How much equity do I need to buy a commercial property?

The financing rules for commercial properties in detail

Raising equity capital for the purchase of commercial property differs fundamentally from financing residential construction. You have to abandon the idea that the bank will cover 80 percent of the purchase price.

The 50 percent standard: Why 20 percent isn't enough

In the private residential market, banks finance up to 80 percent of the market value (loan-to-value ratio). Therefore, you need to provide 20 percent equity.

However, if you need to raise equity capital to purchase commercial property , banks usually require a down payment of 30 to 50 percent .

• Standard office buildings: Here, the loan-to-value ratio is often between 60 and 70 percent. Therefore, you need 30 to 40 percent equity to purchase commercial property .
• Special properties: For an industrial building or laboratory that is difficult to use for other purposes, the loan-to-value ratio often drops to 50 percent. This means you have to provide 50 percent equity for the purchase of the commercial property yourself.

The more specialized the property, the more equity capital is needed to purchase commercial real estate . The bank always asks: "If this tenant moves out, how quickly and expensively can I find a new one?"

Sources of funds: Caution with the pension fund

This is arguably the most important difference and a common stumbling block.

For private home ownership, you may use funds from the 2nd pillar (pension fund) or pillar 3a as equity.

However, if you are raising equity capital to purchase commercial property , early withdrawal or pledging of pension funds is prohibited by law unless the property is used purely for business purposes by the owner himself (and even then it is complex).

• Investment properties: If you buy an office building to rent it out, you may not use a single cent from your pension fund as equity for the purchase of commercial real estate .
• Hard equity: The required equity for the purchase of commercial real estate must consist of "hard" funds: bank balances, securities, gifts or loans that do not have to bear interest.

Amortization: Pay back faster

Not only is the hurdle for raising equity capital to purchase commercial real estate higher, but the repayment (amortization) is also stricter.

• Housing: The second mortgage must be reduced to 65% loan-to-value within 15 years.
• Commercial real estate: Because commercial properties can depreciate in value more quickly (due to technological advancements and wear and tear), banks often require faster amortization. The equity used to purchase a commercial property is therefore only the beginning; you will then need strong cash flow to pay off the debt quickly. Often, the mortgage needs to be reduced to 50% or less within a shorter timeframe.

Third-party usability as a key factor

Why does the equity capital requirement for purchasing commercial real estate vary so much? It's due to the "suitability for third-party use".

• High fungibility: A modern office building in Zurich city center. A new tenant can be found quickly. The risk is moderate, therefore somewhat less equity is needed to purchase the commercial property (e.g., 35%).
• Deep fungibility: A specialized production hall in a rural area. If the company moves out, years of vacancy or expensive renovations are likely. The bank demands significantly more equity for the purchase of the commercial property (up to 50-60%) as security.

The affordability calculation in industry

In addition to the equity capital required for the purchase of commercial property, the bank also checks the affordability.

When it comes to housing, the one-third rule applies (housing costs max. 1/3 of income).

For commercial properties, the net rental income is examined.

• The rental income must be sufficient to cover the imputed interest (usually 5%), the high amortization payments and the ancillary costs.
• Banks often require that a surplus remains after deducting these costs. If the cash flow is insufficient, the bank demands even more equity for the purchase of commercial property in order to reduce the mortgage and thus the interest burden.

A calculation example

Imagine you want to buy a small commercial unit for 1 million Swiss francs.

• Purchase price: 1,000,000 CHF.
• Loan-to-value ratio at the bank: 60% (since it's a business).
• Maximum mortgage: CHF 600,000.
• Required equity capital for the purchase of commercial property: CHF 400,000.

In addition, there are closing costs (notary fees, property transfer tax) that you cannot finance. Therefore, you realistically need approximately CHF 450,000 in equity to purchase commercial property .

Compare that to an apartment: 200,000 CHF would often suffice. The equity requirement for purchasing commercial property is therefore more than twice as high.

Tips for raising funds

If your own account is not sufficient to raise the necessary equity capital for the purchase of commercial property , there are alternatives:

• Co-investors: Looking for partners. Together, it's easier to raise the equity capital needed to purchase commercial property .
• Seller financing: Sometimes the seller provides a loan for part of the purchase price. However, banks often do not accept this as "hard" equity for the purchase of commercial real estate , but rather classify it as debt financing.
• Additional security: Do you own a debt-free residential property? You can mortgage it to free up liquidity as equity for the purchase of commercial property .

Conclusion

The question "How much equity do I need to buy a commercial property?" can rarely be answered with a fixed percentage, but the rule of thumb is: expect to need 40 to 50 percent . Commercial properties generate returns, but they are not guaranteed success. Banks protect themselves against the risk of vacancies by setting high equity requirements for purchasing commercial real estate .

The most significant strategic mistake is assuming you can use pension funds. Since this is no longer an option, you need substantial liquid assets. Solid equity planning for the purchase of commercial property is the best protection against over-indebtedness should the main tenant default. Furthermore, those who contribute sufficient equity to the purchase of commercial property secure better interest rates and reduce the pressure from strict amortization requirements.

If you want to analyze the loan-to-value ratio for your specific property or which banks offer more flexible models for the required equity capital for the purchase of commercial real estate , Loft provides neutral comparisons and financing tools.

Glossary

• Equity capital for the purchase of commercial property: The financial resources (cash, securities) that the buyer must raise himself, as banks usually only lend up to 50–70% on commercial properties.
• Alternative use capability: The property's ability to be used by other users (industries) without significant effort. This significantly determines the amount of equity capital required for purchasing commercial real estate .
• Loan-to-value (LTV) limit: The maximum percentage of the property's market value that the bank will grant as a mortgage. For commercial properties, this limit is significantly lower than for residential properties, requiring more equity capital to purchase commercial real estate .
• Concentration risk: The risk that the default of a single tenant (often the case with commercial properties) reduces income to zero. Banks compensate for this by providing higher equity for the purchase of commercial real estate .
• Hard equity: Equity capital that does not originate from the pension fund and is not borrowed. This is mandatory for the equity capital required to purchase commercial real estate .