Commercial property finance
Why banks decline commercial property loans, and what changes the answer.
Banks decline commercial property loans for five main reasons: a weak tenant, a short lease, a specialised building, a business or rent that cannot service the debt, and a valuation below the price. Each has a fix in price, equity, structure or lender tier. Lending is not scarce, with business finance for property purchases at a record $27.2 billion in the June quarter 2026 (ABS), so a decline usually means the deal did not fit that lender's policy.
Why do banks decline commercial property loans?
Banks are lending against commercial property in volume. Business finance for property purchases reached a record $27.2 billion in the June quarter 2026 (ABS Lending Indicators), as we covered in our data story on business property lending. So a decline usually means a particular deal did not fit a particular lender's policy, and it rarely says anything final about the borrower.
I worked in banking alongside credit teams at NAB and Judo before founding FGO, and the reasons a commercial property file comes back declined fall into a short list. Realcommercial reported on 24 September 2026 that commercial lenders put lease quality, tenant strength and the income a property can generate ahead of comparable sales when they assess a file. Each reason below pairs the lender's worry with the change that fixes it. The order isn't a ranking; any one of them can stop a file on its own.
| Reason for decline | What the lender is worried about | What changes the answer |
|---|---|---|
| Weak tenant covenant | The rent depends on a tenant who may not be able to keep paying it | A stronger tenant, a security deposit or guarantee behind the lease, or more equity |
| Short lease | Income is contracted for only a year or two, so the valuer discounts it | A lease extension before settlement, a shorter loan term, or an owner-occupier structure |
| Specialised building | Few replacement tenants if the operator leaves, so the vacant value is far lower | A lender with appetite for the asset class, a strong operator, and a lower loan to value ratio |
| Serviceability | The rent or the business does not cover repayments with a buffer | A smaller loan, a longer term, extra income, or additional security |
| Valuation below price | The lender lends a percentage of the lower valuation, leaving a gap | A renegotiated price, more equity, or better evidence for the valuer |
The specialised building is the one buyers underestimate. A buyer's agent quoted by realcommercial in July 2026 warned that a childcare centre bought for $4 million to $5 million could be worth $2 million to $3 million when vacant, because so few operators can take the space. A lender prices that gap into its lending, and we look at one such asset class in more depth in our piece on childcare centre finance.
A decline is a statement about one deal at one lender.
Most decline reasons can be fixed by moving price, equity or structure.
A valuation shortfall is closed by a lower price or more of your own money. Extending a short lease before you settle moves the income the valuer sees. For serviceability, the answer is usually a smaller or longer loan, or more income shown. Pricing matters too, because a rise in the rate the loan is priced off lifts repayments and can tip a test that passed a month earlier, as we explained in our BBSW piece.
Extra security can also change the result. Where property equity sits elsewhere in the structure, the loan can lean on it, the same fork we describe in secured versus unsecured acquisition lending. The lender's general credit factors are set out in what banks look for in business loans, and they apply to commercial property as well.
A different lender tier can suit a file that one tier declines.
Lenders fall into broad tiers: the major banks, challenger and non-bank lenders, and private credit. Each has a different policy on lease length, asset type and loan to value ratio, so a file declined at one tier can sit well inside another's policy. A major bank's policy may exclude a short lease or a specialised asset that a challenger or private lender will take, usually at a higher price and a shorter term. As a rule of thumb, short leases and specialised assets are where challenger, non-bank and private lenders most often step in, and the trade-off is usually a higher rate, a lower LVR or a shorter term.
Private credit deserves care, because ASIC and the RBA have both flagged its scale and opacity as a growing risk, and realcommercial reported in August 2026 that two Australian private credit funds froze investor redemptions after the Bathla Group collapse. Compare the full cost and term of a private credit offer before accepting it.
Test the deal against lender policy before you apply.
Each formal application leaves an enquiry on your credit file, so it pays to test a deal against lender policy before lodging it. Have the lease and tenancy schedule, the outgoings and rent history, the business financials if you will occupy the building, a statement of your assets and liabilities, the contract, and a plan for any vacant space. Know where your equity is coming from, because most of the fixes above come back to it.
The same preparation applies to a refinance, which we cover in our refinance guide, and to buying in a weak market, which we cover in our piece on lending against office property. Whether you hold the property personally, in a trust or in an SMSF also changes the assessment, as we explain in our owner-occupier and investor comparison. If you have a decline in hand or expect one, our Melbourne commercial property finance page explains how we approach the asset types, and talking to us before you apply is the quickest way to find the fit.