensive because the two words point at opposite ends of the transaction. Your tenant's covenant is a promise made to you. A loan covenant is a promise you make to your lender. A restrictive covenant is neither, and it runs with the land rather than with a person. The distinction matters again if your interest in the property is a leasehold rather than a freehold, because then you are on both sides of a lease at once.
Does a national brand always mean I have a strong tenant covenant?
No. The legal entity named on the lease is the starting point, not the trading name on the shopfront. If the national company itself is the tenant, its covenant is the promise supporting your rent. If a local franchisee or special purpose entity signed instead, the covenant is that entity's unless a franchisor, parent company, director or other guarantor has separately agreed to stand behind it. A strong brand can still help the business, but it does not by itself give the landlord a claim against the brand owner.
For a buyer, this is a document check rather than a branding judgement. Match the exact tenant name and ACN or ABN in the lease to the company search, then read every guarantee, side deed, licence or sublease that changes who is liable. If the structure is not obvious, have your solicitor confirm who actually owes the rent before you price the covenant into the property.
| Which covenant | What it is | Who it binds | Where you see it |
|---|---|---|---|
| Tenant covenant, also called covenant strength | The tenant's promise to pay the rent, and the financial capacity behind that promise | The tenant, and any guarantor of the tenant | In the lease and the tenancy schedule |
| Loan covenant | A condition inside your facility, such as an interest cover or loan to valuation test | You, as borrower | In the loan agreement and the letter of offer |
| Restrictive covenant | A restriction on how the land itself can be used or built on | The land, and so every future owner of it | On the certificate of title |
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How does your tenant change what the property is worth?
Your tenant changes the value, and the value is what your borrowing is calculated from. The covenant moves the capitalisation rate a valuer applies to the property's net income, the capitalisation rate moves the assessed value, and your lender's maximum advance is a percentage of that assessed value. Nothing in that chain touches the percentage itself.
The arithmetic is worth saying in words, because it is the part that gets skipped. A valuer takes the net income the property produces after outgoings, and converts it into a capital figure by dividing it by a rate that expresses how much risk sits in that income. Income a valuer regards as secure is divided by a smaller rate, and dividing by a smaller number produces a bigger answer. So the same rent, from a tenant a valuer is more comfortable with, comes out as a larger value. Your maximum advance is a slice of that larger number, which is why a stronger tenant can produce a materially bigger loan while the slice stays exactly the same size.
Two other things move with the tenant. The first is the gap between the rent actually being paid under the lease, the passing rent, and what the space would let for today, the market rent. A lease well above market is not a gift, because a valuer will usually look through it to a sustainable figure and a credit team will ask what happens at expiry when that rent has to be re let. A lease below market cuts the income the value is built on today, but it can also be an argument for the future. The second is the length of what remains. A short term on a strong tenant and a long term on a weak one are different problems, and lenders read them differently. Our guide to what a commercial valuation actually tests sets out what the valuer is instructed to consider.
The tenancy arrangements can also reopen the valuation itself. The prudential standard requires the value at origination to be maintained rather than refreshed at will, with a short list of exceptions, and one of them is where modifications are made to the property or to contractual tenancy arrangements that unequivocally increase its value and an updated valuation confirms the increase. That is the regulator describing, in its own words, a tenant changing the number.
There is also a second number in the background that most buyers never see. On specialised or single tenant assets a lender will often ask what the property is worth with the tenant gone, on a vacant possession basis, and will lend against the lower of the two figures. That is where a strong covenant on an unusual building can still produce a disappointing number, because the covenant supports the income but not the alternative use.
What a valuer will not do is capitalise the tenant's business itself. Australian rental valuation guidance, in the Australian Property Institute's AVGP 301 Rental Valuations and Advice, effective 1 July 2023, states at clause 6.4.2 that "The goodwill of the tenant is normally excluded when providing rental advice." That is rental valuation guidance rather than lending policy, and it is not a covenant standard, but it makes the boundary clear: the covenant supports the reliability of the rent, it does not add the tenant's business value to your asset.
Why does a stronger tenant mean a bigger loan without a bigger percentage?
Because the two levers are not the same lever. The percentage is your lender's policy setting. The value is the valuer's answer. A tenant works on the second one, and only reaches your loan through it.
Do rent-free incentives or above-market rent change the valuation?
Yes. A valuer is interested in sustainable market income, not the headline rent in isolation. Rent-free periods, abatements, fit-out contributions, incentive deeds, outgoings and the gap between passing rent and market rent can all change the effective income behind the valuation. A strong tenant paying a face rent that is well above market does not make the whole face rent permanent, and an undisclosed incentive can make a rent roll look stronger than the economics really are.
The Australian Property Institute's AVGP 301 Rental Valuations and Advice says that where incentives are a market norm they should be reflected in the assessed market rent and the assumed incentive should be stated. For a buyer, the practical move is simple: ask for the lease, every incentive or side deed, the outgoings schedule and the rent ledger before you rely on the advertised yield.
| Question | Through the value | Through the percentage |
|---|---|---|
| What actually moves | The capitalisation rate applied to net income, and therefore the assessed value | Nothing that is published. No Australian lender we read keys its maximum to who the tenant is |
| Who decides it | The valuer, on the instruction the lender gives | The lender's own credit policy, set by asset type, location, loan size and occupancy |
| How much it typically matters | This is where almost all of the tenant effect lands | Marginal, and where the tenant does appear it is usually as an eligibility condition rather than a higher ratio |
| What you can do about it | Present the lease, the ledger and the guarantees so the income is easy to verify | Choose the lender whose published policy fits the asset, rather than arguing the tenant up |
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What if the tenant is my own business?
Then the covenant your lender assesses is your own trading business, and the lease stops doing the work it does on an arm's length deal. This is the most common version of the question for self employed buyers, and almost nothing published about tenant covenants answers it, because most of that material is written for passive investors buying someone else's tenant.
Three things change at once. Lenders commonly haircut or discount rent paid under a related party lease, or ask for an independent market rent assessment from a registered valuer, because the rent cannot be treated as independent income when it is ultimately paid out of your own business's cash flow. That discount reduces the income the cover test is calculated from, so it usually reaches your loan through the cover test rather than through the percentage. The lender also looks through the lease to the trading business's own financials, which turns the assessment into a serviceability question about your business rather than a covenant question about a third party. And on a specialised building the vacant possession figure matters more again, because the lender is asking what the security is worth if your business is no longer in it.
Writing yourself a generous lease does not solve any of that, and can make it worse, because a rent well above market is the thing the market rent assessment is there to find. What does help is the opposite: a formal lease on ordinary commercial terms at a rent an unrelated tenant would pay, documented properly rather than agreed between entities you control. Buying the premises inside a self managed super fund is a different question again, with its own arm's length requirements and its own lender pool, and it is one for your accountant and a specialist before it is one for a general commercial lender.
None of that makes the structure wrong. Owning your premises in one entity and trading from another is ordinary and often sensible, but the ownership structure, the rent you set and the tax treatment of it are questions for your accountant and solicitor before they are questions for a lender. Our guide to owner occupied versus investment commercial property sets out how the two paths diverge.
What if the valuation comes back short?
You have a small number of moves and only one of them touches the valuation itself. Everything else works on the other side of the equation, which is why the first thing to do is read your finance clause and find out how much time you actually have, before you spend any of it arguing with a valuer.
| The move | What it actually changes | When it is worth trying |
|---|---|---|
| Ask for the valuation to be reviewed | The assessed value, and it is the only lever that does | Where there is a factual error, a wrong lettable area, or a comparable sale the valuer did not have. Not where you simply disagree |
| Put in more cash | The loan amount, not the value or the percentage | Whenever the shortfall is small enough that the extra deposit is available without stranding your working capital |
| Add other security | The lender's total security position across the facility | Where you hold another property with equity and are willing to encumber it, which is a separate decision with its own risk. Note that where a residential exposure is secured by both residential and commercial property, the prudential standard requires a 40 per cent haircut to the commercial value in the ratio calculation |
| Renegotiate the price | The purchase price, not the valuation | Where the valuation is itself the evidence that the price sits above market, and the vendor has no better buyer |
| Change lender | The percentage, because the maximum is a policy setting | Where another lender's published policy fits the asset class or location better. Expect a new valuation and allow time for it |
| End the contract under the finance clause | Nothing about the property. It ends your obligation | Only inside the clause's own deadline and on its own terms. Take legal advice before relying on it |
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Two of those moves need a word of warning. A valuation review is an evidence process, not a negotiation, so it succeeds on a fact the valuer did not have and fails on an opinion you hold more strongly. And changing lender restarts the clock, which is exactly the thing you have least of once the finance clause is running. The deposit side of the same problem is covered in our note on the commercial property loan deposit.
Does APRA set a maximum LVR on commercial property?
No. APRA does not prescribe a maximum borrower-facing LVR for commercial property. APS 112 does use LVR bands for prudential capital treatment, including bands at 60 per cent and 80 per cent for commercial property exposures dependent on property cash flows, but those are risk-weight bands for the lender rather than lending limits a customer is entitled to receive. APG 112 separately requires the lender to assess the tenancy profile against the maturity of the loan. The maximum LVR offered to you still comes from the lender's own credit policy.
The wording sits in the Australian Prudential Regulation Authority's Prudential Practice Guide APG 112 Capital Adequacy: Standardised Approach to Credit Risk, June 2024, at paragraph 25: "In determining whether a commercial property 'dependent' on property cash flows would be categorised as standard or non-standard, an ADI must assess whether there is a positive determination that the borrower can meet their repayment obligations. In making this determination, an ADI is required under APS 112 to assess the tenancy profile relative to the maturity of the loan. If the property is leased by multiple lessees, an ADI's assessment may consider whether the weighted average lease expiry (WALE) sufficiently exceeds loan maturity."
Read the two APRA references separately. The LVR bands determine prudential capital treatment for the lender; they do not say what percentage the lender must or may offer you. The tenancy rule is a requirement to assess the income profile against the debt term. For a borrower, that becomes practical when the committed lease is shorter than the facility being requested: the lender may respond with a shorter term, a review event around lease expiry, faster amortisation or a condition around renewal rather than an automatic decline. Cover can still be the binding number, which is why interest cover is the test to watch. The mechanics sit in our guide to how commercial property loans work.
The cross referenced standard is current. Prudential Standard APS 112 is in force and states that "This Prudential Standard commences on 1 July 2025." A draft revision of APG 112 is also in circulation and carries the same paragraph 25 wording, with its own commencement still shown in square brackets as a proposal, so the requirement is current and is proposed to continue.
What is WALE, and when does it actually matter?
Weighted average lease expiry matters when a property has more than one tenant, and it is close to meaningless when it has one. It is an average of the time left across the leases in a building, weighted by each tenancy's share of the income or the area rather than counted evenly, so a large tenant with a short term pulls the average down harder than a small one. You calculate it by taking each lease's share of the total income, or of the lettable area, multiplying that share by the years remaining on that lease, and adding the results together, which is why income weighting and area weighting produce two different answers on the same building and why you should always say which one you have used. The prudential sentence that mentions it is expressly conditional on the property being leased by multiple lessees, and it should not be stretched to a single tenant building, where the lender simply reads that one lease term against the loan term.
Do options to renew count towards the lease term?
Usually not, and lenders differ enough that you should never assume yours will. The common position is that a lender reads the term the tenant is committed to, and an option is the tenant's choice rather than the tenant's commitment, so a lease written as three years plus two further terms of three years is a three year lease with options and not a nine year lease, however it is described in the marketing material. Some lenders will give an option period weight where the covenant behind it is strong, and some will not look past the committed term at all, which is why this is a question to ask before you rely on the answer rather than after.
There is also a floor worth knowing about. The lease documentation products we read publish a minimum of twelve months remaining on the lease before the product is available at all, so a lease inside its final year can put a whole product class out of reach regardless of how strong the tenant is. That is a threshold rather than a discount, and it is the sort of thing that decides which lenders you can approach before anybody looks at your numbers.
That matters because the tenancy profile your lender has to assess against the loan maturity is built on committed term. A three year committed term against a fifteen year loan is a question the credit team has to answer, and the answers are the same ones set out above: a shorter facility, a review event, faster amortisation, or a condition about renewal. What genuinely helps is an option that has already been exercised in writing, a longer initial term negotiated at the next review, or a guarantee standing behind the tenant. What does not help is counting the option years and hoping nobody reads the lease closely, because the valuer and the credit team both will.
Can a short lease stop an interest-only extension or refinance?
Yes. A lease that expires during or shortly before the proposed facility period can make an interest-only extension or refinance harder even where the tenant is strong today. The lender still has to decide whether the rental income supporting the loan is likely to exist through the relevant debt term. Depending on policy and the rest of the file, that can lead to a shorter facility, a shorter interest-only period, principal repayments, a requirement for the lease to be renewed, a lower advance or a different lender pathway. An unexercised option is not the same thing as committed lease term.
If lease expiry is approaching the interest-only expiry or facility maturity, treat those dates as one refinance problem rather than waiting for each event separately. Check the committed lease term, the interest-only end date and the facility maturity date together, then test whether the current lender will extend before you rely on a refinance. The downstream decision is covered in our guide to commercial interest-only expiry and refinance.
Does a stronger tenant increase the LVR a lender will offer?
Not in the current lender-published sources reviewed for this guide. Those sources set their published maximums by product, security or property type, location, loan size or occupancy. Tenant and lease quality appeared as eligibility or credit factors, not as a separate published LVR tier that rose because the tenant was stronger.
That is a scoped finding, so here is the method behind it. On the day this guide was built we read four lender-published sources directly: a major bank's lease documentation product page, the same bank's commercial lending guide for brokers dated May 2026, a non-bank lender's commercial lending page, and a private lender's policy page. They published up to 65, up to 70, up to 75, and 65 to 75 per cent respectively. Each maximum was keyed to something structural such as product, security type, asset class, project stage or metropolitan location. The closest tenant quality came to the percentage was an eligibility condition: one lease documentation product requires an active arm's-length lease before the product is available at all. That is a gate, not a tenant-driven LVR tier.
The second negative is the regulatory one, and it is set out above in full. The prudential regulator sets no maximum loan to valuation ratio for commercial property. It requires the lender to assess the tenancy profile against the loan term and leaves the ratio to the lender's own policy. Those two facts together are why the maximum LVR figures circulating online disagree with each other. They are all trying to express a valuation effect as a percentage, and the percentage is not where the effect lives. What you can control sits closer to home: the loan to valuation ratio you are offered follows from the asset and the lender you approach, and both are covered on our commercial property loans page.
One qualification belongs here rather than buried, because it is the closest thing to a tenant rule in the prudential framework and a reader will find it eventually. The standard does contain tenant tests. To be treated as not dependent on property cash flows, a portfolio must be diversified enough that no single tenant exceeds a quarter of net rental income for retail shopping centres or a tenth for other real estate portfolios, and government tenants are expressly excepted from those limits. That is a classification test applied to large diversified corporate portfolios, not a maximum advance on your building, and it says nothing about how much you can borrow. But it does mean the regulator distinguishes between tenants, and a page arguing that nothing links the tenant to the ratio should say so plainly.
We also went looking for the opposite of our own answer, and it is worth saying exactly what we searched for and did not find. We ran a targeted hunt across the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission, the Reserve Bank of Australia, the Australian Property Institute, the Australian Banking Association, the Australian Finance Industry Association and the Property Council of Australia, looking for any published figure linking a commercial loan to valuation ratio to the quality of a tenant. What came back from those bodies was a quarterly banking statistics release, an industry association submission on capital framework revisions, a central bank speech and a valuation institute's home page. Nothing on point from any of them. Every figure we located that keys a ratio to a tenant came from a broker, a finance company or a lender's own marketing page, which is the same result the table above reaches from the other direction.
Where do the maximum LVR figures online actually come from?
Almost all of them come from broker pages summarising panel appetite, and almost none of them traces to a document above the broker who wrote it. That is not automatically wrong, because a broker summarising what a panel writes is describing something real. It is a problem only when the summary is read as a published policy, which is exactly what happens when a figure is quoted back at a lender. The table below is the comparison those scattered figures never make in one place. Every row was read live on 5 September 2026, sources are described by type and date rather than by name, and the last row is our own published figure, because a page that audits other people's numbers has to include its own.
| Figure published | What it is keyed to | Who published it | Does it trace above a broker? |
|---|---|---|---|
| 75 per cent, falling to 50 to 55 per cent | The value of the property and the class of asset, with 60 to 70 per cent described as typical and the lower band for specialised assets | An Australian mortgage broker page, updated 25 June 2026 | No. No lender document or regulator is cited |
| 65 to 75 per cent, above 80 per cent with extra security | Property type, and whether additional residential security is added | An Australian mortgage broking page, reviewed 27 March 2026 | No. Presented as the writer's own panel guidance |
| 82 per cent, 80 per cent, and 100 per cent | Lender selection, loan size and the borrower's occupation, the highest figure for one profession only | An Australian mortgage brokerage page, no date shown, read 5 September 2026 | No. No policy document is cited and no date is given |
| 80, 75 and 70 per cent | Loan size alone, the ratio falling as the loan rises | An Australian mortgage broking page, published 25 May 2024, modified 1 May 2026 | No. Attributed to the writer's own lending panel |
| 65 to 80 per cent | Occupancy and asset class, higher for owner occupiers and lower for investment purchases | An Australian commercial finance brokerage page, no date shown, read 5 September 2026 | No. Described as accumulated panel knowledge |
| 70 or 80 per cent | The commercial freehold as security within a business acquisition | An Australian loan broker page, 11 August 2026 | No. No source is cited for the figure |
| Up to 75 per cent | Metropolitan location and a standard asset | A private lender's own published policy page, published 2 December 2024, modified 2 October 2025 | Yes. It is the lender's own policy, and it is keyed to location, not to the tenant |
| 65 to 75 per cent | Lender class and project stage, applied to as is value and to gross realisation on development | A non-bank development lender's own page, 10 May 2026 | Yes. The lender's own criteria, and no tenant is mentioned |
| Up to 70 per cent | Security type and product, for commercial property investment | A major Australian bank's own commercial lending guide for brokers, May 2026 | Yes. The lender's own document, and it is not keyed to the tenant |
| Up to 65 per cent | The product, with an active arms length lease as an eligibility condition rather than an LVR key | A major Australian bank's own lease documentation product page, read 5 September 2026 | Yes. The lender's own published product terms |
| 80 per cent | The basis the valuer was instructed on, and whether the income covers the interest at that loan size | Switchboard Finance's own published article, 17 April 2026 | No. It is ours, it is a broker page, and it is keyed to the valuation and cover, not to the tenant |
Scroll the table sideways to see every column.
If you want the long version of our own figure and the conditions attached to it, it is set out in our article on high LVR commercial property lending. It is keyed to the valuation basis and interest cover. It is not keyed to your tenant either.
So why does everyone say a strong tenant gets you a higher percentage?
Because in one market it is literally true, and that market is not this one. The United States has a distinct financing structure, credit tenant lease financing, in which the loan is advanced against the contractual rental obligations of a tenant carrying an investment grade credit rating rather than against the appraised value of the building. United States lender and law firm material published on that structure, read on 6 September 2026, describes loan to value ratios well above anything available here and minimum cover set barely above one times, on the reasoning that the tenant's credit, not the property, is what is being lent against.
That is a real product with a real name, and the sentence "a stronger tenant means a higher loan to value ratio" is an accurate description of it. It is simply a description of an American structure. No Australian equivalent appeared in anything we read: here the tenant reaches your loan through the valuation and the cover test, and the percentage stays a policy setting keyed to the asset. When you see the claim made about Australian lending without a product named, it is usually this idea travelling without its passport.
The same import problem shows up in the vocabulary. Several of the terms circulating in this topic are British or American in origin and carry meanings that do not map onto Australian lending, which is worth knowing when you are reading an answer that does not say which country it is describing.
Does interest cover or the LVR actually cap your loan?
Usually the cover test, not the percentage. Your lender runs both and lends the lower of the two answers, and on a tenanted commercial deal the income test is the one that bites first far more often than the loan to valuation ratio is. That is why a borrower who spends the whole process arguing about a percentage often loses the loan on a number nobody mentioned.
The two tests measure different things and the names get used loosely. Interest cover asks whether the property's net income covers the interest on the loan. Debt service cover asks whether it covers the interest and the principal repayments together, which is a harder test on the same facility. Both are expressed as a multiple, and the broker published and lender published sources we read on 6 September 2026 quoted minimum cover in a band of roughly one and a quarter to one and a half times, described variously as an interest cover ratio or a debt service cover ratio depending on the writer. Treat the multiple as a lender by lender setting rather than a market rule, and always ask which of the two tests a quoted number refers to. You will also see the ratio itself written as LTV rather than LVR, particularly in material written outside Australia; they mean the same thing.
| The test | What it measures | What your tenant does to it | When it is the binding one |
|---|---|---|---|
| Loan to valuation ratio | The advance as a percentage of the assessed value | Nothing directly. The tenant moves the value the percentage is applied to | Where the deposit is the constraint, typically on a lower yielding asset |
| Interest cover ratio | Whether net income covers the interest at the lender's assessment rate | A weaker or unverifiable tenant reduces the income the test is run on | On interest only facilities, and on most tenanted investment deals |
| Debt service cover ratio | Whether net income covers interest and principal together | The same, and the harder test to pass on the same numbers | Once the facility amortises, which is where a short lease usually pushes you |
| The valuation itself | What the property is worth on the basis the lender instructed | This is where almost all of the tenant effect lands | Where the assessed value comes in under the price |
Scroll the table sideways to see every column.
There is a fourth channel worth naming, because it does not change the size of your loan at all. Lease quality is described across the broker published material we read as the largest single property specific driver of the rate offered on an investment deal, with a short lease or a smaller local operator attracting a premium over the same building let to a stronger tenant on a longer term. That changes what the loan costs rather than what it is, but it loops back into the test above, because a higher rate raises the repayment the income has to cover.
I have a strong tenant. Why is the lender still saying no?
Because tenant strength is only one part of the file. A national or otherwise strong tenant cannot repair a loan that fails the cover test, a lease that expires well before the requested facility, a specialised property with weak vacant-possession value, an asset or location outside policy, inconsistent rent evidence, or a borrower and ownership structure that does not fit the product being used.
- The value is short: the valuer may be using a higher cap rate, market rent below passing rent, an incentive adjustment or a lower vacant-possession figure.
- The income is short: the net rent may not cover interest or debt service at the lender's assessment rate.
- The lease is short: a strong tenant with little committed term can still leave the lender exposed to reletting risk before the loan matures.
- The entity is wrong for the product: a related-party lease or trading borrower can move the file out of a lease-documentation pathway even when the underlying business is healthy.
- The security is the problem: specialised use, regional location, title, zoning or weak alternative use can cap the advance independently of the tenant.
The practical move is to ask which test failed before changing lenders. If the problem is valuation evidence, fix the evidence. If it is cover, reduce the requested debt or improve the sustainable income. If it is lease term or product fit, changing structure may matter more than changing the tenant story.
Does a stronger tenant let a lender accept a lower cover ratio?
Sometimes, and this is the one place your tenant reaches a threshold rather than a valuation. The broker published material we read describes lenders accepting cover at the lower end of their range on a prime asset with a strong tenant and a long lease, and requiring more headroom where the lease is short or the location secondary. Read that carefully, because it is a discretion inside a policy band rather than a published concession, and it is exercised by a credit team on a file rather than granted by a rate card.
It also runs the other way, which is the part borrowers miss. If the income the cover test is calculated on gets discounted, for a related party lease or an unverifiable payment history, the test tightens without any policy changing. So the practical version of the whole question is this: your tenant rarely moves the percentage, sometimes moves the required cover, and almost always moves the income the cover is measured on.
What does the lender want in the file to prove your tenant?
A lender wants three things: the lease, a rent ledger showing the rent has actually been paid, and searches confirming the tenant is the entity the lease says it is. Everything else is supporting material around those three. What lenders actually look at first is not the tenant's brand, it is whether the income is verifiable.
In full, the material commonly asked for on a tenanted commercial purchase or refinance runs to the executed lease and every variation, side deed or incentive deed attached to it; the tenancy schedule, which is the one page summary of who occupies what, at what rent, until when; a certified rent ledger or rent roll showing the payment history rather than the entitlement; company and directorship searches on the tenant entity; any guarantee given by directors or a parent company; and the bank guarantee or security deposit held under the lease. On a lease documentation product the lease is doing the work that tax returns would otherwise do, which is why the paperwork discipline is higher rather than lower. Our note on the lease doc commercial property loan covers what that product will and will not accept.
None of this is a checklist that guarantees an approval, and it is worth being blunt about that. It is the material a credit team commonly asks for, and its absence is what stalls files.
How do I check my tenant's covenant myself?
You can do most of what a credit team does, from public registers and documents you are already entitled to ask for. Doing it before you are under contract is worth more than doing it well, because the answers change what you offer rather than what you argue for later.
Search the tenant entity and its directors on the national companies register, and check whether the name on the lease is the operating business or a separate entity holding nothing. Ask for a rent ledger rather than a rent roll, because a roll shows what is owed and a ledger shows what has been received. Read whatever guarantee exists, and note who gave it, since a guarantee from the same empty entity that signed the lease adds nothing. Check the personal property securities register for security interests over the tenant's assets, which tells you who else already has a claim on the business you are relying on. Where the tenant is a franchisee, establish whether the franchisor stands behind the lease or simply licenses the brand. If any of it turns up something you do not understand, that is a question for your solicitor before it is a question for your broker.
What should I check before I make an offer on a tenanted commercial property?
Before you rely on the tenant in your price or your finance, verify the payer, the money and the committed term. The best time to find a weak covenant, hidden incentive or short lease is before exchange, while the answer can still change your offer and your finance clause.
- Match the legal tenant: confirm the exact entity, ACN or ABN and whether the brand, franchisee, special purpose entity or related company actually signed.
- Read the whole lease file: obtain the executed lease plus every variation, incentive deed, side letter, licence, assignment or sublease that changes the economics or liability.
- Check committed term: separate the current fixed term from options that have not yet been exercised.
- Verify the money: reconcile the passing rent, outgoings, incentives and review basis, then obtain a rent ledger that shows what has actually been paid.
- Read the security behind the rent: identify bank guarantees, security deposits, director guarantees and parent-company guarantees, including expiry dates and limits.
- Test market rent: ask whether the passing rent is above or below current market and whether the valuation could normalise it.
- Check the failure case: understand what the property is worth and how readily it can be re-let if the tenant leaves.
- Protect the contract: have your solicitor settle the due-diligence and finance conditions and the time you need for valuation and approval before you are committed.
That list is not a substitute for legal, valuation or finance advice. It is the handover point between them: your solicitor confirms what the documents mean, the valuer tests the sustainable income and security, and the lender decides what debt that evidence can support.
Is this the same diligence I should be doing anyway?
The overlap is almost total, which is the point of this section. A buyer who does proper diligence on a tenanted asset ends up holding the same documents the lender will ask for, so gathering them early does two jobs at once and takes the finance timetable off the critical path.
What the lender asks for about the tenant
- The executed lease and every variation or side deed
- The tenancy schedule, rent, term, options and review basis
- A certified rent ledger showing payments actually made
- Company and directorship searches on the tenant entity
- Any director or parent company guarantee
- The bank guarantee or security deposit held under the lease
What a careful buyer gathers anyway
- The lease, because it is what you are actually buying
- Outgoings recovery, to know what the net income really is
- Arrears history, because a ledger is where trouble shows first
- Who the tenant entity is, and whether it is a shell
- Whether anyone stands behind the tenant if it stops paying
- What security you hold, and how it is called on
Does a bank guarantee or security deposit help your borrowing?
Indirectly, yes, if you are the landlord. A bank guarantee or security deposit held under the lease supports the rent, the rent is the income your valuation is built on, and the document itself is evidence in your file that the income has a fallback. What it is not is security for your own loan. It is held under the lease, for lease obligations, and calling on it is a landlord and tenant process rather than a lending one.
Guarantees from directors or a parent company work the same way. They strengthen the covenant behind the rent, which is the number your value is calculated from, and a credit team will read a lease with a substantial parent guarantee very differently from the same lease without one. They do not become collateral your lender can take. If you want to know what your lender's own security actually reaches, the all monies clause in your mortgage is the clause to read, and the cover test your facility is measured against is explained under debt service cover ratio.
The contrast is worth stating once, because it is where the search results go wrong. For a tenant, the bank guarantee is a cost and a constraint: the bank issuing it will usually want cash or security behind it, and that reduces what the tenant can borrow elsewhere. For a landlord, the same instrument is support. Same words, opposite side of the table.
Whose borrowing are we talking about?
Ask that question first, every time, because the answer changes the advice completely. If you are the landlord, a guarantee under the lease is support for your income. If you are the tenant, the guarantee your landlord holds is an encumbrance on your own borrowing capacity. Almost all of the material published on this topic answers the second question, because that is the larger audience, so check which version you are reading before you act on it.
What happens to your loan if the tenant fails?
Your loan does not automatically change when your tenant fails. Your income changes, and that is what your lender reacts to. The facility keeps running on its own terms, and the pressure arrives through the cover tests rather than through any clause about your tenant.
If the tenant enters voluntary administration there is a defined sequence, and it is set out for creditors by the Australian Securities and Investments Commission in its guide Voluntary administration: a guide for creditors, a page last updated 17 December 2024. During the administration, "owners of property (other than perishable property) used or occupied by the company, or people who lease such property to the company, cannot recover their property". Within five business days after their appointment the administrator must tell you whether they intend to keep occupying or using the property, and if they do continue, "they will be personally liable for any rent or amounts payable that arise after the end of the five business days". If they do not intend to continue, they must tell you where the property is, so far as they know. That guidance describes your position as a creditor of the tenant. It says nothing about your own loan.
If the company moves on into liquidation, the relevant provision is section 568 of the Corporations Act 2001, headed "Disclaimer by liquidator; application to Court by party to contract". It allows a liquidator to disclaim onerous property, and subsection (1A) is the limb that matters to a landlord: a liquidator "cannot disclaim a contract (other than an unprofitable contract or a lease of land) except with the leave of the Court", which puts a lease of land in the category that can be disclaimed without going to Court first. Subsection (8) gives you a way to force the question, because once a person interested in the property applies in writing, a liquidator who declines or neglects to disclaim for twenty eight days loses the ability to do so. That is a legal process with real consequences for your income, so it is a conversation for your solicitor rather than something to run from a web page.
What all of that does to your facility is arithmetic. Losing the rent reduces the income measured against your interest and your repayments, and a facility that was comfortably covered can fall below its test within a quarter. Lenders usually treat that as a review point rather than an immediate default, because a vacant building with a solvent borrower is a problem to be worked through, and enforcement destroys value for everyone. Where this commonly lands is a conversation about the covenant test, a plan to re let, and sometimes a temporary variation. Our guide to a commercial loan covenant breach sets out how that conversation usually runs, and if the tenant's situation has gone further than administration, our guide to a winding up application covers what follows.
Do I need to tell my lender before agreeing to a rent reduction or lease variation?
Check the facility documents before you sign the variation. A rent reduction or lease variation does not automatically breach every commercial loan, but the facility can contain reporting, consent or covenant requirements that become relevant when a material lease is varied, surrendered, replaced or its rent is reduced. Even where prior consent is not expressly required, a permanent reduction can lower the income used for ICR or DSCR and can weaken the next valuation.
That is why the form of the concession matters as much as the amount. A short dated abatement with an end date and a return to the contracted rent reads differently from a permanent reduction recorded in a deed of variation, even where the cash cost this year is identical. Model the cover test at the reduced rent, read the facility requirements and speak to the lender before executing a material change rather than discovering the problem at annual review or refinance. Whether a side letter or formal variation is legally appropriate is a question for your solicitor. If the revised income is already pushing a covenant test, use our guide to a commercial loan covenant breach for the next steps.
What should I do if my tenant is weakening but has not failed?
Act while you still have options, because everything above becomes available to your tenant's administrator rather than to you once an appointment is made. Late payments showing in the ledger, requests to vary the rent, and a tenant asking to surrender early are all early signals, and they are all easier to solve before a formal process starts than after. Talk to your lender before the test is missed rather than after, since a covenant conversation opened by the borrower reads very differently from one opened by the lender.
From our broking, indicative and qualitative
We are not publishing a covenant linked LVR band here, and the reason is the argument of this page. If we published one we would be doing exactly what the section on published maximums criticises: converting a valuation effect into a percentage and attaching our name to it. What we can describe is what the pattern looks like from the file.
- Tenanted deals are declined in kind rather than in number. The common reasons are that the lease term is materially shorter than the loan being asked for with no plan for the gap, that the rent being relied on cannot be evidenced as paid, or that the security is specialised enough that the vacant possession figure, not the tenant, sets the number.
- The document most often missing at the first pass is the rent ledger. Buyers arrive with the lease, because the lease is what they negotiated, and a lease proves the entitlement to rent rather than the receipt of it.
- The option years get counted more often than any other single error. A lease described as three by three by three is read by the buyer as nine years of income and by the credit team as three, and the gap surfaces late, usually after a price has been agreed.
- The number that actually stops deals is the cover test, not the percentage. Files arrive built around a loan to valuation ratio the borrower has read somewhere, and fall over on income the property cannot evidence.
- The difference between a tenant a credit team is comfortable with and one it is not is usually verifiability rather than size. An entity that can be searched, whose accounts or public record say something, and which has a guarantor behind it, reads as lower risk than a larger business that cannot be checked.
- A national logo can be a false comfort when the lease is actually signed by a local franchisee or thin special purpose entity. The first question is always who owes the rent and who, if anyone, guarantees that obligation.
- Headline rent can be a false comfort too. An incentive deed, temporary abatement or rent materially above market can change the sustainable income the valuation and cover test are built on, so the complete lease file matters more than the face rent alone.
Indicative only, based on deals we have placed and current as at 6 September 2026. This is a description of patterns, not a quote, not an offer and not an approval likelihood. Actual terms depend on lender policy and your circumstances at the time of application. Not financial advice.
Your tenant is not a dial that raises the published percentage your lender will advance. The covenant affects the reliability and sustainability of the rent, the capitalisation rate and the assessed value, while the lease term can also affect facility term, interest-only appetite and refinance risk. The lender then runs its own LVR policy and cover test against those inputs. That is why the useful questions are not only "is the tenant strong?" but "who legally owes the rent, what is the effective rent after incentives, how much committed lease term remains, has the rent actually been paid, what happens when the lease and loan dates collide, and what is the property worth if the tenant leaves?" Those are the facts you can verify before exchange or refinance. If the tenant later asks to change the rent or lease, read the facility requirements and model the revised income before you sign the variation.
Key takeaway: verify the legal tenant, effective rent, payment history, guarantees and committed lease term first. Then solve the valuation and cover tests separately, because tenant quality cannot rescue the wrong number on either side.Frequently Asked Questions
Tenant quality can change how much you can borrow without changing the lender's published LVR. A stronger covenant can support a stronger valuation and more reliable rental income, while the lender still applies its own LVR policy to the assessed value. The tenant can also affect term, cover, conditions and evidence, but it is not a published percentage dial.
It can. For an income-producing commercial property, a stronger and more verifiable covenant can support a lower capitalisation rate because the rent is viewed as more reliable. A lower cap rate applied to the same sustainable net income produces a higher capital value, although market rent, incentives, lease term, location and alternative use still matter.
No. Check the legal entity named on the lease. If the national company signed, its covenant supports the rent. If a franchisee or special purpose entity signed and the brand owner did not guarantee the lease, the landlord's contractual payer is the smaller entity. The logo alone does not create a guarantee.
Only if the legal structure supports that conclusion. A franchise can be leased directly by the franchisor, by a local franchisee, or through a head lease and sublease. Lenders and valuers look at the entity actually liable for rent and any guarantee behind it, so identify the tenant and the guarantor before you treat the brand as the covenant behind your rent.
Yes. A lease that expires during or shortly before the proposed facility period can make an interest-only extension or refinance harder even where the tenant is strong today. Depending on lender policy, that can lead to a shorter facility, a shorter interest-only period, principal repayments, a renewal condition, a lower advance or a different lender pathway. Treat lease expiry, interest-only expiry and facility maturity as one planning problem.
Do not assume they do. An unexercised option is a choice the tenant may take later, not committed income today. Some lenders may give options weight, while others assess the fixed term only, so separate exercised term from unexercised options before relying on the lease length.
Not necessarily. A valuer tests sustainable market income, so passing rent that is materially above market can be adjusted or treated as a reversion risk rather than capitalised forever. The lease term, review mechanism, incentives and market rent all help determine how much of the current rent supports value.
They can affect the effective income a valuer relies on. Rent-free periods, abatements and fit-out contributions reduce the economics below the face rent, and Australian valuation guidance says market incentives should be reflected where they are part of normal leasing evidence. Always provide the incentive deed or side letter with the lease.
Yes, but a related-party lease is assessed differently from an arm's-length investment lease. A valuer will usually test the rent against market and the lender may look through the lease to the trading business's own serviceability. It can also move the file out of a lease-documentation product that requires an arm's-length tenant.
The core evidence is the executed lease and variations, a rent ledger showing what has actually been paid, and searches confirming the tenant entity. The lender may also want the tenancy schedule, incentive deeds, outgoings, guarantees, bank guarantee or security deposit and evidence of any exercised option.
Indirectly, if you are the landlord. The guarantee supports the rental obligation and is evidence behind the income, but it is held under the lease and is not security for your own loan. It may strengthen the covenant and the lender's comfort with the rent without changing the lender's published LVR.
Check the facility documents before signing. A commercial loan can contain reporting, consent or covenant requirements that become relevant when a material lease is varied, surrendered, replaced or its rent is reduced. Even where prior consent is not expressly required, a permanent reduction can weaken cover and the next valuation, so model the revised income and speak to the lender before executing a material change.
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