Over the last decade of helping buyers and sellers with commercial real estate, we've often seen buyers focus heavily on a property's asking price and potential returns without fully considering how much money they'll need for the down payment.
For example, a buyer may expect to put 20% down on a commercial property, only to find that their lender requires 30% based on the property's income, condition, or their financial situation. On a $1 million property, that means coming up with an additional $100,000 before accounting for closing costs and other expenses.
In general, commercial real estate loans require a down payment of around 20% to 35%, although some financing programs, such as SBA loans for eligible owner-occupied properties, may allow buyers to put down as little as 10%.
In this article, we'll explain how much down payment you need to buy commercial property, how requirements differ by loan type, and what factors can affect the amount you'll need to pay upfront.
How Much Down Payment Do You Need for Commercial Property?
Most commercial real estate buyers need a down payment of around 20% to 35% of the property's purchase price when using a conventional commercial mortgage. However, the exact amount depends on the type of financing, how you plan to use the property, and your financial qualifications.
For example, if you're purchasing a commercial building to operate your own business, you may qualify for an SBA loan with a lower down payment. On the other hand, if you're purchasing an office building or retail center primarily to generate rental income, lenders may require a larger upfront investment.
Here's a general breakdown of typical commercial property down payment requirements:
| Financing type | Typical down payment |
|---|---|
| Conventional commercial mortgage | 20% to 35% |
| SBA 504 loan | 10% to 20% |
| SBA 7(a) loan | Often 10% to 20%, depending on the loan and lender |
| Commercial investment property loan | 25% to 35% or more |
These ranges are general estimates rather than guaranteed minimums. SBA financing also has specific eligibility requirements, and its lower down payments generally apply to businesses purchasing property for their own operations rather than passive real estate investments.
Your lender may also require a larger down payment if the property's appraised value comes in below the purchase price, its income doesn't support the requested loan amount, or your financial qualifications don't meet the lender's requirements.
Before making an offer, we recommend speaking with a commercial lender to understand how much financing you may qualify for and how much cash you'll need to contribute toward the purchase.
Commercial Real Estate Down Payment Requirements by Loan Type
Some financing programs offer lower down payments for businesses buying their own facilities, while others suit investors buying commercial properties to generate rental income.
Here's how the down payment requirements typically work for the most common financing options.
1. Conventional Commercial Real Estate Loans
Conventional commercial real estate loans typically require a 20% to 35% down payment, though individual lenders may have different requirements.
Banks, credit unions, and other commercial lenders offer these loans. You can use them to finance owner-occupied commercial buildings as well as income-producing investment properties.
Most conventional lenders finance a percentage of the property's appraised value, commonly around 65% to 80%, depending on the property and the borrower's qualifications.
For example, if you're purchasing an $800,000 commercial building and your lender agrees to finance 75% of its value, you'll need a $200,000 down payment, assuming the property appraises for the purchase price.
Lenders will also review your credit history, financial statements, existing debts, and the property's ability to support the loan payments before determining how much they're willing to finance.
2. SBA 504 Loans
SBA 504 loans are designed for eligible small businesses that purchase, construct, or improve commercial properties they intend to use for their own operations.
One of the biggest advantages of this program is its relatively low down payment requirement, which can be as little as 10% of the total eligible project cost.
A typical SBA 504 financing structure includes:
- 50% financing from a participating commercial lender.
- 40% financing through a Certified Development Company (CDC), backed by an SBA guarantee.
- 10% contribution from the business purchasing the property.
However, the required contribution increases to 15% if the business has operated for two years or less, or if the property qualifies as a limited- or special-purpose facility. If both conditions apply, the business must generally contribute at least 20%.
For example, an established business purchasing a $1 million warehouse for its own operations may qualify with a $100,000 contribution under the standard 504 structure, excluding any additional costs.
SBA 504 loans aren't available for passive real estate investments, such as purchasing a retail center solely to collect rental income.
3. SBA 7(a) Loans
SBA 7(a) loans are another financing option for eligible small businesses purchasing commercial property for their own operations.
Unlike SBA 504 loans, which primarily finance major fixed assets, SBA 7(a) loans can also cover other qualifying business expenses, such as equipment purchases, renovations, and working capital.
Down payment requirements vary by lender and transaction. Some qualified borrowers may be able to purchase commercial property with around 10% down, while others may need to contribute 15% to 20% or more.
The SBA 7(a) program allows loans of up to $5 million, but the amount you can borrow depends on your business's financial performance, creditworthiness, repayment ability, and lender requirements.
This financing option may be worth exploring if you're purchasing a commercial building and also need funding for improvements or other eligible business expenses.
4. Commercial Investment Property Loans
If you're purchasing commercial real estate primarily to generate rental income, lenders will generally require a larger down payment than they would for an eligible owner-occupied property financed through an SBA program.
Most commercial investment property loans require around 25% to 35% down, although some properties may qualify for lower down payments and others may require substantially more.
Lenders will closely evaluate the property's rental income, occupancy, lease agreements, operating expenses, and overall financial performance.
For example, a fully leased industrial building with stable rental income and long-term tenants may qualify for more favorable financing than a vacant office building that requires substantial renovations.
The lender will also consider whether the property's net operating income is sufficient to cover the proposed debt payments.
If you're purchasing a commercial property as an investment, we recommend reviewing its existing income and operating expenses before approaching lenders. This can help you estimate how much financing the property may support and how much equity you'll need to contribute.
What Factors Affect Your Commercial Property Down Payment?
Lenders look beyond the purchase price to evaluate the property's financial performance, its condition, and the buyer's ability to repay the loan.
Some of the key factors that can affect your down payment include:
- Loan-to-value (LTV) ratio: Lenders use the LTV ratio to determine how much of a property's value they're willing to finance. For example, if a lender offers 75% LTV on a $1 million property, you'll need to contribute $250,000, assuming the property appraises for at least the purchase price.
- Property type and condition: The type of commercial property you're purchasing can affect how lenders assess risk. A fully occupied warehouse with established tenants may qualify for different financing terms than a vacant office building or a property requiring substantial repairs.
- Owner-occupied or investment property: Buyers purchasing commercial property for their own business operations may qualify for SBA financing with lower down payment requirements. Properties purchased primarily for rental income generally require conventional or investment property financing.
- Property income and cash flow: For income-producing properties, lenders review rental income, operating expenses, occupancy rates, and net operating income (NOI). They also calculate the debt service coverage ratio (DSCR) to determine whether the property's income can support the proposed loan payments. If the income is insufficient, the lender may reduce the loan amount and require a larger down payment.
- Credit history and financial qualifications: Your credit history, existing debts, income, business financials, and available cash reserves can all affect how much financing a lender is willing to provide.
- Tenant and lease stability: For leased properties, lenders may review tenant creditworthiness, lease expiration dates, vacancy rates, and rental payment histories. Properties with unstable income or significant upcoming vacancies may require more equity from the buyer.
- Interest rates and loan terms: Higher interest rates increase monthly loan payments, which can reduce the amount of debt a property's income can support. Depending on the lender's underwriting requirements, this may increase the required down payment.
Another important factor is the property's appraised value, which may differ from the agreed purchase price.
For example, suppose you're purchasing a commercial property for $1 million, but the lender's appraisal values it at $900,000. If the lender is willing to finance only 75% of the appraised value, your maximum loan would be $675,000.
That means you'd need a $325,000 down payment instead of the $250,000 you may have initially expected, plus any additional closing costs and required reserves.
We recommend a preliminary financing assessment before making an offer, especially if you're buying a property with vacancies, deferred maintenance, or limited operating history. This can help you understand how much financing the property may support and avoid unexpected down payment requirements later in the transaction.
Additional Costs to Budget for When Buying Commercial Property
Your down payment is only one part of the total cost of purchasing commercial real estate. Buyers often need additional cash for financing fees, property inspections, closing expenses, and other costs that come up before or shortly after the purchase.
Before making an offer, we recommend accounting for the following expenses:
- Loan origination and lender fees: Commercial lenders may charge origination, processing, underwriting, and other fees to arrange the loan. These costs vary by lender and financing program.
- Property appraisal: Most lenders require a commercial real estate appraisal to confirm the property's value before approving financing. The cost depends on the property type, size, and complexity.
- Property inspections: You may need to pay for building inspections, roof assessments, HVAC evaluations, structural inspections, and other assessments to understand the property's condition.
- Environmental assessments: Lenders may require a Phase I Environmental Site Assessment, particularly for industrial properties or sites with a history of potentially hazardous uses. Additional testing can increase costs if the initial assessment identifies concerns.
- Title, survey, and legal fees: Budget for title searches, title insurance, property surveys, attorney fees, and other expenses associated with verifying ownership and completing the transaction.
- Closing costs and prepaid expenses: Depending on the purchase agreement, you may be responsible for recording fees, certain transfer-related expenses, property tax adjustments, prepaid insurance, and other settlement costs.
- Repairs and improvements: If the property requires renovations, equipment replacements, or improvements before you can occupy or lease it, you'll need additional funds beyond the purchase price.
- Cash reserves: Some lenders require buyers to maintain funds for future loan payments, operating expenses, repairs, or unexpected vacancies after closing.
For example, if you're purchasing a $1 million commercial property with a 25% down payment, you'll need $250,000 toward the purchase price. If your inspections, financing fees, legal expenses, and other closing costs total another $30,000, your total upfront cash requirement would be $280,000 before accounting for any additional reserves or improvements.
The actual amount will vary depending on the property, financing structure, and terms of the purchase agreement.
Some financing programs, including SBA 504 loans, may allow certain eligible project expenses to be included in the financed project cost. However, not every expense qualifies, and including additional costs can also affect your required borrower contribution.
We recommend asking your lender for an estimate of the total cash needed to close, rather than budgeting only for the down payment. This can help you avoid committing too much available capital to the purchase and leave sufficient funds to operate or improve the property afterward.
Find Commercial Property in Upstate South Carolina With Upstate Commercial Hub
The down payment you'll need to purchase commercial property depends on the type of financing you choose, the property you're buying, and your financial qualifications. Understanding these requirements early can help you set a realistic budget and avoid unexpected financing challenges during the purchase process.
Before you start looking at properties, we recommend speaking with a commercial lender to understand your financing options and how much cash you'll need for the down payment, closing costs, and other expenses.
The Upstate Commercial Hub team at eXp Commercial helps buyers find and evaluate commercial real estate across Greenville, Spartanburg, Anderson, Seneca, and surrounding areas of Upstate South Carolina.
If you're planning to purchase commercial property, contact our team to discuss your investment goals, explore available properties, and learn how we can help you navigate the buying process.
