Quick answer
A commercial property loan finances the purchase or refinance of non-residential property such as shops, offices, warehouses and factories. Lenders assess the property's value, location and use, the borrower's financial position and, for investment property, the rental income. Deposits and loan-to-value limits are usually stricter than for homes, and terms, reviews and covenants vary considerably between lenders.
Key points
- Covers owner-occupied premises and commercial investment property.
- Lenders assess both the property and the business or rental income.
- Expect larger deposits and stricter loan-to-value limits than home loans.
- Stamp duty, legal costs and valuations add significantly to the purchase.
At a glance
- Property types
- Retail, office, industrial, warehouse, mixed-use and specialised
- Security
- The commercial property itself, sometimes with additional security
- Main tests
- Property value and type, LVR, income and servicing
- Extra costs
- Stamp duty, legal, valuation and registration fees
Our review: commercial property loans at a glance
What works well
- Builds an asset instead of paying rent
- Control over the premises and lease terms
- Potential long-term capital value
- Owner-occupiers can lease surplus space
What to watch
- Larger deposit and upfront costs
- Ties up capital the business may need
- Loan reviews and covenants can be onerous
- Specialised properties can be harder to finance and sell
Usually suits
- Established businesses with stable earnings and a long-term base
- Owners who want to stop paying rent to a landlord
- Investors buying tenanted commercial property
Probably look elsewhere if
- The business may need to move within a few years
- Paying the deposit would starve working capital
- The property is highly specialised with few other potential users
Owning your premises can be one of the most significant financial decisions a business makes. It swaps rent for repayments, gives you control over the building and, over time, can create an asset. It also commits a large amount of capital and debt to a single property. A commercial property loan is how most businesses make that move, and it is assessed very differently from a home loan.
Owner-occupied versus investment
Lenders split commercial property lending into two broad camps. Owner-occupied loans finance premises your own business will use; the lender looks closely at the business’s earnings because they will fund the repayments. Investment loans finance property leased to tenants; the lender focuses on the lease, the tenant’s quality and how long the lease has to run. Many owners buy a building larger than they need and lease the surplus, which blends the two.
How lenders assess commercial property
| Factor | What lenders consider |
|---|---|
| Property type | Retail, office, industrial and warehouse are common; specialised property is harder |
| Location | Demand for similar property nearby affects resale value |
| Value and LVR | Commercial LVR limits are usually lower than residential |
| Income | Business earnings for owner-occupiers, rent and lease terms for investors |
| Borrower | Financial statements, tax returns, credit history and other debts |
A valuation by a lender-approved valuer is standard for most commercial purchases. Because commercial property values depend heavily on income and use, valuations can differ from the price agreed with the seller.
Upfront costs to budget for
The deposit is only part of it. Transfer duty is set by each state revenue office and can be substantial; check the current rules with Revenue NSW, the State Revenue Office Victoria or your own state. Add legal fees, building and pest or condition reports, valuation, loan establishment and registration charges. Then keep a working capital buffer: a business that empties its accounts to buy premises can find itself short of cash for operations within months.
Covenants, reviews and terms
Commercial loans often come with conditions that home loans do not. These can include periodic reviews, requirements to provide annual financial statements, minimum interest cover or LVR covenants, and terms shorter than the full amortisation period, meaning the loan must be refinanced or renewed at expiry. Ask about each, and how a breach would be handled.
Alternatives and related options
If you need to secure premises before selling another property or arranging long-term finance, a bridging loan can carry you through. If you already own property and need business funds rather than premises, a secured business loan or second mortgage may suit. Our guide to commercial versus residential security explains how lenders treat each.
An illustrative example
A made-up engineering workshop has rented the same factory for ten years. The landlord offers to sell. The business’s financial statements show stable profits, and the directors have savings plus equity in their homes.
The lender values the factory, confirms the business’s earnings comfortably cover the proposed repayments and agrees to lend a share of the price against the factory itself, with the directors contributing the rest from savings and a smaller loan against one director’s home. Transfer duty and legal costs are paid from separate savings so the business keeps its working capital buffer.
The purchase replaces rent with repayments and gives the business control of its premises. It also concentrates risk: if the business struggled, both the premises and a director’s home would be exposed. The directors accept that trade-off with eyes open after independent advice.
Questions to ask a commercial lender
- What is the maximum LVR for this property type and location?
- How often will the loan be reviewed, and what is assessed at review?
- What covenants apply, and what happens if one is breached?
- Is the term shorter than the repayment period, requiring renewal?
- What are the total establishment, valuation and legal costs?
Thinking about buying premises?
If your business is established and you are weighing up owning rather than renting, a commercial property loan may be worth exploring. To get started, make one enquiry. There is no credit check when you first enquire, a real person reads it and your details are not passed around a list of lenders. Include the property type, location and price range, and whether you will occupy it. For bridging or settlement deadlines, mention the date in your enquiry.
Frequently asked questions
How much deposit do I need for a commercial property?
It varies by lender, property type and borrower, but commercial lending generally requires a larger contribution than residential lending. Some owners use equity in other property to help fund the deposit.
Can I buy commercial property through my SMSF?
Self-managed super funds can buy business real property in some circumstances under strict rules, often with a limited recourse borrowing arrangement. Get specialist advice; the rules are detailed and penalties for getting it wrong are serious.
What is a loan review on a commercial loan?
Many commercial loans are reviewed periodically. The lender may re-check the property value, financial statements and covenants and can change terms. Ask how often reviews occur and what triggers them.
Is stamp duty payable on commercial property?
Yes, transfer duty generally applies in each state and territory, with rates and rules set by the state revenue office. Check the current duty for your state before you budget.
Sources and further reading
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