Freehold or leasehold going concern: what you can borrow on each
Freehold vs Leasehold Going Concern | Switchboard Finance
Accommodation Finance
Freehold · Leasehold · Going Concern
Freehold or leasehold going concern: what you can borrow on each
Tenure is the first fork in any accommodation purchase, and it changes everything a lender will do for you. Freehold and leasehold going concern are financed in completely different ways, against different security. Here is what you can actually borrow on each.
Quick Answer
With a freehold going concern you own the land, building and trade, so a lender secures against real property. With leasehold you own the business and rent the land, so the loan is financed against the lease. Compare both on our motel finance and caravan park finance pages.
Freehold or leasehold: which can you actually afford?
The tenure you choose decides how much a lender will put behind you, not just what you pay for the business. With a freehold going concern, you own the land, the building and the trade, so the lender holds real property as security and can lend against bricks and mortar as well as the established operation. With leasehold, you own the business and rent the land, so there is no real estate for the lender to fall back on, only the lease and the trade it supports.
That single difference is the whole story of accommodation finance. Where this commonly lands is buyers comparing two motels at similar asking prices and assuming the borrowing will be similar too, when the freehold buyer can gear far harder than the leasehold buyer. If you are still working out what "going concern" even means in a business sale, start with our companion piece on what going concern actually means, then come back to the tenure question and the loan to value ratio each one supports.
What you can borrow on each
What you can borrow comes down to what the lender can take as security, and that is where freehold and leasehold split apart. A freehold going concern is typically financed up to around 60 to 70%, indicative and varies by lender, because the loan sits behind land, building and trade. A leasehold is financed against the lease alone, so lending is lower and the loan term is capped inside the remaining lease, commonly up to about 15 years, indicative and varies by lender. What a lender weighs first on a leasehold is the length and strength of that lease, because it is both the security and the clock on the loan.
The leasehold numbers are not a worse deal, they are a different deal. A leasehold buyer puts in less cash for a higher running yield, while a freehold buyer ties up more capital but holds an asset the lender treats as security it can rely on. The same logic runs through motel finance and pub and hotel finance, where freehold, leasehold and gaming entitlements each shift the lending again.
The deed of consent, and why leasehold lending hinges on it
A leasehold loan lives or dies on the lease, which is why lenders insist on a deed of consent from the landlord before they will fund. The deed is the landlord's written agreement that a lender can take security over the leasehold business and, if the borrower defaults, step in or assign the lease to a new operator rather than simply terminating it. Without that protection the lender has nothing to enforce against, so no deed of consent usually means no leasehold loan.
Lease terms in Australia are also shaped by retail and commercial leasing rules, and the obligations attached to a lease are not trivial. The NSW Government guidance on retail leases sets out the kind of disclosure and renewal provisions that affect how secure a lease really is. A long lease with clean renewal options and a cooperative landlord is a far stronger proposition than a short tail with no deed in place, and the same checks apply when you finance a leasehold park through caravan park finance.
Where leasehold is the stronger fit, and where it gets tricky
Leasehold is the right tenure for plenty of buyers, but only when the lease supports it. The appeal is lower entry, higher yield, but a diminishing asset, which works beautifully for an operator with a long, secure lease and a willing landlord, and works against you when the lease is short or the consent is not forthcoming.
Where leasehold is the stronger fit
- You want a lower entry cost into a trading going concern
- You are chasing a higher yield on the cash you invest
- There is a long, secure lease with a cooperative landlord
- You want to run an operation before committing to freehold
Where leasehold gets tricky
- A short remaining lease caps the loan term hard
- No deed of consent from the landlord means no loan
- Lending is lower and entirely lease dependent
- It is a diminishing asset as the lease runs down
On the lender's side, the freehold case is usually the simpler one to fund, because the security is real property that holds its value and can be refinanced or used for an exit strategy down the track. Whichever way you lean, get the tenure and lease position checked before you sign, not after, because it sets the ceiling on everything you can borrow.
Freehold and leasehold going concern are two different finance products wearing the same "for sale" sign. Freehold lets you secure against land, building and trade and gear up to around 60 to 70%, indicative and varies by lender. Leasehold is financed against the lease, lends less, and caps the term inside the remaining lease behind a deed of consent. Neither is better in the abstract, the right one depends on your cash, your time horizon and the lease in front of you.
Key takeaway: Check the tenure and the remaining lease before you sign, because they set the ceiling on what any lender will put behind you.Frequently Asked Questions
Whether you should buy a leasehold or freehold motel depends on how much cash you have and how long you intend to hold it. A freehold going concern means you own the land, the building and the trade, which lets a lender secure against real property and usually lend more. A leasehold motel has a lower entry cost and higher yield but is a diminishing asset, and the loan term is capped inside the remaining lease. Compare the lending on each on our motel finance page.
A deed of consent is the landlord's written agreement that lets a lender take security over a leasehold business and step in if the borrower defaults. Without it, most lenders will not finance a leasehold going concern at all, because the lease is the security. It sits alongside the lease itself and the going concern being sold. You can read more about retail lease obligations at the NSW Government.
What you can borrow on a leasehold going concern is lower than on a freehold and depends heavily on the strength and length of the lease, because the loan is financed against the lease rather than land. The loan term is generally capped inside the remaining lease, commonly up to about 15 years, indicative and varies by lender. Lenders look at the loan to value ratio against a going concern valuation, not bricks and mortar. Our caravan park finance page sets out how this works across asset classes.
A loan term longer than the remaining lease is very rare on a leasehold going concern, because the lease is the lender's security and it cannot extend credit past the asset's life. Where a lease has options to renew, some lenders will count part of the option period, indicative and varies by lender. This is why lease length is one of the first things a lender checks. Speak to a broker before you commit to a leasehold with a short tail.
A leasehold motel can be a strong investment for the right buyer, offering lower entry, higher yield, but a diminishing asset that loses value as the lease runs down. A freehold going concern holds the land value and is easier to refinance or use for an exit strategy later. The right choice depends on your time horizon and cash position. Our motel finance page compares both tenures in detail.
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