Can an SMSF Buy Rural or Commercial Property Around Cairns?

SMSF to buy commercial or rural-residential property near Cairns?

An SMSF may be able to buy commercial or rural-residential property near Cairns, but postcode, property use, land size, fund structure and lender policy all affect the available finance.

A self-managed super fund may be able to borrow to purchase commercial or rural-residential property around Cairns.

The property being located in regional Queensland does not automatically make it unacceptable. It does reduce the number of suitable lenders, particularly where the transaction combines:

• an SMSF borrower;
• a regional postcode;
• commercial or rural security;
• a high LVR;
• limited fund liquidity; or
• a property with specialised use.

The first step is to define the property correctly. “Rural property” can describe several very different securities.

Related research: Can You Get a Home Loan for a Hobby Farm or Rural Residential Property?

How many lenders offer SMSF loans?

The supplied lender policy reference contains 21 SMSF applicant policy entries.

At least six expressly provide some form of SMSF lending:

• La Trobe Financial;
• RedZed;
• Resimac;
• Firstmac;
• ORDE Financial; and
• Pepper Money.

At least four expressly provide a commercial SMSF lending pathway:

• La Trobe Financial;
• RedZed;
• ORDE Financial; and
• Pepper Money.

Other policy entries state that the lender does not accept SMSF applications or provide insufficient information to confirm acceptance.

Several major residential lenders in the policy reference expressly do not offer SMSF loans. This includes ANZ, Bankwest, Commonwealth Bank, NAB, Westpac, Suncorp Bank, ING, St.George, UBank and Newcastle Permanent.

This is why an ordinary residential lender search may repeatedly produce postcode or applicant-type declines.

Can an SMSF borrow to buy property?

SMSFs are generally prohibited from borrowing, except where the borrowing satisfies an available exception such as a complying limited recourse borrowing arrangement.

Under a typical property LRBA:

• borrowed money is used to acquire a single acquirable asset;
• the asset is held through a separate holding trust;
• the SMSF obtains the beneficial interest;
• the fund has the right to obtain legal ownership after the loan is repaid; and
• the lender’s recourse against the SMSF is limited to the asset covered by the arrangement.

The legislation allows certain acquisition and borrowing expenses but distinguishes maintaining or repairing an asset from improving it.

The structure should be established before the purchase contract is signed. Incorrect purchaser names or trust structures can create tax, duty, finance and compliance problems that may be difficult to correct later.

What types of Cairns property might an SMSF lender consider?

The lender’s classification matters more than the property’s advertising description.

Standard commercial property

This may include:

• offices;
• warehouses;
• factories;
• retail premises;
• light-industrial units;
• medical suites; and
• some mixed-use properties.

Commercial SMSF policies commonly apply different LVRs depending on location, tenant, lease term and security type.

Rural-residential property

This usually involves a residential dwelling on a larger block in a rural-residential zone.

The lender may consider:

• land size;
• proximity to Cairns or another service centre;
• road access;
• water and sewerage arrangements;
• whether the property earns agricultural income;
• the proportion of the land used residentially; and
• how easily the property could be resold.

La Trobe’s SMSF policy expressly includes existing rural-residential investment property, subject to the full policy.

Agricultural or farming property

An income-producing farm may be assessed under rural or agribusiness policy rather than ordinary SMSF residential policy.

Factors can include:

• farming activity;
• water licences;
• crops or livestock;
• improvements and machinery;
• environmental risks;
• land area;
• business income;
• zoning; and
• dependence on the property’s productive capacity.

A lender accepting rural-residential acreage may still decline a working farm.

Specialised commercial property

Properties such as service stations, hotels, motels, pubs, childcare centres, caravan parks and purpose-built tourism assets may be restricted or require specialist commercial credit.

A standard office or warehouse generally has a broader lending market than a property designed for one specialised business.

Does the Cairns postcode create an automatic decline?

Not necessarily.

Each lender uses its own location categories, postcode tools and valuation rules. Cairns or its surrounding districts may be treated differently depending on:

• the specific suburb;
• whether the property is metropolitan, regional or rural;
• the property type;
• the requested LVR;
• the proposed loan amount; and
• whether the transaction is residential or commercial.

One lender may accept a residential SMSF property in a particular postcode but not a commercial property there. Another may accept the commercial property at 65% LVR but not at 75%.

The postcode should therefore be assessed against the exact product rather than against the lender’s general residential location policy.

How do commercial SMSF postcode restrictions work?

Some policies apply a higher maximum LVR only in major capital cities.

For example, ORDE’s supplied policy permits commercial SMSF lending for offices, warehouses, factories, retail premises and light-industrial property. Its maximum 80% commercial SMSF LVR is limited to Melbourne, Sydney and Brisbane.

The policy includes lower-LVR commercial tiers, but the postcode and security still need to fit the lender’s commercial location tool.

For a Cairns property, the relevant question is therefore not simply whether the lender offers commercial SMSF loans. It is:

What is the maximum LVR for this specific commercial property in this specific postcode?

Examples of commercial SMSF policy differences

The following lender examples are drawn from the policy reference and show why the property and postcode need to be considered together.

La Trobe Financial

La Trobe’s SMSF policy includes the purchase or refinance of existing:

• residential property;
• commercial property; and
• rural-residential investment property.

The property must be acquired as a single asset through an acceptable SMSF borrowing structure.

Its policy contains different LVR and loan-size limits for residential, commercial and rural property. Regional acceptance remains subject to the security and valuation.

RedZed

RedZed offers separate residential and commercial SMSF products.

Its supplied commercial SMSF policy provides:

• commercial loans up to 75% LVR in Category 1 locations;
• commercial loans up to 65% LVR in Category 2 locations;
• corporate trustee structures;
• a maximum of four SMSF members; and
• servicing using fund income, with some capacity to consider additional member contributions.

The postcode category for the actual Cairns property would need to be confirmed.

ORDE Financial

ORDE’s policy provides for residential and commercial SMSF purchases and refinances.

Acceptable commercial securities include:

• offices;
• warehouses;
• factories;
• retail premises; and
• light-industrial property.

The highest commercial LVR is geographically restricted, demonstrating that a lender may accept the property type but reduce leverage outside the largest capital-city markets.

Pepper Money

Pepper’s SMSF policy provides for existing residential and commercial investment property.

Its acceptable commercial security list includes:

• offices;
• retail property;
• industrial property;
• commercial property;
• multiple units on one title;
• some boarding or rooming houses; and
• some mixed-use property.

The supplied policy provides for up to 75% LVR on qualifying commercial SMSF security, subject to loan-size, postcode and property requirements.

Can the SMSF buy the business premises used by a member’s company?

Potentially, where the property qualifies as business real property and the transaction complies with superannuation law.

The Australian Taxation Office states that business real property generally means land and buildings used wholly and exclusively in a business. It can be an exception to certain related-party acquisition and in-house asset restrictions.

Transactions involving related parties must be conducted on commercial, arm’s-length terms and must not give members an improper present-day benefit.

A lender may permit commercial property to be occupied by a business associated with an SMSF member. It may require:

• a formal lease;
• market rent;
• an independent rental assessment;
• evidence that rent is being paid;
• financial information for the tenant business;
• confirmation that the property qualifies as business real property; and
• legal and accounting advice.

The fact that a lender accepts the security does not establish that the transaction complies with superannuation, tax or related-party rules.

Can an SMSF buy residential property from a member or live in it?

Residential SMSF property is subject to strict related-party and present-benefit restrictions.

An SMSF investment should be maintained for retirement purposes. A member, relative or related party generally cannot use the fund’s residential property as their home or holiday accommodation.

The ATO also states that an SMSF generally cannot acquire an asset from a related party unless a specific exception applies. Business real property is one such exception, but ordinary residential property does not generally qualify merely because it is being purchased as an investment.

Legal and tax advice should be obtained before entering any related-party purchase or lease.

Can the SMSF buy vacant land and build?

This can be considerably harder than buying an existing property.

An LRBA is generally structured around the acquisition of a single acquirable asset. Borrowed money can be used for certain costs and for maintaining or repairing the asset, but the legislation distinguishes this from improving the asset.

Building a new dwelling, subdividing land or substantially redeveloping an SMSF property can create questions about:

• whether the resulting asset is the same single acquirable asset;
• whether borrowed funds are being used for improvements;
• whether separate titles will be created;
• whether the lender offers SMSF construction finance;
• whether the holding trust documentation remains valid; and
• whether additional fund cash can legally be used for the proposed work.

Many SMSF property lenders restrict their products to completed, existing property.

A proposed development should be reviewed by a suitably qualified SMSF lawyer and accountant before finance or contracts are arranged.

Related research: Can You Use a Bridging Loan to Buy Vacant Land in Australia?

What does “single acquirable asset” mean for property?

A property held under an LRBA generally needs to be capable of being treated as one asset.

A house and land held under one title may ordinarily constitute a single acquirable asset. Multiple separately titled lots may require separate arrangements or may not fit the lender’s SMSF policy.

Issues can arise where the purchase includes:

• two or more separate titles;
• a business and property purchased together;
• plant and equipment;
• water licences;
• livestock;
• removable assets;
• multiple dwellings on separate titles; or
• development land intended for subdivision.

The lender’s “single title” policy and the legal definition of a single acquirable asset need to be considered separately.

How much deposit does an SMSF need?

Commercial and regional SMSF loans commonly require a larger contribution than an ordinary residential investment loan.

The fund may need enough money for:

• the purchase deposit;
• stamp duty;
• legal fees;
• bare trust or holding trust costs;
• loan establishment fees;
• valuation fees;
• lender due-diligence costs;
• liquidity after settlement; and
• any GST or tax timing differences.

A 70% LVR does not simply mean that the SMSF needs 30% of the purchase price.

For example, on an $800,000 commercial property:

• maximum loan at 70% LVR: $560,000;
• minimum purchase contribution: $240,000; and
• acquisition and finance costs: payable in addition.

The fund may also need to retain a prescribed or lender-determined amount of liquid assets after settlement.

How do lenders assess SMSF borrowing capacity?

SMSF servicing is different from ordinary personal home loan servicing.

The lender may consider:

• current employer superannuation contributions;
• voluntary member contributions;
• rental income from the proposed property;
• income from other SMSF assets;
• existing fund expenses;
• insurance premiums;
• accounting and audit costs;
• existing SMSF liabilities;
• the proposed interest rate and repayment term;
• the members’ ages;
• the fund’s investment strategy;
• the remaining loan term before retirement;
• minimum fund balance requirements; and
• liquidity after completion.

Some lender policies assess the fund using only existing and proposed fund income. Others may consider additional future member contributions where they can be supported by the members’ personal income.

Related research: Can a Fully Maintained Company Car Increase Your Home Loan Borrowing Capacity?

Does a commercial lease help?

A strong commercial lease can improve the lender’s assessment of the property and rental income.

The lender may examine:

• tenant quality;
• remaining lease term;
• renewal options;
• rent review provisions;
• outgoings;
• vacancies;
• incentives;
• whether the tenant is related to an SMSF member; and
• whether the rent is consistent with the market.

A property with no tenant may still be acceptable, but the lender may use a lower rental figure, require additional servicing support or reduce the maximum LVR.

A short lease to a specialised tenant may also affect the valuation.

Related research: Can You Get a Home Loan for a Property with a Commercial Lease?

Why does the valuation matter so much in a regional market?

Commercial and rural valuations consider more than the physical condition of the property.

The valuer may comment on:

• local population and economic activity;
• comparable sales;
• rental evidence;
• vacancy periods;
• reliance on tourism or one major industry;
• land size;
• alternative uses;
• environmental issues;
• flood or cyclone exposure;
• building condition;
• lease quality; and
• the expected selling period.

A property can be worth the agreed purchase price while still receiving a conservative lender assessment because the market is considered less liquid.

Example: Cairns commercial property purchased through an SMSF

An SMSF wants to purchase an $850,000 warehouse near Cairns.

The fund has $400,000 in cash and managed investments. The warehouse is leased to an unrelated local business for another four years.

The assessment may include:

1. confirming that the exact postcode is acceptable for commercial SMSF lending;
2. determining whether the lender’s maximum LVR is 65%, 70% or 75%;
3. obtaining a commercial valuation;
4. reviewing the lease and tenant;
5. confirming the property is held on one title;
6. reviewing the SMSF and holding trust deeds;
7. verifying fund contributions and other investment income;
8. assessing liquidity after settlement;
9. obtaining guarantees and independent legal advice where required; and
10. confirming that the investment is consistent with the fund’s investment strategy.

At 65% LVR, the maximum loan based on the purchase price would be $552,500 before any lower valuation or loan-size restriction.

The SMSF would need to contribute at least $297,500 towards the price, plus costs, while retaining enough liquidity to meet lender and trustee requirements.

Questions to answer before making an offer

Before an SMSF signs a contract for a rural or commercial property around Cairns, the trustees should establish:

• What is the precise zoning and current use?
• Is it residential, rural-residential, agricultural, mixed-use or commercial?
• Is the property on one title?
• What is the total land area?
• Is the postcode acceptable for the selected SMSF product?
• What maximum LVR applies in that postcode?
• Is there a tenant and acceptable lease?
• Is the tenant related to an SMSF member?
• Is the proposed use compliant with superannuation law?
• Does the lender accept individual trustees, corporate trustees or both?
• What minimum SMSF balance is required?
• What liquidity must remain after settlement?
• Can the fund demonstrate sufficient servicing?
• Are personal guarantees required?
• Has the holding trust been established correctly?
• Has specialist legal, accounting and financial advice been obtained?

The main point

An SMSF may be able to finance commercial or rural-residential property around Cairns, but the available lender pool is limited.

The decisive issue is usually the combination of:

• postcode;
• property classification;
• land size;
• LVR;
• valuation;
• lease;
• SMSF structure;
• fund servicing; and
• superannuation compliance.

At least four lender policies in the supplied reference expressly provide a commercial SMSF pathway, while one expressly identifies rural-residential SMSF property as acceptable.

That does not identify a universally suitable lender for Cairns. The exact property should be checked against the lender’s current postcode and security policy before the SMSF signs an unconditional contract.