Finance Owner Occupied Business Property with No Down Payment
100% commercial real estate financing is available up to $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 the business for approximately the last 1.5 years
- Debt service coverage ratio of approximately 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
Typically these loans are only available for general purpose/multi-use properties which are defined as the type of building that can be occupied by almost any type of business, but there are a few exceptions listed further down the page. Higher loan amounts are also possible in some situations.
100% Commercial Loans Require That You Already Own The Business
The 100 percent commercial loan for real estate requires that you already own the business. It is NOT for someone buying both a business and a building, because as of January 1, 2018 the SBA requires a 10% down payment on a business acquisition.*
This program is also NOT for any type of investment property (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 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.
Examples of eligible owner occupied business properties for 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 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
- Auto Repair Facilities - both independent and franchises in good standing as long as most lifts are above ground. Also eligible would be:
- Tire Businesses
- Muffler Repair
- Transmission Sales and Repair
- other similar Automotive Businesses
"Special" or "single use" properties like hotels, gas stations, golf courses, etc. are not eligible and will require a down payment. Also, smaller loans may not be eligible, so please contact us to discuss.
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% for Purchase, Refinance or Construction
This program can be used for existing businesses for the purchase, refinance and even construction of a building that would be at least 51% or more owner occupied. (Owner occupied means that the business would legitimately occupy 51% or more of the building. Construction requires that the business initially occupy at least 60% of the net square footage).
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. There are still many businesses that for one reason or another have been unable to refinance their current loans. In some cases, it is due to a loss of property value and in others it may just be that their bank does not believe they have strong enough financials for the past 3 years.
The key to qualifying for this program is that you must have solid recent financials.
125+% Financing Possible
The SBA 7a program allows the financing of not just all closing costs, but you can finance working capital, building improvements and other business debt up to and over 125% of the value of the building.
Going above the value of the building is possible for businesses with strong cash flow, but you need to be mindful of the fact that you will have "negative equity," however lenders do it all the time and and it can be very helpful in the right situations - especially since everything is usually financed over 25 years.
100% Financing Positives and Negatives
When it comes to commercial property financing, having the option to avoid putting cash down can be a difference maker for a lot of businesses. Many businesses - especially those that took longer to recover from the recession - would welcome the opportunity to be able to purchase or refinance a building without having to put equity in. The money they keep in their business could be used for anything from marketing to inventory to hiring new employees or just to have some cash on hand.
This program is available as a 3, 5, 7 and sometimes a 10 year fixed with a 25 year amortization as well as adjustable rate that adjusts with the Prime Rate (also with a 25 year amortization).
Fixed rates are a little harder to qualify for and sometimes require some minimal cash out of pocket (usually $10,000 or less) but are still underwritten in a reasonable manner. 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"
Oddly enough, many SBA loans are offered with variable or "floating" rates at a margin above the Prime Rate and this is true for this program as well. Most of the 100% financing variable rate loans that we have seen end up somewhere between Prime + 1.25% and Prime + 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.
Is This Program Right for You?
The reality is that you may not have the cash to put down 20% to 30%, 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. (Keep in mind that 10% down is readily available via either the 7a or the 504).
Rationale for why you might consider the variable rate if you cannot qualify for a fixed rate:
- The 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 will) 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 20% equity typically needed, but it is possible.
- If you are constructing a building there is 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 20% 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 loan payments would be similar to what you would have had if you were to continue leasing.
- Perhaps this one is the most important...in order for the Prime Rate to go up, the economy needs to be heating 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 many 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% Fundings
We recently helped the following clients:
- 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
- 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
- Numerous other dentists, veterinarians and physicians either moving, building or expanding their practices
Borrowing the Down Payment and Other Options
You may not qualify for the 100% financing program, but you may qualify with a down payment of somewhere between 2% and 15% which is still a lot less than a conventional loan AND the SBA allows you to borrow the down payment 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. Please contact us if you have questions about this as most SBA lenders typically do not mention this to prospective borrowers.
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.
Funds from Seller
Lastly, the seller can hold a second mortgage. This option was more common before 2018 as the rules have since been changed, but it is still a viable option, but it is "case by case" and in most circumstances a lender will still want you to have some skin in the game.
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" of a 1.25 times the amount of your new payments including real estate property taxes for the new building AND after adding back to that income certain non-cash expenses like amortization and depreciation as well as any mortgage interest or rent that you would be replacing. To put it another way, you need to have net income of $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
Term and Amortization: 25 years
Property Taxes: $15,000 per year or $1250 per month
Monthly Payment including property taxes: $7541.06
Total of Yearly Payments: $90,492.76 ($7541.06 x 12)
Required DSCR: 1.25x
Amount of Net Income needed to get to 1.25x: $113,115.96 ($90,492.76 x 1.25)
In the case of the 100% financing program, some (not all) lenders will underwrite the loan 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...so sticking to the above example, in order to qualify you might need to have a DSCR of 1.25x using a payment of $7,718.16 per month at 8% ($92,617.94/year) which means you would need Net Income of $115,772.43 (after "addbacks").
A note about projections and qualifying...if the building you are either purchasing or constructing is going to be larger than your current space AND if you don't quite have a 1.25 "stress tested" DSCR, but you have been paying more in rent than what your new payment will be then it might be possible for you to qualify using projections based on the new space.
For instance, if the new space is 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, then it is possible that a lender may approve the loan based on the fact that your DSCR with improve after the move.
Projections Based on Rising Revenue
If your business revenue is on a strong upward trajectory and the lender has confidence in the transaction 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.