$45M Build-to-Hold Development — ICR Shortfall Solved Through Lease Incentive Analysis
When year-one numbers fail the test, the real story is in the stabilised position.
The Challenge
A developer sought $32M in investment funding for a completed $45M mixed-use commercial asset they intended to hold long-term. The property was 85% pre-leased to quality tenants — but the deal had been declined by two major banks.
The issue: Interest Cover Ratio (ICR) fell short when assessed on year-one net income. Lease incentives offered to attract anchor tenants — including rent-free periods of 6-12 months and substantial fitout contributions — meant the first two years showed significantly reduced rental income on paper.
- Year 1 ICR: 1.18x (lender minimum: 1.50x)
- $2.8M in lease incentives spread across anchor tenants
- Rent-free periods distorting true income capacity
- Standard credit assessment couldn't see past the incentive period
Our Approach
We reframed the entire credit submission around stabilised income versus year-one income. The strategy centred on demonstrating that the "problem" was temporary and fully quantifiable:
- Lease-by-lease incentive schedule: Mapped each tenant's incentive period with exact expiry dates, showing precisely when full contracted rents would commence
- Stabilised ICR projection: Calculated the ICR once all incentives burned off — a dramatically different picture
- Cash flow waterfall: Demonstrated the client's capacity to service debt during the incentive period through existing cash reserves
- Tenant covenant analysis: Highlighted the credit quality of anchor tenants (ASX-listed, government, national brands) to justify the incentive investment
- Interest reserve proposal: Structured a $400K interest reserve to cover the ICR shortfall during years 1-2
The Numbers That Matter
The Outcome
Investment loan approved at 71% LVR with a commercial lender who understood development economics. The interest reserve mechanism satisfied prudential requirements while preserving the client's liquidity.
Key Insight
"Lease incentives aren't a weakness — they're an investment in tenant quality. Show lenders the stabilised position and bridge the gap with structure."