Vacant possession vs as-leased: how lenders value commercial security
A commercial valuation can produce two legitimate numbers for the same building on the same day. One assumes the lease stays in place and capitalises the income. The other assumes the tenant is gone and the building sells empty. The gap between them is frequently seven figures — and on several lenders’ policies, only the smaller number counts.
The two bases
Market value subject to existing lease takes the passing rent, applies a market yield, and capitalises it. A well-let building on a strong lease produces a high number here, sometimes carrying a “profit rent” above what the space would let for today.
Market value on a vacant possession basis asks a different question: what would this building sell for empty, to a buyer who has to find their own tenant or occupy it themselves? It is often expressed as vacant possession, alternate use — the asset stripped of its current income.
Neither figure is wrong. They answer different questions.
Why several lenders only accept the lower one
A lender enforcing security does not inherit a tenant’s covenant as a certainty. Leases break, tenants fail, and the circumstances in which a lender is selling are exactly the circumstances in which a lease is most likely to be under pressure. Lending against a capitalised income stream and then realising the asset empty is precisely the exposure the vacant-possession basis removes.
A standing policy of assessing all commercial securities on a vacant possession, alternate use basis is therefore conservative but coherent — and it is the stated position of more than one active non-bank commercial lender.
How big the gap gets
Observed across commercial files 2024–2026:
- A property assessed at $6.10m as tenanted against $5.10m on vacant possession — a $1.0m gap, about 16%.
- A refinance assessed at $17.5m as-leased against $15.0m on vacant possession, on a $12.5m facility struck at roughly 71.5% LVR.
Run the second one through. At 71.5% of $17.5m the facility looks comfortable. Against $15.0m, the same $12.5m is over 83% — well outside commercial appetite. Nothing about the building changed. The basis did.
The further step: core value
Some lenders go past the vacant-possession headline and lend against the report’s stated core value rather than its market value at all. Where core value sits materially under market value, that is a second, quieter reduction underneath the first. Read the report specifically to find it.
Where the core figure looks unreasonably conservative, a second valuer’s opinion is a legitimate lever — but pull it before you have committed to a lender and a timeline, not after.
Four things to do about it
1. Ask for the vacant-possession figure up front
Before submitting to a lender you suspect uses that basis, get the vacant-possession number confirmed. It costs a phone call. The alternative is discovering late in an assessment that the leased value overstates serviceable LVR by fifteen points.
2. Do not sign a new lease immediately before the inspection
An executed lease has to be referenced in the report. A below-market rent, a short term or a poorly structured outgoings clause gets built into the valuer’s income analysis and stays there. Sequence the valuation first, or accept that the terms you sign are the terms that get capitalised.
3. Get the lease characterised correctly
How a lease is described materially changes the number. On one file a lease was treated as gross where the relevant retail tenancies legislation did not apply and outgoings including land tax were in fact recoverable — understating net income significantly. That is a correctable error, and correcting it is far more productive than arguing about comparable sales.
4. On residual stock, expect vacant possession as standard
Residual stock securities are commonly required on a vacant possession, unencumbered basis rather than subject to existing lease — while the lender still wants the underlying leases supplied for file completeness. A report on the wrong basis gets sent back for reissue, at a cost in days.
Where the leased value is genuinely defensible
If your building’s value really does rest on its income, the constructive move is not to argue the basis. It is to challenge the rental assumption, which is where commercial valuations most often actually go wrong.
At typical cap rates the leverage is extreme. On one file a valuer’s assessed net market rental of roughly $670,000 p.a. was challenged with an independent assessment of $900,000–$950,000. At a ~4.5% cap rate, that ~$230,000 rental gap implied a valuation swing of roughly $4.5–5m.
A modest disagreement about rent compounds into a very large disagreement about value. Where a rental assumption looks conservative or misapplies the lease terms, a second independent rental assessment is usually the highest-return piece of evidence you can commission.
The short version
- Find out which basis your lender uses before you size the deal.
- Get the vacant-possession figure confirmed early, even if you expect to be assessed on the leased value.
- Read the report for a core value sitting under the headline.
- Do not execute a new lease immediately before an inspection.
- If you dispute something, dispute the rental assumption, not the comparables.
General information only. It is not credit assistance, financial product advice, or an offer of finance, and it does not take account of your objectives, financial situation or needs. Figures and lender policies described are indicative observations over 2024–2026 and change without notice.