Why does the bank's assessed net income come in lower than my rent roll shows?

Three reasons typically explain the gap. First, the lender applies a standard vacancy allowance (2.5–5%) even on a fully leased property. Second, the lender applies a standard management fee allowance (3–5%) regardless of whether you self-manage. Third, the lender verifies outgoings recoverability against the lease and may treat as non-recoverable items that the landlord has been recovering in practice. The combined effect typically reduces assessed net income to 80–90% of the rent roll figure.

What ICR do I need to satisfy bank serviceability?

Bank policy typically requires 1.30× ICR at the stressed serviceability rate (headline rate + 3.0%). Non-bank policy is more flexible, with thresholds typically 1.10–1.25× at a narrower stress buffer (headline + 1.5–2.5%). The effective facility size that ICR supports is therefore meaningfully larger at non-banks than at banks on the same property income.

Does my personal income help service the commercial loan?

Yes, but typically only as a secondary support, not as primary serviceability. Banks assess the property income against ICR as the primary test, then assess the personal/entity sponsor's broader capacity as a secondary support — generally requiring positive surplus servicing capacity across the borrower's total commitments. On owner-occupier commercial, the trading entity's income is the primary serviceability source rather than the property income itself.

Will a vacant property be lent against at all?

Vacant commercial is generally outside bank Full Doc lane and into Asset Lend lane at non-bank pricing. The serviceability assessment is replaced by a security-only assessment (typically capped at 50–65% LVR on conservative valuation) with interest capitalisation through the lease-up period. This is its own pricing and structure — see the Asset Lend product page for detail.

How are outgoings actually treated in the bank's calculation?

Lenders deduct non-recoverable outgoings (per the lease) from gross rent to arrive at assessed net income. Recoverable outgoings (per the lease) are treated as a wash — recovered from tenant, paid to council/etc — and not deducted. The lease is the source of truth; the landlord's actual recovery practice is not. If the lease says management fees are recoverable but practice has not recovered them, the lender will treat them as recoverable.

Does a stronger tenant covenant let me borrow more?

Sometimes, in two ways. Some lenders offer higher LVR (typically +5% versus standard) on listed-corporate or government covenant deals. Most lenders will price more sharply (25–75 bps tighter) on strong-covenant deals — which compresses serviceability stress and indirectly supports a marginally larger facility. The strongest practical effect of tenant covenant is on cap rate (and therefore valuation, and therefore LVR-derived facility size), more than on serviceability calculation directly.

How Banks Assess Commercial Property Income — The Adjustment Framework

From gross rent to assessed net property income

Lenders work from the gross passing rent on the lease, then apply a series of standard adjustments to arrive at the net property income figure that feeds into serviceability. The same property will produce different assessed net income figures across different lenders — the gross rent is the starting point, but the adjustments are where lender policy diverges.

Line item	Treatment	Typical adjustment
Gross passing rent (lease)	Starting point	Used as quoted
Less: vacancy allowance	Lender-applied even on fully leased	2.5–5.0% of gross
Less: management fee	Lender-applied at standard rate	3.0–5.0% of gross
Less: non-recoverable outgoings	Lender verifies recoverability against lease	Variable by lease terms
Less: capex sinking fund	Conservative lenders apply	0.5–1.5% of value
= Assessed net property income	The number that matters	Typically 80–90% of gross

Recoverable versus non-recoverable outgoings — the lease detail that matters

The single largest variable between assessed net income and gross rent is the treatment of outgoings. On a true net lease (tenant pays all outgoings), assessed net income runs at 90%+ of gross rent. On a gross lease (landlord absorbs outgoings), assessed net income can run at 70% or below. Most Australian commercial leases sit somewhere on the spectrum between, with specific outgoings recoverable and others not.

Lenders verify recoverability against the lease document, not against the rent roll. A landlord-stated 'net rent' figure that does not match the lease's recoverability provisions is invariably challenged at credit assessment. The five outgoings categories that consistently require verification: council rates, water/sewerage rates, building insurance, body corporate / strata levies, and land tax. Property management fees are generally treated as non-recoverable regardless of lease terms (an industry convention rather than a legal rule).

ICR — the covenant that sets your facility ceiling

Interest Coverage Ratio (ICR) is the ratio of assessed net property income to annual interest expense at the lender's stressed serviceability rate. ICR is the primary income-serviceability covenant on commercial debt — and the effective ceiling on facility size in most assessments. Bank policy typically requires ICR of 1.30× or higher; non-bank policy is more flexible, with thresholds typically 1.10–1.25×.

Worked example: a property generating $150,000 of assessed net property income, at a stressed assessment rate of 10.5% (assume current rate ~7.5% plus 3.0% stress buffer), can support interest expense of $115,385 (=$150,000 ÷ 1.30 ICR). That converts to a maximum facility size of approximately $1.099m (=$115,385 ÷ 10.5%). Note this is interest-only serviceability — the facility is then also tested against LVR caps, and the binding constraint is the lower of the two.

ICR or LVR — which binds your deal

On low-yielding, high-value assets (premium CBD office, prime industrial), ICR typically binds the facility size before LVR — meaning the lender will lend less than the LVR cap because income cannot service the full LVR-derived facility. On high-yielding, lower-value assets (secondary retail, regional industrial), LVR typically binds first. Knowing which constraint binds your deal — at structuring stage — prevents wasted submission cycles.

Stressed serviceability rate — the regulatory buffer

Banks calculate serviceability not at the actual loan rate, but at a stressed rate that is the headline rate plus an APRA-required buffer (currently 3.0% on commercial debt at major banks, slightly lower at some non-bank ADIs). The buffer is intended to test the borrower's capacity to service the loan if rates rise materially during the facility term. The practical consequence is that the ICR calculation that determines your facility size uses a rate 250–300 bps above your actual paying rate.

Non-bank lenders apply a stress buffer too, but typically narrower (1.5–2.5%), reflecting their position outside the APRA prudential framework. The narrower stress is one of the structural reasons non-bank facility sizes are larger than bank facility sizes on the same property income — and is part of what funds the policy difference between the two lanes.

How lease quality feeds the assessment

Beyond the income calculation itself, lenders adjust ICR thresholds and acceptable LVRs based on the quality of the lease producing the income. Three lease-quality factors materially move the assessment outcome — sometimes by 5–10% LVR or 25–75 bps of pricing on equivalent net income.

Tenant covenant strength — listed corporate, government, or major franchise tenants attract the most favourable lender treatment, including potentially higher LVR and lower ICR threshold; weak or unknown tenants attract the opposite
WALE (Weighted Average Lease Expiry) — strong long-WALE income (5+ years) is treated as durable; short-WALE income (under 2 years) attracts a discount and tighter covenants reflecting re-letting risk
Lease review structure — fixed annual reviews at 3–4% are most lender-favourable; market reviews carry implicit risk of re-set lower and are sometimes discounted; CPI reviews sit between

Evidence — what banks want to see

Lenders verify property income against documentary evidence at three levels: the lease (contract), the rent roll (current state), and the rental receipts (actual performance). Submissions that arrive with all three reconciled price tighter and approve faster than submissions where the evidence is fragmented.

The fully executed lease with all variation deeds, option exercises and side letters — not just the head lease
A current rent roll showing passing rent, lease expiry, options, rent review history and any arrears per tenant
12 months of rental receipts (bank statements or property manager trust account statements) evidencing actual payment performance against the rent roll
Outgoings statement (most recent annual reconciliation) showing what is recovered against what is charged
Where tenant covenant is part of the lender story: tenant financials, ABN history search, ASIC search on corporate tenant

How Banks Assess Commercial Property Income