Buying a commercial property for your business

Buying a commercial property for your business: finance options for owner-occupiers

Buying the property your business operates from can be a major financial decision.

Instead of paying rent to an external landlord, the business owner gains control over its premises while potentially building a valuable long-term property asset.

Owning your premises can also provide greater certainty over where your business operates, particularly if you have invested significantly in fitting out the space or need a property that meets specific operational requirements.

But financing an owner-occupied commercial property can be very different from financing a commercial investment. One of the biggest differences can be the amount a lender is prepared to advance.

How much can you borrow for an owner-occupied commercial property?

There is no universal maximum. The loan-to-value ratio (LVR) is the amount borrowed expressed as a percentage of the lender's accepted property value. The maximum LVR depends on the lender, property, business, industry, servicing position and overall transaction.

For a standard commercial investment property, an indicative 65% LVR would require the purchaser to contribute approximately 35% of the property's value towards the purchase, before transaction costs, assuming the lender's valuation matches the purchase price.

Excludes stamp duty, legal fees and other transaction costs. Assumes the lender accepts the purchase price as the property value. Figures are illustrative only.

Owner-occupied commercial lending can be different. Depending on the business, lender, property and cash flow, some lenders may consider approximately 70% LVR or higher. In certain eligible circumstances, funding covering the full purchase price may also be possible, although this can involve specialist lending policies or additional security.

Higher-LVR lending is not available to every business or property and generally involves specific eligibility and credit requirements. This distinction is important because many business owners assume they automatically need a 30–35% deposit to buy their premises. That is not always the case.

For example, on a $2 million property, the difference between borrowing at 65% and 80% LVR is $300,000 in the buyer's required contribution towards the purchase. That can make a substantial difference to the cash a business has available for operations, equipment or future growth.

Why might a bank lend more to an owner-occupier?

The lender is assessing both the property and the operating business. Where an established and profitable business is purchasing premises for its own occupation, the lender may place significant weight on the strength of the business cash flow supporting the debt.

Banks may consider historical profitability, recurring cash flow, existing debt, industry, management experience, property type, location, valuation, the proposed loan term and the borrower's overall financial position. Certain industries and professions may also have access to specialised lending policies.

Unlike an investment property, where rental income is often central to the assessment, the primary repayment source for an owner-occupied purchase is generally the operating business's cash flow.

That means a business with a strong financial track record may have access to lending options that differ from those available to a passive commercial property investor. However, the business must still demonstrate that it can afford the proposed repayments.

Investment property versus owner-occupied property finance

These are general characteristics rather than universal lending rules.

The distinction matters when comparing lenders. A lender that is comfortable financing a tenanted investment property may have different policies for premises occupied by the borrower's own business, even where the properties are otherwise similar.

How do banks assess serviceability?

A lender will usually examine whether the operating business can comfortably support the proposed property debt. This may include reviewing business financial statements, tax returns, current management accounts, existing business loans, equipment finance, director commitments, proposed repayments and other related entities.

The lender may apply a servicing interest rate above the actual loan rate when assessing borrowing capacity. As a result, the maximum loan is not determined by the property value alone.

For example, a business may have sufficient equity to qualify for an 80% LVR loan but still be unable to borrow that amount if its cash flow cannot support the repayments.

Lenders may also consider how purchasing the property will change the business's ongoing expenses. Existing rent payments may cease, but the business will take on loan repayments and potentially additional ownership costs, including maintenance, insurance and property outgoings.

The important question is whether the business can comfortably meet those commitments while continuing to fund its normal operations.

What types of commercial properties can businesses finance?

Owner-occupied finance can potentially apply to offices, warehouses, factories, medical premises, childcare properties, professional suites, retail premises, showrooms, workshops and industrial facilities.

Specialised properties can attract different valuation and LVR policies.

For example, a standard warehouse in an established industrial area may have a broader pool of potential buyers and tenants than a purpose-built facility designed for a very specific business use.

That can influence how a lender assesses the property as security and the maximum amount it is prepared to advance.

Don't forget the transaction costs

Even when a lender is prepared to provide a high percentage of the property value, the purchaser needs to consider additional costs such as stamp duty, conveyancing and legal fees, valuation costs, lender fees, due diligence, building and pest reports where applicable, GST implications and fit-out costs.

Depending on the property, there may also be ongoing costs such as council rates, insurance, maintenance and owners corporation fees.

It's also important to allow for the possibility that the lender's valuation will be lower than the agreed purchase price. If that happens, the buyer may need to contribute more equity than originally expected.

The finance strategy should therefore be considered before contracts become unconditional.

Should the property be owned by the trading business?

Not necessarily. Commercial property can be held through different ownership structures.

Depending on the circumstances, the purchaser might be an individual, company, trust or potentially an SMSF where the property and transaction comply with superannuation rules.

For example, some business owners choose to hold their premises in a separate entity and lease the property to their operating business. This can have legal, tax, asset protection and financing implications.

The appropriate ownership structure is a legal, accounting and taxation decision and should be discussed with the relevant professional advisers before contracts are exchanged. The finance structure then needs to align with that ownership structure.

Where an SMSF is involved, additional superannuation and borrowing rules apply, so the transaction requires specialist advice.

Why obtain finance advice before making an offer?

Commercial lending policies can vary significantly. Before committing to a property, it is useful to understand:

• Your likely borrowing capacity
• Which lenders may consider the transaction
• The likely equity contribution
• Serviceability requirements
• Valuation considerations
• The proposed loan term and repayments
• Any additional security requirements
• The total funds required, including transaction costs

This can help avoid entering a contract based on an assumed LVR that is not available for the particular property or borrower.

It can also help you determine whether purchasing the property will leave sufficient working capital in the business after settlement.

Understand your borrowing options before buying your business premises

Buying your own commercial premises can provide greater control over your business's location while allowing you to build a long-term property asset. But the amount you can borrow, the deposit required and the most suitable loan structure will depend on your business and the property you're purchasing.

3LANE Finance specialises in commercial property and business finance. We assess both sides of an owner-occupied transaction: the property being acquired and the business responsible for servicing the debt.

We can compare appropriate major-bank, non-bank and specialist lender options and structure the application around the business's financial position and longer-term plans.

If you're considering buying premises for your business, speak with 3LANE Finance before making an offer so you can understand your borrowing position, likely contribution and available finance options.

Talk to a 3LANE commercial finance broker

Important: This article provides general information only and does not constitute financial, legal, tax or credit advice. Lending criteria and policies vary between lenders and can change. Obtain advice appropriate to your circumstances before acting.