Finance 100% of Owner Occupied Business Property / No Down Payment
100 percent commercial real estate financing is available up to (and sometimes over) $5 million for owner occupied properties with an SBA loan and most existing SBA-eligible small businesses are eligible.
At a minimum, you must have the following to qualify:
- Good personal credit
- Stable cash flow for your business for approximately the last 1 to 1.5 years
- Debt service coverage ratio of approximately 1 to 1.25x. (see bottom of page for explanation of debt service coverage)
- Your business must legitimately occupy at least 51% of the total square footage of the property
These loans are available for general purpose/multi-use properties as well as some single purpose properties. General purpose/multi-use is defined as the type of building that can be occupied by almost any type of business.
100 percent financing is also available for some "special use" properties such assisted living facilities, doggy day care businesses, kennels, preschools, childcare buildings and others which are listed further down the page.
SBA Loan No Down Payment - 100% Financing for Commercial Property: Rates and Terms
The typical offer for a well-qualified small business for one of these loans is either a floating rate or a 2, 3 or 5 year fixed rate with a 25 year amortization with a rate between Prime + 0% and Prime + 2%. Certain medical professionals might be eligible for low 10 or 25 year fixed rates in some areas of the country.
SBA loans for a business that requires more flexibility in underwriting due to past credit issues, an old personal bankruptcy, inconsistent income, etc. but still need 100% financing for their commercial real estate could end up with a higher rate, but no higher than Prime +3% on a floating rate.
Prime minus .50% Fixed for 2 Years
Update: The Prime Rate at the time of this update ( September 1, 2023) is 8.5% after the most recent Federal Reserve rate hike. The Federal Reserve has been increasing the Fed Funds Rate - which the Prime Rate follows in lock-step - in a continued attempt to curb inflation.
It is difficult to know what will happen with the economy and how it will impact rates over the next few years, and while the current upheaval in the financial markets is making SBA loans less profitable for many lenders, the flip side to that equation is that some lenders are getting creative and more flexible.
Lenders are in the business of making loans and with higher rates leading to fewer loans, lenders need to find ways of continuing to do a sustainable level of good loans. And one way they are trying to do this is by offering more competitive terms, so one hundred percent loans are definitely still available and some lenders are offering below-market rates including some loans at or below the Prime Rate on either a fixed or floating rate.
These loans are fully amortized 25 year loans meaning they do not have a balloon payment. The loans simply adjust with the Prime Rate from the start or after any initial fixed period and they can be refinanced after the 3rd year without a penalty or after 2 years with a 1% penalty.
100% SBA Financing for Purchase, Refinance or Construction
This program can be used by an existing business not just for the purchase of a building, but also to refinance a building and other business debt and even construction of a building whether it be ground up or major or minor renovations.
The key is that the property must be at least 51% or more owner occupied by your business. In other words, your business and/or your employees must legitimately occupy 51% or more of the building. (Ground up construction requires the business initially occupy at least 60% of the total square footage per SBA rule).
It is also worth noting that some SBA 100% construction lenders will allow for construction of generic space for commercial tenants.
The following link provides detailed information on 100% construction loans: 100% financing commercial construction loans.
100% SBA Financing by Borrowing the Down Payment and Other Options
If your business does not qualify for 100% SBA financing, you may still qualify for a low down payment AND some SBA lenders may allow the borrowing of the down payment for an SBA loan. (You would have to borrow it from somewhere other than the SBA lender, but it is allowable).
There are a few ways to do this.
- If you have another stable, consistent source of income from another job, another business or a spouse and can show the capacity to repay the borrowed funds from that source than it is acceptable for the down payment to be borrowed. Please contact us if you have questions about this as many SBA lenders will tell you this is not possible or they will not allow it.
- The other option is a feature of the 504 loan in that the business can actually borrow the down payment from another source. Some 504 lenders will allow this and some may require that the business owner borrow the money for the down payment and prove that they can afford the payments on the borrowed money from their take home pay or other income. This is really a judgement call for a lender as it adds more risk to the transaction and any lender that will consider this is going to want to see that the business and the borrower have enough cash/liquidity to handle their obligations. This is not something that a lot of lenders allow, but there are lenders who are okay with it if the cash flow of the business is strong and the business is stable. And it might be possible to get a low 25 year fixed rate with the 504 with just 10% down.
Retirement Fund Rollover
It is possible to rollover various types of retirement accounts (tax and penalty free) to be used for down payment.
The SBA also allows the use of gifts from friends or family.
You can have investors supply you with the funds for down payment in exchange for a percentage of ownership in the business, but you will typically need some of your own "skin in the game."
Funds from Seller
Lastly, the seller can hold a second mortgage for half of the down payment but it must be on "full standby," meaning no payments for 24 months or it can be on "partial standby" which means you need to make "interest only" assuming the business has enough cash flow to make the interest only payments and assuming you put down at least 2.5% of the purchase price.
Many sellers are agreeable to full or partial standby structure this since they are getting 95%+ of the proceeds of the sale at closing.
Over 100% SBA Financing Possible
100% commercial real estate financing is possible and some lenders will actually allow much higher leverage of up to 150% or more for the right borrower/right business.
The SBA 7a program provides a business mortgage loan that allows an existing business to get either a business property loan or business acquisition financing with no down payment thus allowing the small business to conserve their cash for other business needs. This is possible, because the 7a is first and foremost a "cash flow" loan, meaning the lender's primary underwriting criteria is that the business must have strong enough cash flow (post-closing) to service the proposed debt. Because of this, lenders have the ability to offer loan amounts that are higher than the purchase price or value of the real estate or in the case of a business expansion, 100% financing for the acquisition of a business IF (and only if) the existing business is strong and has enough equity on it's balance sheet.
Business owners can finance not just the purchase, refinance or construction of a building, but all closing costs, payments during construction, working capital, building improvements, equipment and other business debt into a commercial business property loan.
Going above the value of the building and still having proper debt service coverage is made easier by the fact that 25 year amortizations are possible for business property loans as long as the commercial real estate is at least 51% of the total amount financed. So if you take a 100% finanicing "plus" loan you need to be mindful of the fact that you will have "negative equity," which could make it more difficult to refinance at a later date, but this type of financing can be advantageous for growing businesses looking to hang onto their cash.
Purchase & Refi at over 150% Loan To Value
We frequently see situations where borrowers have other debts they would like to consolidate into a business property loan and if the business cash flow will support the payoff of the debt then it sometimes makes good sense to do it.
Here is a recent example for a business that was growing quickly and had taken on lots of debt to accomodate growth. They decided to construct a building from the ground up and roll in all existing debt:
- Purchase of Land and Building Construction Costs: $1,650,000
- Existing Debt: $830,000
- Working Capital provided by Lender: $15,000 (this was limited by what they could qualify for)
- SBA Loan Fee: $67,500*
- Total Loan Amount: $2,562,500
- Total Loan to Value: 155%
*The SBA loan Fee is expensive, but there are no origination fees or points.
On the surface, this seems like it might not make good financial sense for the borrower to close on a loan like this, however, by consolidating all of the business debt into the new mortgage the business cut it's monthly costs by $15,000 per month.
Admittedly, in doing so, they extended the length of time they would be paying on all of their debt, but for them it was all about growth and now they have freed up a significant amount of monthly cash flow and they can afford to pay large amounts towards the principal on the new loan as well.
In fact, in this case, if they pay an extra $5000 per month towards principal they would pay the entire loan off in under 15 years and still have $10,000/month in additional positive cash flow.
100% Commercial Loans
The 100 percent commercial loan for real estate almost always requires that you already own the business for which you are trying to finance a building.
The exception is for a business expansion.
If you are expanding your current business by purchasing another business (with or without a building) or adding a location you might be eligible for a 100% business purchase loan (with no down payment) or it might be possible to leverage the equity on your balance sheet in lieu of a down payment to get better terms. Please contact us for more about how this works.
Some examples (far from a complete list) of eligible owner occupied business properties we have helped get 100% financing:
- General Purpose or Multi-Use buildings (buildings that could be occupied by most any type of business)
- Professional Office Buildings for CPA's, Attorneys, Insurance Agencies and others
- Office Condos
- Medical Practice Buildings - click here for info including new 25 year fixed rate program
- Dental Practice Buildings - click here for info including new 25 year fixed rate program
- Veterinary Clinics and Hospitals - click here for info including new 25 year fixed rate program
- Some Quick Serve and Fast Food Franchise Restaurants
- Independent Family Owned Restaurants
- Pre-Schools and some Daycares
- Many types of Retailers
- Fitness Center Buildings & Gyms
- Physical Therapy Buildings, Occupational Therapy Buildings
- Independent Car Dealers
- HVAC Contractors
- Independent Insurance Agencies
- Auto Repair Facilities - both independent and franchises in good standing. Also eligible would be:
- Tire Businesses
- Muffler Repair
- Transmission Sales and Repair
- other similar Automotive Businesses
SBA 100% commercial real estate financing is NOT for investment properties (multi-family, apartments, single family, single tenant, multi-tenant , etc.). However, you can use SBA financing to purchase self storage, mini storage or boat and RV storage and RV parks with as little as 10% down AND the down payment can be borrowed.
Click here for more info or call us at 1-800-414-5285 to discuss what is possible.
"Special" or "single use" properties like hotels, gas stations, golf courses, etc. require a down payment, but the SBA is quite flexible on the source of the down payment.
Also, smaller loans may not be eligible, so please contact us to discuss.
Businesses Leasing Property
If you are looking for 100% financing for a business that will occupy leased space, then click here for info on how to do that.
If you have 10% down and you are financing a multi-purpose building then click here to read about the low rate 25 year fixed rate options.
*If you have a seller willing to hold a second mortgage on "standby" for 5% of the sales price of the business/building then the SBA only requires a 5% down payment.
100% Commercial Real Estate Financing Positives, Negatives & Loan Options
This program is typically available as a 1 year fixed, a 5 year fixed or a quarterly floating rate with a 25 year amortization - all of which adjust with the Prime Rate.
The most common business property loan offering in a low rate environment is a 5 year fixed rate with a 25 year amortization. Some of the fixed rate lenders have tougher underwriting than others and if you cannot qualify for a fixed rate then the quarterly adjustable rate is worth looking at as long as you know what you are getting into.
"Prime Plus Loans"
If you cannot qualify with a fixed rate lender, then a floating rate lender might be worth a look. Also, floating rate loans can be a good value if rates are expected to drop.
Even for borrowers putting 10% or more down, many SBA lenders only offer variable or "floating" rates at a margin above the Prime Rate. Most of the 100% financing variable rate loans that we have seen end up somewhere between Prime plus .50% and Prime plus 2.75% depending on the transaction. Obviously, the rate goes up with each increase in the Prime Rate, but it can also go down when Prime drops.
Rates NOT Based on the Prime Rate
Keep in mind that with 10% down, there are excellent rates available that are not based on the Prime Rate. These need to be fairly solid transactions, but the rates can be significantly below "market rate."
Is This Program Right for You?
The reality is that you may not have the cash to put down 20% to 30% for a traditional bank loan, but you might have a great business and having a building of your own could have it's advantages and will most likely provide significant value down the road. (And remember, that 10% down is readily available via either the 7a or the 504).
Rationale for why you might consider the variable rate if fixed rates are not ideal at the time of application:
- The 7a program only has a 3 year prepayment penalty and it is only 1% in the 3rd year, so if Prime is rising by the 3rd year (and to protect yourself you have to assume it is) then you might have the ability to refinance with either a small penalty or no penalty at all. Of course you will need equity in your commercial real estate to be eligible for a refinance, and 2 or 3 years might not be enough time to accumulate the 10% to 20% equity typically needed, but there are options:
a. As of 2022, you can refinance an SBA 7a loan with an SBA 504 with only 10% equity in your property.
b. Some 7a lenders (especially the lower rate lenders) will refinance a high rate 7a with a low rate 7a loan. (Most SBA lenders do not realize this is possible).
c. Some conventional lenders only require 15% equity for the refinance (or purchase) of "owner occupied" business property and occassionally you might even see a conventional lender only require 10% equity.
- If you are constructing a building there may be a good chance that your building will appraise higher than what it cost you to build. This is very important, as the sooner you have equity, the sooner you will be able to refinance should your rate be rising.
- You might be able to purchase a building for less than it's current appraised value in which case you would have "built in" equity at closing putting you closer to having the necessary equity to refinance later.
- You can prepay extra principal of up to 25% per year for the first 3 years and as much as you want after that.
- If you currently are making lease payments chances are there is an escalation clause in your lease and your lease payments will be going up over it's term, so it is possible that any adjustments in (floating rate) loan payments would be similar to what you would have had if you were to continue leasing.
- Perhaps this one is the most important...if the Prime Rate is going up, it is usually because the economy is heating up (or has heated up), so one would hope that if the economy is doing a lot better then your business should also be doing better making you more able to handle rising payments.
- Most of these loans "re-amortize" annually, so if you make lump sum prepayments of principal your payments will re-adjust each year to help keep them low.
- Tenants - you can have tenants. SBA loans require that your business "owner occupy" at least 51% of an existing building or 60% of a building you would construct, but you can lease out the rest of the space, so your tenant(s) can help offset your costs - possibly dramatically. One caveat with this...the SBA does not allow you to use SBA guaranteed funds to "finish out" space for a tenant, so keep that in mind if you are building.
Appreciation and Buying Right
Given that commercial property prices are still relatively low in some areas of the country this might be the last time for a while to get a relative bargain on a suitable building...and as mentioned above, if the economy starts heating up then real estate prices typically rise and one would certainly hope that your property value would go up as well, so it is possible that you could build equity quickly.
Recent 100 Percent Fundings
We have assisted the following clients buying commercial property with no money down:
- Veterinarian purchasing the building he was renting as well as the pet boarding business the seller operated on the property. This transaction was fairly remarkable for a few reasons: 1) the veterinarian had been in busines in this location for just 1.5 years, 2) the lender was able to allow him to buy not just the building without a down payment, but the pet boarding business as well, and 3) the total amount was approximately $3.5 million. (Closed March of 2023).
- Assisted Living Facility - borrower was purchasing another Adult Care Home/Assisted Living Facility. This was their 3rd location. Purchased the business and the building with no down payment.
- Preschool expanding to another location - loan was structured over 100% loan to value and included renovation costs for building to convert to pre-school as well as a business debt consolidation
- Chiropractor buying the building she was leasing AND another nearby practice
- IT firm purchasing the building it was renting
- Manufacturing company buying and renovating a new building - $3.5 million transaction and was technically 99% financing as the borrower had to come out of pocket approx 1%. We were also able to get this client a $150,000 line of credit.
- Karate School with a great local following - ground up construction
- Pharmacist buying a new building
- State Farm Insurance Agent buying a building down the street from where she was leasing
- Allstate Insurance Agent moving from leasing to owning
- Managed IT Service and Cloud Computing company purchasing a building
- Metal Fabrication company in Florida whose landlord was selling the building they had been leasing
- Dentist building a new $5 million facility from the ground up
- Independent Child Care center moving from leased space - ground up construction
- CPA buying a larger building
- Martial Arts business buying larger facility
- Law Firm moving to larger space
- Fitness Gym and Tanning Salon with multiple tenants - almost $4 million transaction also refinanced borrowers existing debt significantly improving cash flow of business
- Dentist purchasing building, refinancing practice & equipment debt and receiving working capital - total savings of $4500/month
- Bar B Q restaurant for existing business moving to a larger space
- Hair Salon moving from renting to owning
- Used Car Dealer purchasing property they were leasing - small building + lot. In business for just over 2 years with 1 year of profitability
- OB/GYN doctor moving from leased space to owning
- Custom Graphics and Printing company moving from leased space to owning. Building has 2 other tenants to help pay the loan.
- Mobile Medical Service business purchasing the office condo they were leasing.
- Country Store/General Store purchasing the building it had been leasing for the past 10+ years.
- Independent Insurance Agent purchasing a building for his agency that also has tenants to help pay the mortgage.
- Fitness Center/Gym purchasing the building they had been renting for many years and buying out a long time partner
- HVAC contractor with a rapidly growing business. Loan was ground up construction and included debt consolidation and a significant amount of working capital.
- Custom Decorative Metal Fabrication business primarily doing online sales. Client was leasing 2 properties next door to each other. Loan was structured to allow the purchase of both properties as they were re-structured to be deeded together.
- Oral Surgeon moving to a new location. 100%+ financing, 25 year fixed rate.
- Commercial and Residential Remodeling Contractor purchasing the building they had been renting
- IT and Internet Security Firm moving to larger space
- Rita's Water Ice Franchise purchasing building they were renting
- Accounting Firm moving to larger space
- Steel Tube Manufacturer buying new equipment and refinancing existing equipment with no down payment
- Med Spa / Laser Center buying building they were leasing that had 5 other tenants whose rents completely covered the new mortgage payment
- Numerous other dentists, veterinarians and physicians either moving, building or expanding their practices
Refinance Your Commercial Building With Little or No Equity
If you currently own a building and you do not have enough equity to refinance with a conventional or bank loan then this program could be a good fit. If you are unable to refinance your building and/or business debt with your current bank or lender due to to loss of property value, uneven financials, COVID 19, etc. but your most recent financials and your tax return for the most recent tax year show enough income to qualify, then there is a good chance you could qualify with an SBA lender.
Every transaction has it's own story and the key to qualifying is that you and your business have to be strong enough on paper recently. The SBA provides a lot of rules to lenders, but it is ultimately up to a lender to decide what they fell comfortable approving.
Debt Service Coverage
The Debt Service Coverage Ratio is a ratio that shows how much net income you have relative to the amount of the mortgage payment. Essentially, your business needs to have "net income after add backs" of 1.15 to 1.25 times the amount of your new payments including real estate property taxes for the new building. "Add backs" are typically non-cash expenses like depreciation, interest and amortization, but also include rent that will be replaced or one time expenses not likely to recur for a while - like an investment in your business for new equipment.
To put it another way, you ideally need to have net income after addbacks of $1.15 or $1.25 for every $1.00 of new mortgage debt.
SBA Debt Service Coverage Ratio
Here is an example of how to calculate your Debt Service Coverage Ratio or DSCR aka DCR:
Loan Amount: $1,000,000
Interest Rate: 4.75%
Term and Amortization: 25 years
Property Taxes: $15,000 per year or $1250 per month
Insurance: $3300 per year or $275 per month
Monthly Payment including property taxes: $7203.69
Total of Yearly Payments: $86,444.34 ($7203.69 x 12)
Required DSCR: 1.25x
Amount of Net Income needed to get to 1.25x: $108,055.43 ($86,444.34 x 1.25)
Some lenders will require debt service coverage of 1.25x, some will require just 1.15x and others will allow less if they can understand why it may make sense to do so.
In the case of the 100% financing program, the more conservative lenders will occasionally underwrite using a "stress-tested" rate that is higher than the actual rate - typically 1% or 2% higher - because as mentioned above, this is sometimes a variable rate program and it is just a matter of time before rates go up and they want to be sure you can handle an increase in payment.
They do not do this in all cases, as each transaction is unique and you may have other factors in your favor that give them a level of comfort that you can handle an adjustment to the rate, but it is worth mentioning.
Projections & Debt Service Coverage Below 1.15x
A note about projections and qualifying...if the building you are either purchasing or constructing is going to be an improvement in some way over your current space AND if you don't quite have the lender's required DSCR it may still be possible to qualify.
For instance, if you have been paying more in rent than what your new payment will be then an argument could be made that you could qualify using projections based on the fact that you have been able to handle a higher payment.
Similarly, if the new space is in a much better location, or perhaps larger and gives you an area that will enable you to sell or produce more product or offer more services and it will logically lead to increased revenues and profit, then it is possible that a lender may approve the loan based on the fact that your DSCR with improve after the move.
This actually happens quite frequently.
Projections Based on Rising Revenue
Additionally, if your business revenue and profit is on a strong upward trajectory and the lender has confidence that the trend will continue then they may also allow you to qualify based on the strength of projections. Again, this is case by case, but it is possible.
Please contact us at 1-800-414-5285 to find out more.