How Much Deposit Do You Need For Commercial Property?

For many commercial-property purchases, having around 30% of the purchase price plus buying costs available is a practical place to start.

It is not a fixed commercial-property deposit rule.

Some suitable properties may be financed at up to 80% loan-to-value ratio (LVR), which would mean contributing 20% towards the purchase price. Other properties may be limited to 70%, 60% or lower LVRs because of their location, use, valuation, lease or resale market.

There is another complication that buyers often miss: the maximum LVR does not necessarily determine the loan you will actually receive.

The loan can also be limited by the valuation and by how much debt the lender believes can be serviced.

That means the deposit you ultimately need is better thought of as:

Purchase price − actual approved loan = contribution required

And that contribution does not necessarily have to come entirely from savings. Depending on the structure, cash, usable equity in another property or a combination of both may be available.

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How Much Deposit Do I Need For A Commercial Property Loan?

There is no single deposit percentage that applies to every commercial-property loan.

As a starting point:

Buying costs are generally additional.

So, if a lender approves an 80% LVR loan on a $1 million property, you would contribute $200,000 towards the purchase price. At 70% LVR, the contribution becomes $300,000.

The important word is approves.

In commercial lending, our brokers do not look at the advertised maximum LVR in isolation. The actual loan can be restricted by three different things:

• Security policy: How much the lender is prepared to lend against that type of commercial property.
• Valuation: The value the lender accepts for the property.
• Servicing: How much debt the business income, lease income or other acceptable income can support.

Whichever becomes the limiting factor can increase the amount you need to contribute.

That is why two buyers purchasing similarly priced commercial properties can need very different deposits.

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What Is The Minimum Deposit For A Commercial Property Loan?

A 20% contribution may be possible for some suitable commercial properties where an 80% LVR is available.

It should not be treated as a universal minimum.

Home Loan Experts Mortgage Broker Ajar Rajbhandari points out that the maximum LVR shown by a commercial lender is only one part of the transaction. The property, valuation, borrower, loan structure and servicing still need to work.

For example:

• If the lender accepts the property at 80% LVR, you may need 20% plus costs.
• If the lender limits it to 70% LVR, you may need 30% plus costs.
• If servicing supports only a 60% loan, you may effectively need 40% even where the property could qualify for a higher maximum LVR.

This is why asking only, “What is the lender’s maximum LVR?” can give commercial-property buyers the wrong impression about how much cash or equity they will actually need.

Why Is 30% Plus Costs A Useful Starting Point?

A 30% contribution means you are looking for approximately 70% LVR finance before allowing for valuation or servicing constraints.

In the commercial enquiries assessed by Home Loan Experts, Senior Mortgage Broker Jonathan Preston uses having around 30% or more available as an important early qualification point for many standard commercial-property scenarios.

It provides more room than structuring the purchase around an 80% LVR from the outset.

That does not mean you should automatically contribute 30%, or that 70% LVR will always be approved. It is a useful planning position before the property and financials have been assessed.

The more useful question is:

“With this property, this income and this amount of available cash or equity, how much is a lender actually likely to provide?”

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How Much Deposit Is Needed For Different Types Of Commercial Property?

Commercial lenders do not view every property as equally strong security.

A major consideration is what happens if the property has to be sold or leased to somebody else.

A standard warehouse that could suit many businesses is quite different from a facility heavily modified for one particular use.

The following figures are starting points rather than fixed lender rules:

Can The Valuation Change How Much Deposit I Need?

Yes.

This is one of the reasons it can be risky to calculate your commercial deposit solely from the contract price.

Suppose you agree to buy a commercial property for $1 million.

You expect a 70% LVR loan, so initially you plan for:

$700,000 loan + $300,000 contribution

But the lender’s accepted valuation comes back at $900,000.

If it lends 70% of that value:

$900,000 × 70% = $630,000

You still have to complete a $1 million purchase.

Your required contribution becomes:

$1,000,000 − $630,000 = $370,000

Instead of $300,000, you now need $370,000 towards the price, plus applicable costs.

The valuation shortfall has effectively added another $70,000 to the amount you need.

Why The Maximum LVR May Not Be The Loan You Actually Get

An equally important limit is servicing.

Consider a $1 million commercial investment property where the lender is willing to accept the property at up to 70% LVR.

The security limit suggests:

Maximum loan based on LVR: $700,000

It would be easy to assume you therefore need $300,000.

But suppose the lender assesses the lease and net rental income and determines that the income supports only $550,000 of debt.

Your position becomes:

Purchase price: $1,000,000

Loan supported: $550,000

Contribution required: $450,000

You effectively need to contribute 45% of the price even though the property itself may fit a product offering up to 70% LVR.

This is particularly important with lease-doc lending.

Jonathan Preston’s approach is to start with the actual net rent and determine how much debt that income can support before relying on the headline LVR.

For an investor, this can give a much more realistic deposit figure early in the process.

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What Affects The Deposit Required For A Commercial Property Loan?

Several parts of the transaction can change the final contribution.

Property Type

Properties with broad alternative uses will generally give a lender more comfort than highly specialised security.

Location

Regional, remote and less-liquid commercial markets can attract lower maximum LVRs from some lenders.

Valuation

If the lender accepts a value below your purchase price, you may have to fund the difference.

Owner-Occupied Or Investment

For an owner-occupied property, the lender may focus heavily on the financial strength of the business operating from the premises.

For an investment property, the tenant, lease and rental income may become central to the assessment.

Tenant And Lease

Commercial investment lenders can consider factors such as:

• Tenant strength
• Remaining lease term
• Net rent
• Rental increases
• Lease conditions
• Property outgoings

A property with a long lease to an established tenant can present differently from an otherwise similar property with only a short period left on the lease.

Vacancy

A vacant commercial property can still be financeable, but the lender cannot rely on an existing tenant’s rent.

That may change both the servicing assessment and the lender’s appetite for the property.

Servicing

Having enough cash for the deposit does not automatically mean you can borrow the balance.

The proposed debt still needs to satisfy the lender’s servicing requirements.

Lender Appetite

Commercial lending policy varies substantially.

The same warehouse, office or retail property can produce different outcomes with different lenders because their preferred property types, locations, servicing methods and maximum LVRs differ.

That variation is one reason Home Loan Experts assesses the whole transaction rather than assuming the lender with the highest advertised LVR will provide the largest usable loan.

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Commercial Investment Property Deposit Vs Owner-Occupied Deposit

There is not necessarily a separate deposit percentage simply because the property is an investment or because your own business will occupy it.

What often changes is how the lender decides how much it is willing to lend.

Commercial Investment Property

For a tenanted property, a lender may assess:

• The tenant
• Remaining lease term
• Net rental income
• Lease conditions
• Outgoings
• Vacancy risk
• Property type
• Location

Around 30% plus costs can be a useful starting position for many commercial investment scenarios, although the actual contribution may be lower or considerably higher.

Buying Premises For Your Own Business

If your business will operate from the property, the lender may instead examine:

• Profitability
• Cash flow
• Trading history
• Existing business debt
• Financial statements
• Industry experience

Warehouses, workshops, clinics, offices and showrooms purchased by established business owners are among the owner-occupied commercial scenarios our brokers assess.

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How Can I Fund A Commercial Property Deposit?

A commercial-property contribution does not necessarily have to be accumulated entirely as cash.

This distinction is particularly useful for established business owners and property investors.

Cash

Cash is the simplest option.

If your purchase is $1 million and the lender provides $700,000, you could contribute $300,000 in cash towards the price.

Buying costs would still need to be covered.

Equity In Your Home

Usable residential equity may potentially be released to help fund the commercial purchase.

For example, somebody may have only part of the required contribution in savings but substantial equity built up in their home.

Releasing that equity is still borrowing. It increases the debt secured against the residential property and needs to be assessed as part of the overall structure.

Equity In An Investment Property

Equity in a residential investment property may also form part of the funding.

Romy Dhungana regularly considers available residential equity when assessing established property owners moving into commercial property.

The important figure is therefore not always “How much cash have you saved?” but:

“How much cash and usable equity is available across your position?”

Equity In Another Commercial Property

An existing commercial property may also contain usable equity.

How much can be released will depend on factors including its current value, existing debt, servicing and the lender’s policy.

Additional Property As Security

In some structures, another property may be provided as additional security.

This can reduce the amount of cash required because the lender has a larger security position.

There can be a downside. Linking properties can make a later sale or refinance more complicated, so the structure should be considered rather than using additional security simply because it is available.

A Combination Of Cash And Equity

It is also possible for the contribution to come from several sources.

For example:

Contribution required: $400,000

Cash: $150,000

Equity released: $250,000

Total available: $400,000

This is why our brokers ask about both available cash and existing property ownership when initially assessing a commercial purchase.

Sale Proceeds

Funds from selling another property or asset may also form part of the contribution.

The settlement timing needs to work if the commercial purchase depends on those proceeds.

Funds Held By A Business Or Purchasing Entity

Funds held within a business, company, trust or other purchasing entity may potentially form part of a transaction.

The appropriate ownership and tax structure is not simply a lending decision. An accountant and solicitor should advise on whether and how those funds should be used.

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How Much Cash Do I Need To Buy A Commercial Property?

Do not stop at the deposit percentage.

A more useful calculation is:

Contribution towards purchase + buying costs + valuation shortfall, if any = funds required

Depending on the transaction, costs may include:

• Stamp duty
• Legal and conveyancing fees
• Commercial valuation fees
• Lender fees
• Registration and settlement costs
• Due-diligence reports
• Building or environmental reports
• GST, where applicable

GST, tax consequences and ownership structure depend on the transaction and should be confirmed with the appropriate tax and legal advisers.

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What If I Don't Have Enough Deposit For A Commercial Property?

First identify what is creating the funding gap.

Increasing your savings is not necessarily the only solution because a commercial-property shortfall can have several different causes.

The Lender’s Maximum LVR Is Too Low

Another lender may have a different appetite for that type of property.

The Valuation Is Lower Than The Purchase Price

You may be dealing with a valuation shortfall rather than an ordinary deposit problem.

Servicing Is Limiting The Loan

The property might be acceptable at 70% LVR, but the available income may support a smaller loan.

In that case, changing the deposit alone does not explain the underlying issue.

The Property Is Specialised

A lender with greater appetite or experience in that type of commercial security may assess it differently. Alternatively, a larger contribution may genuinely be required.

You Have Equity Elsewhere

Usable equity in a home, residential investment property or another commercial property may form part of the funding structure.

The Transaction Requires Too Much Debt

Sometimes the purchase itself does not work at the required debt level.

A lower purchase price or different property may create a more workable position.

The practical first step is therefore to determine why the contribution is too high before deciding how to fix it.

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How Home Loan Experts Works Out The Deposit You May Need

When our brokers assess a commercial property purchase, the first question is not simply, “Do you have 20% or 30%?”

They look at the transaction that sits behind the percentage.

That includes:

• What property are you buying?
• What is the purchase price?
• Where is it located?
• Will your business occupy it or will it be leased?
• If it is leased, what is the net rent?
• How much time remains on the lease?
• How much cash do you have available?
• What other property do you own?
• Is usable equity available?
• How much do you need to borrow?
• What income will support the debt?

From there, the broker can identify the likely security limit, servicing limit and funding gap.

That gives you a more meaningful answer than simply being told that commercial property “needs a 30% deposit”.

Already Found A Commercial Property?

If you know the purchase price, property type, location and approximately how much cash or property equity you have available, Home Loan Experts can assess the scenario and help identify commercial-lending options that may fit.

Call us on 1300 889 743 or enquire online to speak with our commercial brokers.