The landlord calls.
They’re thinking about selling the property your business operates from.
Before putting it on the market, they ask whether you’d like to buy it.
You’ve been there for years.
Customers know the location.
You’ve fitted out the premises.
Moving would be disruptive.
And every month, a substantial rent payment leaves the business account.
So buying the property seems obvious.
Instead of paying rent to somebody else, why not make loan repayments and own the building?
For business owners around Geelong, buying an owner-occupied commercial property can potentially make sense.
But “the mortgage will replace the rent” is only the beginning of the calculation.
Commercial property ownership changes the amount of capital tied up in the business, the costs you’re responsible for and the financial commitments you’ll carry for years.
Before saying yes to the landlord, work out what buying the property actually means.
Start With the Property Price
The landlord wants $1.2 million.
Is that what the property is worth?
Perhaps it is.
But the fact that you’ve operated there for ten years doesn’t automatically make the asking price reasonable.
Look at comparable commercial property.
Consider obtaining appropriate valuation advice.
Understand the property’s zoning, condition, location and alternative uses.
If you’re borrowing to buy the premises, the lender may also require a valuation.
The lender’s valuation and the agreed purchase price aren’t necessarily the same.
How Much Can You Borrow?
Commercial property finance doesn’t necessarily work the same way as a standard home loan.
The amount a lender is prepared to advance can depend on factors including:
property type
location
intended use
borrower
business financial position
loan purpose
lender policy
valuation
Different lenders can have different maximum lending positions.
Don’t assume the deposit requirement based on what you contributed when buying a residential property.
Investigate the finance before committing to a contract.
The Deposit Isn’t the Only Cash You Need
Suppose you’re purchasing the property for $1.2 million.
Even after determining the buyer contribution, there may be other costs.
Depending on the transaction, these can include:
stamp duty
legal costs
valuation fees
lender fees
building or specialist inspections
due diligence costs
other acquisition expenses
The exact costs depend on the property, location and transaction.
Obtain appropriate legal and tax advice.
The important point is that the cash required at settlement can be significantly more than the deposit alone.
Don’t Empty the Business Account to Buy the Building
This is one of the biggest traps.
The business has $400,000 available.
The buyer wants to contribute every dollar towards the commercial property.
That reduces the amount borrowed.
But what happens to the operating business the day after settlement?
It still needs money for:
wages
stock
suppliers
fuel
tax
equipment
insurance
everyday expenses
A business can become property rich and cash poor very quickly.
The premises should support the operating business.
Buying them shouldn’t starve that business of the working capital it needs to generate income.
Compare Rent With the Complete Ownership Cost
Suppose you’re currently paying $8,000 a month in rent.
The proposed loan repayment is $9,000.
It can look like you’re effectively buying the property for another $1,000 a month.
That’s too simple.
As the owner, other costs may become your responsibility.
Depending on the property and arrangements, these could include:
council rates
insurance
repairs
maintenance
structural expenditure
property management
other outgoings
Some may already be paid by the tenant under the existing lease.
Others may not.
Understand what you’re paying today and what you’ll pay as owner.
Compare the complete occupancy cost.
Ownership Does Give You Something Rent Doesn’t
Rent generally buys the right to occupy premises for the lease period.
Loan repayments may contribute towards ownership of an asset, subject to the loan structure and property value.
That can be attractive.
The business may also gain greater control over the premises.
You aren’t negotiating another lease every few years.
You aren’t exposed to a landlord deciding to sell to somebody who wants vacant possession, subject to your lease rights.
You may have greater certainty about remaining in the location.
That strategic value can matter.
But Ownership Reduces Flexibility
What if the business outgrows the property?
What if you need to move closer to customers?
What if your workforce changes?
What if the business model changes and you no longer need the same premises?
A tenant can potentially move at the end of a lease.
An owner has a property to sell or lease.
Commercial property can be a long-term commitment.
Before buying, ask whether the building is likely to suit the business in five or ten years.
What If the Business Is Growing Quickly?
This is particularly important.
Imagine you’re currently using 800 square metres.
The business is growing at 25% a year.
The landlord offers to sell you the property.
Will 800 square metres still be enough in three years?
Buying because you love the current location can become expensive if the business quickly needs twice the space.
Look at the growth plan before committing substantial capital to the building.
Could You Lease Out Part of the Property?
Perhaps the building is larger than you currently need.
Could another business occupy part of it?
Potential rental income may improve the commercial position.
But don’t assume that space can automatically be leased.
Consider zoning, access, layout, services, parking and legal requirements.
The lender may also assess the transaction differently depending on how much of the property your business occupies and whether other tenants are involved.
Tell us how the property will actually be used.
What If There Is Already Another Tenant?
You may be buying a property where your business occupies one section and another tenant occupies the rest.
That introduces an investment component.
Understand the existing lease.
How much rent is paid?
How long does the lease run?
Are there options?
What outgoings are recoverable?
What happens if the tenant leaves?
Your solicitor should review the lease as part of due diligence.
Don’t simply assume the existing rent will continue indefinitely.
Buying the Property Personally or Through Another Entity?
Business owners can purchase commercial property through different ownership structures.
The property might be acquired by an individual, company, trust, SMSF or another structure depending on the circumstances and applicable rules.
The legal, tax, superannuation and finance implications can be significant.
Thrive Broking can assist with investigating finance structures, but your accountant, solicitor and appropriately qualified advisers should advise you about the ownership structure.
Choose the structure before signing the contract where possible.
Changing it later can create complications and costs.
What About Buying Through an SMSF?
Some business owners consider purchasing eligible commercial property through a self-managed superannuation fund and leasing it to their business.
Strict rules can apply to these arrangements, including acquisition, borrowing, related-party transactions and the use of the property.
SMSF lending can also have different lender requirements and structures.
Obtain specialist financial, legal and tax advice before proceeding.
Don’t sign a commercial property contract in your personal name assuming it can simply be transferred into an SMSF later.
The structure needs to be considered from the beginning.
What Does the Lender Want to Know About the Business?
If your business will occupy the property and service the debt, its financial performance becomes important.
A lender may want to understand:
trading history
revenue
profitability
existing debt
current rent
proposed loan repayments
business cashflow
tax position
directors or owners
property being purchased
Exact requirements vary by lender and transaction.
The property is important security.
But the business still needs the capacity to meet the finance commitment.
Strong Property Security Doesn’t Fix Weak Cashflow
A valuable building can make a transaction look well secured.
But the loan still needs to be repaid.
If the operating business is losing money or struggling to meet existing commitments, substantial property equity doesn’t automatically make another loan sensible.
Separate two questions:
Is there enough security?
and
Can the business sustainably service the debt?
Both matter.
What If the Business Has ATO Debt?
Tell us upfront.
A business may have strong trading performance and still carry historical tax debt.
Different commercial property lenders can treat tax debt differently.
The amount, payment arrangement, lodgement position and overall financial circumstances may be relevant.
In some situations, a broader refinance involving eligible tax debt may potentially be considered.
In others, the tax position may need to be addressed separately.
Don’t assume the commercial property purchase and ATO debt can be assessed independently.
What If You Already Own Your Home?
Business owners sometimes assume their residential property must be used as additional security.
That isn’t automatically the case.
Whether additional property security is required depends on the lender, commercial property, loan amount, borrower and overall transaction.
Tell us if you don’t want residential property involved.
We can investigate options based on that requirement.
If additional security would materially change the available options, we can explain that too.
Don’t Offer More Security Than Necessary Without Understanding Why
A lender may propose taking security over more than the commercial property being purchased.
That can sometimes support a transaction.
But understand the reason.
What additional property is being secured?
Is the security intended to remain for the full loan term?
Can it potentially be released later?
What conditions would apply?
Security shouldn’t be treated as an administrative detail.
Know what assets are supporting the debt.
What If You Have Equity in Other Commercial Property?
Perhaps this isn’t your first property.
You may already own a warehouse, office, workshop or investment property with equity.
That can potentially influence the funding options available.
But again, using additional security is a strategic decision.
It may reduce the cash contribution required or support another aspect of the transaction, depending on lender policy.
It also connects more assets to the borrowing.
Weigh the benefit against the additional exposure.
What Loan Term Should You Use?
Commercial property finance can be available over different terms depending on the lender and structure.
A longer loan term can reduce scheduled repayments.
A shorter term may clear debt faster but require more cash each month.
Don’t choose purely on the lowest repayment.
Consider:
business cashflow
expected ownership period
other debt
future capital expenditure
property strategy
total finance cost
The property may be owned for decades.
The finance structure should still leave room for the operating business to invest elsewhere.
Principal and Interest or Interest Only?
Depending on the lender and transaction, different repayment structures may potentially be available.
Interest-only repayments can reduce the scheduled cash requirement for a period because principal isn’t being reduced during that time.
That may be useful in some business situations.
But the principal remains outstanding.
Understand what happens when the interest-only period ends and what the repayment becomes.
A smaller payment today needs to fit the longer-term debt strategy.
What If the Property Needs Renovation or Fit-Out?
The purchase price may only be the beginning.
Perhaps the workshop needs upgrading.
The office requires a new fit-out.
You need additional power, racking, refrigeration, medical rooms or specialised business infrastructure.
Now the funding requirement could include:
property + fit-out + equipment + working capital.
Tell us about the complete project.
Different components may potentially be funded in different ways.
Eligible equipment might suit asset finance.
The property may use commercial property finance.
Fit-out and working-capital requirements may need other structures.
Don’t Forget the Equipment Purchase Coming Next
This is another reason not to use every dollar for the property deposit.
Imagine you complete the building purchase in March.
Then in June the business needs $300,000 of machinery.
If all available cash and borrowing capacity were committed to the property, the next investment may become harder.
Think about the business’s capital requirements over the next 12 to 24 months.
The commercial property is one asset within the broader business plan.
What If the Landlord Needs a Quick Settlement?
An off-market opportunity can sometimes come with time pressure.
The landlord may want certainty before listing publicly.
Don’t allow urgency to remove due diligence.
You still need appropriate legal advice.
Finance needs to be investigated.
The property may require valuation and inspections.
The ownership structure needs to be considered.
A good opportunity doesn’t become better because you signed an unconditional contract before understanding how you’ll fund it.
Should You Make the Contract Subject to Finance?
That’s a legal and negotiation question you should discuss with your solicitor or conveyancer.
Don’t assume commercial property contracts operate exactly like the residential purchase process you’re familiar with.
Before signing, understand the finance conditions, due diligence provisions, deposit requirements and settlement obligations contained in the contract.
Finance approval and a signed purchase contract need to work together.
Get Appropriate Property Due Diligence
The fact you’ve occupied the property for years doesn’t mean you know everything about it.
Depending on the premises, appropriate due diligence may include matters such as:
title
zoning
permitted use
building condition
environmental issues
services
easements
leases
planning matters
other legal or property considerations
Use appropriate professionals.
A lender valuation isn’t a substitute for your own due diligence.
What If the Valuation Comes in Below the Purchase Price?
This can materially affect the finance.
Suppose you agree to pay $1.5 million.
The lender’s valuation is $1.35 million.
Depending on lender policy, the amount available may be calculated using the lower valuation rather than the contract price.
That can increase the buyer contribution required.
Have some financial room in the transaction.
Don’t assume the valuation will always match the agreed price.
What Should You Send Us?
If your landlord has offered to sell the premises your business occupies, useful starting information includes:
property address
proposed purchase price
current rent
approximate property type and size
how long the business has occupied it
proposed buyer contribution
approximate business revenue
existing business finance
whether fit-out or equipment is also required
expected purchase timing
If you have a contract or selling information, send that through as well.
We can then start investigating the commercial property finance position.
Commercial Property Finance Around Geelong
For an established business around Geelong, buying the premises it already occupies can provide long-term control over an important business location.
Instead of negotiating future leases, the business or related owner may build ownership in the property.
But the purchase needs to fit the operating business.
If buying the building consumes the cash required for wages, stock, equipment and growth, the property can become a financial constraint rather than an advantage.
Look at the building and the business together.
Has Your Landlord Offered to Sell?
Send Thrive Broking the property price, current rent, approximate buyer contribution and details of the business operating from the premises.
If the property requires fit-out or the business has major equipment purchases planned, tell us about those too.
We can investigate commercial property finance options based on the complete transaction.
Owning the premises can give a business control and a long-term asset. The finance needs to make sure buying the building doesn’t take away the cash the business needs to thrive inside it.