How much deposit do you need to buy commercial property in Australia?

If a lender advances 65–70% of its accepted commercial property value, you would need to fund the other 30–35% of the price when the price and valuation match. You also need funds for transfer duty and other purchase costs. The actual loan amount depends on the property, borrower and lender.

There is no single minimum deposit for every commercial purchase. Some lenders publish lower limits for particular commercial products, while some offer up to 80% LVR for eligible transactions.

For a practical starting estimate, calculate the expected loan from the lender's accepted valuation, then subtract that loan from the purchase price. The difference is the buyer's contribution towards the price.

A lower valuation, a specialised property or a lower maximum LVR can increase the amount you need to contribute. An eligible higher-LVR product or acceptable additional security can reduce the cash contribution.

The amount paid as a contract deposit on exchange is credited towards the price. It is different from the total cash or equity contribution required to complete the purchase.

How do commercial property deposits work?

Commercial lenders generally talk about the amount they're prepared to lend in terms of the loan-to-value ratio (LVR).

The LVR compares the amount you're borrowing with the lender's accepted value of the property.

For example, suppose you're buying a commercial property valued at $1,000,000:

These figures assume the purchase price and lender's accepted valuation are both $1,000,000. They show the contribution towards the price only; purchase costs are extra.

So, if a lender is prepared to provide a 65% LVR on a $1,000,000 property, you would need to fund the remaining $350,000 plus applicable transaction costs.

Contract deposit versus total funds required

The contract may require an amount to be paid on exchange. That payment forms part of the purchase price; it does not increase the total equity required. Check the contract with your solicitor before you commit to the timing and amount of that payment.

For example, if the price is $1,000,000, the approved loan is $650,000 and you have already paid a $100,000 contract deposit, the remaining price contribution at settlement is $250,000. You also need to allow for any purchase costs payable at or before settlement.

Simple calculation: purchase price − approved loan − contract deposit already paid + unpaid purchase costs = further funds needed to complete. Confirm the final settlement figure with your solicitor and lender.

Why isn't there a standard commercial property deposit?

Commercial property is a much broader category than residential property.

An office suite in a CBD, suburban medical centre, warehouse, neighbourhood retail premises and purpose-built childcare centre are all commercial properties, but they present very different risks to a lender.

That means a lender may consider:

• the type of property
• its location
• how easily it could be sold or leased
• whether it is owner-occupied or an investment
• the strength and length of any lease
• the tenant
• the property's condition
• the borrower's financial position
• the income available to service the loan
• the loan amount
• other security available.

The deposit is therefore one part of the lender's overall assessment rather than a fixed percentage that applies to every commercial purchase.

How does the property type affect your deposit?

Some commercial properties are easier to finance than others.

A relatively standard warehouse or office in a strong location may have a broad pool of potential future buyers and tenants.

A highly specialised property can be different.

For example, a property purpose-built for a particular industry may require substantial changes before another business could use it. That can make the property harder to sell if the lender ever needs to recover its money.

As a result, lenders can apply lower maximum LVRs to specialised or higher-risk properties, which means the buyer needs to contribute more equity.

The same principle can apply to properties in smaller or highly specialised markets where there may be fewer potential buyers.

Owner-occupied versus investment commercial property

The way you intend to use the property can also affect the finance assessment.

Buying premises for your own business

If your business will occupy the property, the lender will generally look closely at the financial performance of the business.

It needs to be comfortable that the business generates sufficient cash flow to meet the commercial property loan repayments alongside its other commitments.

Buying your premises can give a business greater control over its location and remove some of the uncertainty associated with leasing, but the property debt still needs to be sustainable within the wider business.

Buying a commercial investment property

For an investment property, the lease and tenant become particularly important.

The lender may consider:

• current rental income
• the tenant's financial strength
• remaining lease term
• options to renew
• rental reviews
• vacancy risk
• whether the rent is considered sustainable.

A long lease to a strong tenant can present a different lending proposition from a vacant property or one with a lease about to expire.

What happens if the valuation is lower than the purchase price?

This is one of the most important reasons not to calculate your deposit from the purchase price alone.

The lender will generally arrange or require a valuation of the property.

Suppose you agree to buy a commercial property for $1 million and expect a lender to provide 65% of the value.

If the property is valued at $1 million, a 65% loan would be $650,000.

But if the lender's accepted valuation comes back at $900,000, 65% is only $585,000.

You would then need to contribute $415,000 towards the purchase price ($1,000,000 − $585,000), plus transaction costs. That is $65,000 more than the $350,000 contribution you expected when the valuation matched the price.

A valuation shortfall can therefore substantially increase the cash required to settle.

Can you buy commercial property with less than a 30% deposit?

Yes. Some commercial lenders advertise products with a maximum LVR of 80%, subject to eligibility and assessment. A 20% contribution towards the price would only be enough if the lender accepted the full purchase price as the property value, approved the maximum loan and you could also fund the purchase costs.

Whether you qualify depends on factors including the lender, property type, borrower strength, loan purpose and security position.

Some transactions may also be structured using additional security rather than requiring the entire equity contribution to come from cash.

For example, a borrower with sufficient usable equity in another acceptable property may be able to offer additional security to support the transaction.

However, using another property as security changes the overall risk position and needs to be considered carefully.

The important point is that a 30% or 35% cash deposit is not a universal requirement. The relevant question is how much the lender is prepared to advance against your particular transaction and how the remaining contribution will be funded.

Why a bigger deposit can change your finance options

Having more equity doesn't simply reduce the amount you need to borrow.

A lower LVR reduces the lender's exposure relative to the property's value. That can influence which lenders will consider the transaction and, depending on the lender, the pricing and loan terms available.

It can also provide a buffer if the lender's valuation comes in below the agreed purchase price.

However, contributing every available dollar towards the property isn't automatically the right approach for a business owner.

You may still need cash for operating expenses, fit-out, equipment, stock or future growth. The deposit therefore needs to be considered as part of the wider finance structure rather than in isolation.

Don't forget the costs on top of your deposit

Budget for the whole transaction, not just the difference between the price and loan. Costs and tax treatment depend on the property and contract.

Depending on the property and transaction, these can include:

• transfer duty
• legal and conveyancing costs
• valuation fees
• lender and loan establishment fees
• building, pest or environmental reports
• accounting and tax advice
• due diligence costs
• insurance
• fit-out or property works.

Transfer duty varies by state or territory. GST treatment can also affect the funds needed at settlement: have your solicitor and accountant check the contract and whether the supply is taxable or qualifies as a GST-free going concern.

So, if you're buying a $1 million commercial property with $350,000 available, that doesn't necessarily mean you have enough cash for a 35% contribution. You also need to know how the transaction costs will be funded.

What else will the lender assess?

Having the required contribution does not guarantee commercial property finance approval.

The lender also assesses whether the proposed debt can be serviced. The evidence required depends on the product; some lease-based investment loans focus on rental income and lease conditions.

For an owner-occupied property, this can involve reviewing:

• business financial statements
• tax returns
• Business Activity Statements
• current management accounts
• existing debts
• business cash flow
• the experience and financial position of the people behind the business.

For an investment property, the lender may also assess rental income, lease terms and the tenant.

In other words, there are two separate questions:

1. Does the lender have enough security for the amount being borrowed?
2. Does the borrower have enough income and cash flow to service the debt?

A strong answer to one doesn't necessarily compensate for a weak answer to the other.

When should you organise commercial property finance?

Ideally, before signing an unconditional contract.

Commercial property finance can involve more variables than residential lending, including property-specific lender policies, valuations, business financials, lease assessments and sometimes more complex ownership structures.

Knowing the likely LVR before committing to a purchase gives you a better understanding of:

• how much you may be able to borrow
• how much cash or equity you may need
• which lenders may consider the property
• what information will be required
• whether the proposed purchase fits your financial position.

It also reduces the risk of discovering after signing a contract that the lender requires a substantially larger contribution than you expected.

Work out the full cash requirement before you buy

The deposit is only one number in a commercial property purchase.

Before committing to a property, you need to know how much a lender is prepared to advance, what value it is likely to place on the property and how much cash you'll need for the equity contribution and transaction costs.

3LANE Finance can assess the purchase, compare suitable commercial lending options and help you estimate the equity, cash and information needed before you commit.

Speak with 3LANE Finance about the property, purchase price and proposed ownership structure to map out your funding options.

Important information: This article provides general information only and does not constitute financial, legal, tax or accounting advice. Lending criteria, pricing and availability vary between lenders and are subject to assessment and approval.