Commercial Construction Loans via the SBA

Commercial Construction Loans

Commercial Construction Loans are available via the SBA 7a and SBA 504 programs for small and mid-sized businesses to build "owner occupied" commercial property from the ground up or to expand an existing building or facility.

The 7a program is available up to $5 million and higher in some cases,* and the 504 program can accomodate projects up to and over $20 million.

These loans are available for acquistion of land or buildings and the new construction of buildings as well as permanent financing, and in the case of the 7a, without the need for a seperate constructon loan.

"Owner Occupied" for ground up small business construction loans means your business initially occupies 60% or more of the new space. (51% if renovating an existing building).

* Some lenders will put a small (conventional/non-SBA) 2nd mortgage behind a 7a first mortgage in order to finance larger projects.

100% Financing Commercial Construction Loans

Commercial construction loans are available up to at least $5 million with 100% financing from select lenders for established businesses considering new construction of a building.  Many types of businesses are eligible including doctors, dental practices, veterinary clinics, pharmacies, daycare centers, preschools, some quick service restaurants and franchises and numerous other types of businesses.

Obviously one of the primary benefits of the SBA programs is the leverage that is available.  The ability to borrow 90% to 100+% of the total costs of a construction project for your small business is not something most conventional lenders will consider as most will require at least 20% down.

To that end, some of the 100% programs offer less attractive terms than if you can put down the "normal" SBA down payment of 10%, but they are the right fit for a lot of businesses so they are usually worth a look.

If you have a 10% down payment or equity then it may be possible to get a 25 year fixed rate with either the 504 or the 7a and in the case of the 7a most lenders will give you additional working capital at closing effectively lowering the amount of cash you put down.

Additionally, there are a number of acceptable sources of down payment for this program including the ability to borrow the down payment, gifts, investors, some retirement programs and in some cases seller financing.

Admittedly, each scenario is different and commercial lending can be a little complicated so an in depth discussion about the best way to do this is usually warranted. Please call us for more info at 1-800-414-5285 or visit our 100% commercial real estate financing page here or our medical and dental pages here.

10% Down Commercial Financing - 90% Loan to Cost

Whether you have 10% down or not, the 7a and 504 commercial construction loans offer great leverage at least 90% "loan to cost" which helps you conserve cash, maximize tax deductions and control your overhead.

And as mentioned above, certain 7a lenders will actually go over 100% loan to cost for the right business/right borrower with the right cash flow, but even with 10% down the 7a, especially, is very flexible when it comes to financing construction costs.  Essentially almost any cost you must pay to erect a commercial building is financeable including:

  • Land costs
  • Hard and Soft construction costs
  • Construction contingency
  • Moving costs
  • Working Capital
  • Contingency Working Capital
  • Lease Up Working Capital (for certain transactions like mini storage construction)
  • SBA Fee and finance fees associated with closing

7a construction loans also allow the payoff of small business debt in order to qualify as the SBA allows other business debt to be rolled into the loan and paid over 25 years as long as the real estate component of the transaction is a larger percentage of the overall financing.


SBA Construction Loan Benefit Summary

  1. The SBA 504 loan allows 10% down payment or equity injection for commercial construction projects and you can pay cash, use land that you already own (if you've owned the land for 2 years or more you may be able to use current appraised value) or possibly borrow the down payment.  The 7a program allows up to and over 100% financing.
  2. The 504 and the 7a allow you to finance other business debt, moving costs, construction costs, closing costs and soft costs including interim construction interest, architectural fees, surveys, title insurance, engineering fees and even moving costs allowing business owners to keep their cash for other expenditures.
  3. The 504 and the 7a allow you to finance the cost of long term machinery and equipment, so if you are moving and need some new equipment, the cost of the equipment can be included in the loan. The 504 requires that the equipment have a useful life of greater than 10 years. The 7a does not.  Either way, this is a big benefit for any business utilizing expensive equipment to manufacture products or provide services.
  4. Both programs offer long term amortizations - the 504 is typically a 25 year first mortgage with a 25 year second mortgage while the 7a is just one loan for 25 years. The second mortgage for the 504 is a fixed rate and there is no balloon or call provision on either loan. It is a "one and done" proposition - there is no "re-qualifying" later - allowing you to better control your overhead and plan for the future.
  5. Both programs allow you to initially lease up to 40% of your newly constructed space to another business and for existing buildings you can permanently lease up to 49% of the commercial space.

The 504 Loan - Not Just For Small Businesses

The 504 is technically a "Small Business" program, but the generous loan amounts* and net worth and and income limits make it available to mid sized businesses. Current SBA guidelines allow a business to have a tangible net worth up to $15 million and net - after tax - profits of up to $5 million on average for the last 2 years.

The 7a allows loans for larger businesses as well.

Large Project? Go Green

The 504 allows higher loan amounts and the ability to fund multiple projects if you use or produce renewable energy or if you make a building 10% more energy efficient.

Multiple projects upwards of $15 to $20 million are technically possible and there are numerous local, state and Federal incentives for building green or for retrofitting a building to make it more energy efficient...or using or producing renewable energy.

Click hereGreen Energy for more info.

Commercial Construction Loan Structure

SBA commercial construction loans come in a few varieties.

The 7a program is a "single close" loan where the rate is set from the day of closing.  Most lenders will give you interest only payments during construction and they will also build those payments into the loan.  Additionally, the construction period is often in addition to the typical 25 year amortization.

The 504 program is more complicated in that there is a seperate construction or bridge loan that gets taken out by the permanent financing once construction is complete.

SBA = Leverage

There are numerous viable options for commercial construction financing in the current market, but none with the kind of leverage you can get via the SBA.

Some of the 100% financing programs are floating rates and therefore less attractive, but there are many instances where they are the right loan for a small business.  If it makes sense to do so, lenders will refinance more expensive debt in the construction loan in order to improve the cash flow of the business which can have a significant impact on the borrower's ability to qualify and/or just to improve the cash flow of the business.

Also, 25 year fixed rate construction loans are possible with both the 504 and the 7a, whereas most conventional loans will have a balloon at the end of 5 years and a reset of the interest rate IF you qualify at that time.

No commercial construction loan is ideal and SBA loans are no exception as they have have higher fees and a little more paperwork than conventional loans, but they could be the right fit for your situation.

Please contact us at 1-800-414-5285 for more info.

A Note About Modular Construction

FYI: one of the easiest ways to build an energy efficient building is with modular construction or prefabricated walls. Modular construction uses "structurally insulated panels" which typically cut construction time in half and reduce energy consumption by 50% or more for many structures.

Please click here if you need more info.