Quick answer
When you own premises in one entity and lease them to your own trading business, lenders treat the lease as a related-party arrangement. They look through it to the trading business, because that business pays the rent. They want a written lease at a commercial rent, evidence the rent is actually paid, and a trading business strong enough to carry it. Guarantees across both entities are common, so the two are assessed together.
Key points
- Lenders look through a related-party lease to the trading business paying the rent.
- A signed written lease at a commercial rent, actually paid, is the foundation.
- Expect guarantees that link the property entity and the trading business.
- For small business CGT concessions, property used by a connected entity or affiliate in its business may still be an active asset.
- Get the structure right with your accountant before you buy, not after.
When your property entity leases premises to your own trading business, lenders see a related-party lease. They look straight through it to the business paying the rent, because if that business has a bad year, the rent stops. They want a written lease at a commercial rent, proof it’s actually paid, and a trading business that can comfortably afford it.
It’s one of the most popular ways for business owners to own their premises: a family trust or company buys the building, and the operating business leases it. This guide covers how lenders assess that set-up, and how to document it so the loan goes smoothly.
Why do business owners set it up this way?
Owning premises gives control and stability. The government’s guide to buying or leasing business premises compares the two: leasing has a lower upfront cost and more flexibility, while buying builds equity and gives you full freedom to customise. Holding the building in a separate entity adds a few more reasons:
- Separation of risk. If the trading business strikes trouble, the property sits in a different entity, though guarantees can blur this.
- Flexibility on exit. You can sell the business and keep the building, leasing it to the new owner.
- Tax planning. Rent paid by the business is generally a business expense, and the property entity’s structure may suit your long-term plans. That’s a conversation for your accountant.
The lender’s view is more practical: who pays, and what happens if they stop?
How do lenders assess a related-party lease?
With an unrelated tenant, a lender assesses a commercial property loan mainly on the lease and the tenant’s strength. With a related-party lease, the tenant is effectively you, so the lender assesses the trading business as if it were the borrower.
| What the lender checks | Unrelated tenant | Your own business as tenant |
|---|---|---|
| Source of repayments | Tenant’s rent | Your trading business’s profits, via rent |
| Lease strength | Term, rent, tenant covenant | Treated with caution; the lender looks through it |
| Financials required | The property entity’s, plus lease details | Both the property entity’s and the trading business’s |
| Guarantees | Directors of the borrower | Often the trading business and directors too |
| Vacancy risk | Tenant may leave at expiry | Tenant leaves only if your business moves or fails |
That last row cuts both ways. Your business is unlikely to walk away from premises you own, so lenders see low vacancy risk while things are going well. But if the business fails, the property loses its tenant at exactly the moment the owners have least capacity to cover the gap.
What paperwork makes the lease bankable?
A written lease. Signed by both entities, with a defined term, rent, review mechanism, outgoings and responsibilities. It doesn’t need to be elaborate, but it needs to exist. Lenders and valuers find it hard to rely on an informal arrangement.
A commercial rent. Set at around market levels. An agent’s rental opinion or recent comparable leases help. Rent well above market inflates the apparent value; rent well below market weakens the property entity’s ability to service the loan.
Evidence the rent is paid. Bank statements showing regular rent moving from the trading business to the property entity. If the rent has been paid irregularly or “caught up” at year end, expect questions.
Trading business financials. Recent tax returns, BAS and bank statements, because the lender is relying on this business to pay.
Structure documents. Company and trust details, including the trust deed, so the lender can confirm who can borrow and who signs.
If you’re putting this structure in place or refinancing it, run it past us and we’ll tell you how a lender is likely to see it.
What about tax on a future sale?
Many owners set up this structure partly with an eye on selling one day. The ATO’s active asset test matters here. It explains that an asset whose main use is to derive rent usually can’t be an active asset, but that an asset used by your affiliate or connected entity in running its business may still be one. Rent from an unrelated third party is still treated as rent, even if that tenant runs a business from the property.
The test also has time requirements: the asset must have been active for at least half of the test period, or at least 7.5 years if you’ve owned it for more than 15 years. If you’re thinking of leasing the building to an outside tenant at some point, for example after selling the business, talk to your accountant first about how that affects the concessions.
Illustrative example: a family trust and a joinery company
Illustrative only. The owners of a joinery business run it through a company. They want to buy a $1.4m factory, holding it in their family trust and leasing it to the company.
Before applying, their accountant confirms the structure. A local agent provides a market rent opinion, and their solicitor prepares a five-year lease at that rent with a five-year option. The company has three years of solid tax returns and clean BAS lodgements.
The lender assesses the joinery company’s financials to confirm it can comfortably afford the rent, takes a first mortgage over the factory, and asks for a guarantee from the company and the directors. The application includes the signed lease, the trust deed and the rent opinion, so there are few follow-up questions. Once settled, the company pays rent monthly into the trust’s account, building the payment record the owners will need for a future refinance.
What happens when you refinance or sell the business later?
A related-party lease isn’t set-and-forget. Two moments test it.
Refinancing. When the loan comes up for renewal, the new lender will ask for the same things the first one did, plus a history: has rent been paid every month, has it been reviewed as the lease says, and is the trading business still strong? Owners who’ve kept the paperwork tidy refinance easily. Owners who stopped paying rent during a quiet patch, or never reviewed it, often find the property entity’s accounts no longer support the loan.
Selling the business. If you sell the trading business but keep the building, the buyer becomes your tenant. That turns a related-party lease into an arm’s-length one, which most lenders like, provided the new lease is properly documented and the buyer is a sound tenant. It also changes the tax picture, as covered above. Many owners negotiate a fresh lease as part of the business sale so that the property entity, and its lender, have a clean, long lease to rely on.
Common mistakes to avoid
- No written lease. The single most common issue, and the easiest to fix.
- Rent paid irregularly or not at all. It undermines the lender’s case and can complicate the tax picture.
- Rent set to suit the tax return rather than the market. Lenders and valuers notice.
- Forgetting the guarantees. Separating the property from the business protects less than owners think once cross-guarantees are signed.
- Leaving the structure decision until after exchange. Buying in the wrong entity can be expensive to undo, often triggering stamp duty again.
If you already own premises personally and want to free up capital, a sale and leaseback or a first mortgage business loan may suit better.
Ready to own the building your business works from?
Owning your premises through a separate entity can be a smart long-term move, and lenders are comfortable with it when the lease is genuine, the rent is fair and the business paying it is healthy. We arrange property-secured lending anywhere from $20k up to $5m.
Our form takes roughly a minute to complete, with no credit check at the enquiry stage. Your details stay with us instead of being blasted out to every lender in town. Someone who understands two-entity structures reviews the owner, the tenant business and the building, then phones you. Please describe the structure accurately, including which entity owns what, so we can match you with a lender comfortable with it first time.
Frequently asked questions
Why do lenders treat a lease to my own business differently?
Because it isn't an independent source of income. If the trading business struggles, the rent stops and the property entity can't pay the loan. So the lender assesses the trading business as if it were the borrower, and may treat the lease as less valuable than one to an unrelated tenant.
Do I need a formal written lease with my own company?
Lenders strongly prefer one. A written lease sets the rent, term and responsibilities, and shows the arrangement is real. A handshake arrangement makes it hard for a valuer to treat the property as income-producing and hard for a lender to rely on the rent.
What rent should my business pay to my property entity?
Lenders and valuers generally look for a commercial, market-level rent. Rent set well above market makes the property look more valuable than it is; rent set well below market undercuts the loan. Your accountant can advise on the tax side, and an agent can give a market rent opinion.
Will the lender want guarantees from both entities?
Often, yes. A lender to the property entity may want a guarantee from the trading business, and the directors may guarantee both. That means the two are tied together, which is worth understanding before you sign.
Does owning the premises separately affect the small business CGT concessions?
It can still work. The ATO's active asset test says an asset whose main use is to derive rent usually can't be an active asset, but an asset used by a connected entity or affiliate in its business may still qualify. Rent from an unrelated third party is still treated as rent. Confirm your structure with your accountant.