Commercial Property Finance: What You Need to Know Before You Buy

For many business owners and investors, commercial property represents a compelling opportunity — whether that's buying your own business premises, acquiring an investment property with strong rental yields, or building a portfolio of commercial assets over time. But commercial property finance works quite differently from residential lending, and understanding those differences before you start is essential to avoiding costly surprises.

Here's what you need to know.

What Is Commercial Property Finance?

Commercial property finance covers loans used to purchase or refinance non-residential property. That includes:

• Retail premises — shops, showrooms, and retail strips

• Office space — suites, floors, and office buildings

• Industrial property — warehouses, factories, and logistics facilities

• Mixed-use properties — buildings with both commercial and residential components

• Development sites — land or properties purchased for development

  
  

The lending landscape for commercial property is broader and more varied than residential lending. Terms, rates, and conditions differ significantly between lenders and property types, which makes specialist advice particularly valuable.

How Commercial Lending Differs From Residential

If you're used to residential home loans, commercial property finance will feel noticeably different in a few key ways.

Higher deposit requirements. Where residential lending typically allows borrowing up to 80% of the property value (or higher with LMI), commercial loans generally require a deposit of 30–40%. Some lenders will go to 70% LVR on strong commercial properties, but 65% is more common — meaning you need to have 35% of the purchase price available as equity or cash.

Different interest rates. Commercial loan rates are typically higher than residential rates, reflecting the higher perceived risk. Rates vary based on the property type, location, tenant quality, and your financial profile. Unlike residential lending, there's no standard rate — commercial pricing is often negotiated and assessed case by case.

Shorter loan terms. Residential home loans commonly run for 25–30 years. Commercial loans typically have terms of 10–15 years, sometimes shorter, with regular review periods where the lender can reassess the loan conditions.

More detailed property assessment. Lenders assess commercial properties on their income-generating potential — not just their market value. A property with a strong long-term lease to a creditworthy tenant will be assessed more favourably than a vacant property or one with a short remaining lease term, even if the market values are similar.

Personal guarantees are standard. For most commercial loans, lenders will require personal guarantees from the directors or principals behind the borrowing entity. This means your personal assets can be called upon if the loan defaults — something to factor into your risk assessment.

Owner-Occupied vs Investment Commercial Property

The purpose of your purchase affects both how lenders assess the loan and how the finance is structured.

Owner-occupied commercial property — where your business will operate from the premises — is generally assessed based on the financial strength of the business occupying it. Lenders want to see that the business can service the loan from its operating cash flow. This is a popular strategy for established businesses that want to stop paying rent and build an asset instead, particularly through an SMSF structure as discussed in an earlier post.

Investment commercial property — purchased to lease to tenants — is assessed primarily on the rental income the property generates and the quality and security of the lease. Key factors lenders focus on include:

• The lease term remaining and any options to renew

• The financial strength and credit quality of the tenant

• The vacancy rate for similar properties in the area

• The property's WALE (Weighted Average Lease Expiry) — a measure of the average time until leases expire across the property

  
  

A commercial property with a long-term lease to a national retailer or government tenant is a very different risk proposition from one with a short lease to a small local business — and lenders price accordingly.

Key Due Diligence for Commercial Property

Commercial property purchases warrant more extensive due diligence than residential purchases. Before committing to a purchase, it's worth examining:

The lease documentation — review all leases carefully, including rent review mechanisms, outgoings obligations, permitted use clauses, and any incentives provided to tenants. An experienced commercial solicitor is essential here.

The tenant's financial health — particularly for investment purchases, understanding whether the tenant is financially stable and likely to honour the lease is critical. A long lease to a struggling business offers less security than it appears.

Building condition and compliance — commercial buildings have specific compliance requirements (fire safety, disability access, environmental obligations) that can represent significant costs if not adequately addressed. A thorough building inspection by a qualified inspector is non-negotiable.

Zoning and permitted use — confirm that the property is zoned appropriately for its current use and any intended future use.

GST implications — commercial property transactions are generally subject to GST, which affects the purchase price and cash flow calculations. The going concern exemption may apply in some circumstances — your accountant and solicitor should advise on this before you sign a contract.

Using Equity in Residential Property

Many commercial property buyers — particularly business owners purchasing their first commercial asset — use equity in their residential property to help fund the deposit. Given the higher deposit requirements for commercial lending, having residential equity available can be the difference between being able to proceed and not.

This approach is common and legitimate, but it does mean your home is providing additional security for a commercial transaction — a risk factor worth understanding clearly before proceeding.

The Bottom Line

Commercial property finance is more complex and more variable than residential lending — but for the right buyer in the right situation, it opens up a genuinely compelling asset class. Getting the right advice early, understanding the deposit requirements and assessment criteria, and conducting thorough due diligence on the property and its leases are the foundations of a sound commercial purchase.

Thinking about buying commercial property? Talk to the Cultivate Financial team — we work with business owners and investors across Melbourne on commercial finance and can help you understand what's possible for your situation.

This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend you consider whether it is appropriate for your circumstances. It does not constitute legal, tax or financial advice — please seek professional advice for your individual situation.