Everything You Need to Know About Buying Commercial Property

Purchasing a Commercial Office Building: What You're Actually Funding

When you buy a commercial office building, you're funding both the property itself and the operational income it generates. Lenders assess the building's ability to produce rent, not just its bricks-and-mortar value, which means your loan application looks different to a standard property purchase.

In Mosman, where commercial property typically sits along Military Road or in pockets near the Spit Junction precinct, you're often looking at older-style buildings with mixed tenant profiles. A building with long-term tenants in professional services will be viewed differently by a lender than one with short leases or high vacancy. The rental income directly affects how much you can borrow because lenders use debt service coverage ratios to determine whether the property can support the loan repayments.

Consider a buyer purchasing a two-level office building near Mosman Village. The building has three tenants, two on three-year leases and one on a rolling lease. The combined rent is $180,000 annually. The lender calculates whether that income, after outgoings like strata, council rates, and insurance, can cover the proposed loan repayments with a buffer. Most lenders want to see a debt service coverage ratio of at least 1.2, meaning the net rental income should be 20% higher than the annual loan repayments. If the numbers fall short, the lender either reduces the loan amount or declines the application. This is why a commercial loan for an office building is structured around income, not just the purchase price.

How Much Deposit You'll Need and What It Covers

You'll need a deposit of at least 30% for a commercial property purchase, and in some cases up to 40% depending on the lender and the property's tenancy profile. This is a larger deposit than residential property because commercial lending carries higher risk for the lender.

The deposit covers part of the purchase price, but you also need to factor in stamp duty, legal costs, and building inspections. For a commercial property in New South Wales, stamp duty is calculated on the full purchase price without any concessions, which means it can add a significant amount to your upfront costs. If the property is held in a trust or company structure, there may be additional legal and accounting fees to set up that structure before settlement.

In a scenario where the purchase price sits at the median for Mosman's commercial office market, a 30% deposit would leave you borrowing 70% of the property value. If the rental income supports a debt service coverage ratio above 1.2, most lenders will approve that loan amount. If the ratio falls below that threshold, you'll need a larger deposit to reduce the loan amount and bring the repayments within the lender's acceptable range. Some buyers bring in a guarantor or cross-collateralise another property to reduce the deposit requirement, but that introduces additional risk if the commercial property underperforms.

Interest Rates and Loan Terms for Commercial Property

Commercial property loans typically carry higher interest rates than residential home loans because the lender's risk is higher. You'll usually see rates between 1% and 2% above standard variable home loan rates, depending on the lender, your business financials, and the property's tenancy strength.

You can choose between a variable interest rate and a fixed interest rate. A variable rate gives you flexibility to make extra repayments without penalty and often includes a redraw facility, which can be useful if your business needs access to funds later. A fixed rate locks in your repayments for a set period, which helps with budgeting, but it typically comes with restrictions on early repayment and no redraw facility. Some buyers split the loan between fixed and variable to get both certainty and flexibility.

Loan terms for commercial property are usually shorter than residential loans, ranging from 10 to 25 years. Many lenders structure the loan with a 15 or 20 year term but require a review every three to five years. At each review, the lender reassesses the property's tenancy, your business financial statements, and the debt service coverage ratio. If the property's income has dropped or your business financials have weakened, the lender may adjust the interest rate, reduce the loan amount, or require additional security.

What Lenders Look at in Your Application

Lenders assess three main things when you apply for a business loan to purchase a commercial office building: the property's rental income, your business financial statements, and your business credit score.

The rental income determines whether the property can service the loan. Lenders will ask for copies of all lease agreements, a rental roll showing current tenants and lease expiry dates, and evidence of recent rental payments. If the property has vacancies or tenants on short-term leases, the lender may discount the rental income or decline the application altogether. Buildings with a single tenant on a long lease are usually easier to finance than multi-tenanted buildings with rolling leases.

Your business financial statements show whether your business can support any shortfall if the property's income drops. Lenders typically want to see two years of financial statements, including profit and loss statements and balance sheets. If your business is new or has fluctuating cash flow, the lender may ask for a larger deposit or additional security. A strong cashflow forecast and a detailed business plan can help if your financials are borderline.

Your business credit score affects both approval and the interest rate you're offered. A score above 650 is generally acceptable for most commercial lenders, but a score below that may limit your options or result in a higher rate. If your business has missed payments or has existing debts, the lender will factor that into their assessment.

Loan Structure and Repayment Flexibility

Most commercial property loans are structured as principal and interest, meaning each repayment reduces the loan balance over time. Some lenders offer interest-only repayments for the first one to five years, which lowers your monthly repayments and frees up cash flow for other business expenses. However, interest-only loans don't reduce the loan balance during that period, so you'll face higher repayments once the interest-only period ends.

If you're planning to renovate the building or complete tenant fit-outs after purchase, you might structure the loan with a progressive drawdown. This means you borrow the purchase amount upfront and have access to additional funds as the renovation progresses. The lender releases funds in stages based on progress reports, and you only pay interest on the amount drawn down. This can be more cost-effective than borrowing the full amount upfront if the renovation will take several months.

Flexible repayment options include the ability to make extra repayments, access a redraw facility, or link the loan to an offset account. Not all commercial lenders offer these features, and they're more common with variable rate loans than fixed rate loans. If your business generates seasonal income, flexible repayment options can help you pay down the loan faster when cash flow is strong and reduce financial pressure during quieter periods.

Security and Collateral Requirements

The commercial property itself will be used as collateral for the loan, but some lenders also require additional security depending on your deposit size and business financials. This might include a guarantee secured against your residential property, other business assets, or a director's guarantee.

A director's guarantee means you're personally liable for the loan if the business defaults. Most commercial lenders require this for small to medium businesses, particularly if the business is structured as a company or trust. If you're uncomfortable with a director's guarantee, you'll need a larger deposit or stronger business financials to negotiate a limited or no-guarantee loan.

If the commercial property is part of a larger portfolio, some lenders will allow you to cross-collateralise, meaning the new property and your existing properties are all secured under one loan. This can help you borrow more or reduce your deposit requirement, but it also means the lender can claim multiple properties if you default. If you go down this path, make sure you understand the risk and have a plan to separate the securities later if your circumstances change.

Mosman's Commercial Property Market and What It Means for Financing

Mosman's commercial property market is small and tightly held, with most office buildings concentrated near Military Road and Spit Junction. Properties in this area typically attract tenants in professional services, medical, and financial sectors, which lenders view as relatively stable tenant types.

The limited supply of commercial office buildings in Mosman means properties tend to hold their value, but it also means there's less comparable sales data for lenders to use in their valuations. If the valuation comes in lower than the purchase price, you'll need to either renegotiate the price or increase your deposit to cover the shortfall. Lenders rely on licensed valuers who assess recent sales, tenancy profiles, and the building's condition. Older buildings with deferred maintenance or outdated facilities may be valued lower than similar buildings in good condition.

The local tenant market is relatively strong because of Mosman's affluent residential population and proximity to the CBD, but vacancy rates can fluctuate depending on economic conditions. A building with long-term tenants and strong lease covenants will always be easier to finance than a building with short leases or recent vacancies, so factor that into your purchase decision.

Structuring the Loan Through a Company or Trust

Most buyers purchase commercial property through a company or trust structure rather than in their personal name. This provides asset protection, tax flexibility, and makes it easier to bring in business partners or investors later.

If you're buying through a company, the loan will be in the company's name, but lenders will still assess your personal financial position and require a director's guarantee. If the company is new or has limited trading history, the lender may also ask for additional security or a larger deposit. Established companies with strong financials and a solid trading history will usually get better loan terms than newly registered companies.

A trust structure is common for commercial property because it allows you to distribute income and capital gains tax-effectively. However, lenders are often more cautious with trust structures, particularly if the trustee is a company. You'll need to provide the trust deed, evidence that the trustee is properly appointed, and financial statements for both the trust and the trustee. The approval process can take longer than a standard company or personal loan, so factor that into your purchase timeline.

If you're considering a specific structure, speak to your accountant before applying for the loan. The loan structure should align with your tax strategy and long-term business goals, not just the lender's requirements.

Call one of our team or book an appointment at a time that works for you. We'll walk through your purchase plans, review your business financials, and structure a business loan that fits the property and your cash flow.

Frequently Asked Questions