Commercial Construction Loans

Commercial Construction Loans

Commercial Construction LoansCommercial Construction Loans are available up to and over 150% loan to cost via the SBA loan 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 $12 million with as little as 10% down/10% equity and approx $20 million with 20% equity.**

These loans are available for acquistion of land or buildings, new construction of buildings, and in the case of the 7a, you can put up a building or build out property without the need for a seperate constructon loan.

The SBA 7a is one loan, so it is essentially a "construction to perm" loan.

The definition of "owner occupied" for ground up SBA construction loans means your small business should initially occupy 60% or more of the new space and the rest may be leased out - some of it permanenty and the rest for up to 10 years.

If renovating an existing building then your business must occupy at least 51%.

If you need a commercial construction loan for anything other than an owner occupied business property than feel free to fill out a contact form as we likely know a non-SBA commercial lender who can help.  

150+% Financing Commercial Construction Loans

SBA construction loans are available up to at least $5 million with 100%+ financing from some SBA lenders for established businesses considering new construction of a commercial building for their small business. 

FYI: Generally speaking, the SBA definition of a small business is a business with average net after-tax income of less than $5 million for the previous two fiscal years, so many mid-sized businesses are eligible.

Many types of businesses and properties are eligible for 100%+ construction financing, but you may have access to better rates if the type of property you need is fairly generic.  (Generic is another way of saying "multi-purpose/multi-use" or that the property could be used by most types of businesses).

This program is especially popular with:

  • Medical practices
  • Dental practices
  • Veterinary clinics
  • Daycare centers
  • Preschools
  • Quick service restaurants
  • Franchises
  • Auto repair, body shops, auto service, tire, transmission and muffler shops
  • Fitness Centers and Gyms
  • Independent Restaurants
  • Law Offices
  • CPA's
  • Insurance Agencies
  • Many, many other types of businesses.

Commercial construction loans are available for most any type of small business constructing or remodeling a multi-purpose building and in some cases, lenders will finance properties over 100% loan to cost that might not seem like they would be considered multi-purpose, like a doggy day care or pet boarding facility.

150% PLUS Construction Financing

Obviously one of the primary benefits of an SBA construction loan is the leverage that is available.  The ability to borrow over 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 for a commercial building construction loan.

In the case of the 7a loan, many lenders will allow commercial construction financing well over 100% loan to value/loan to cost.

This is primarily due to the fact that the 7a is first and foremost a "cash flow loan," but it can be used for any business purpose - including loans for construction of commercial property - so if the cash flow of your business is strong enough then there are SBA lenders who will allow you finance well over 100% of the construction costs to include the payoff of business debt, moving costs, additonal working capital needed by the business AND the payments on the construction loan.

Below is an example from a recent transaction:

Scenario: Commercial building construction loan for HVAC business looking to acquire land, put up a building and consolidate business debts:

  • Land Purchase: $400K
  • Construction: $800K
  • Architectural & Engineering: $80K
  • Plans, Permits, Survey, Appraisal, Environmental, Legal, Title, Construction Monitoring, Soft Costs, Etc.: $51K
  • Contingency: $80K (10% of construction costs)
  • Interest Reserve: $112K (built into loan to make interest only payments during construction)
  • Refinance: $250K (refinance of borrower's existing line of credit).
  • Working Capital $110K (lender also built in an additional $110K in working capital to be used at borrower's discretion for moving costs and business operations).
  • SBA Loan Fee: $52K
  • New Line of Credit: $250K
  • SBA Loan Fee for LOC: $7.25K

Total Loan to Value/Loan to Cost = 140%

Total Loan to Value/Loan to Cost including the Interest Reserve, addl Working Capital, Contingency and Refinance of Existing Line of Credit:  160%+

This very high loan to cost is possible because SBA construction loans do not require that the lender maintain a specific loan to value or loan to cost with the 7a due to the fact that the primary requirement used for qualifying is the cash flow of the business and the debt service coverage of the business AFTER closing.

The "AFTER" in the above paragraph is crucial to understand, because for many transactions like this one, the whole idea of going over 100% loan to value is to put the borrower in a better overall financial position post-closing.

The SBA loan fees for this transaction total approx 2.625% (financed into the construction loan), but there are none of the typical origination fees like with conventional commercial construction financing which are typically 1% to 2%, so you do pay a premium (fee-wise), but the tradeoff is you get a commercial construction loan that allows the financing of other debt with no down payment.

The small business's total out of pocket for this transaction was $0 after financing in the 3rd party reports like appraisal, environmental, etc. paid prior to closing.  (Logically, small business construction loans require borrowers to pay for any costs incurred prior to closing, but since almost any of the typical construction costs are financeable, the lender will re-imburse the borrower by financing those costs into the loan).


In many cases a borrower might not qualify for an SBA construction loan like this if they could not roll their current debts into the new 25 year loan, so the flexibility this program provides allows borrowers with existing expensive debt to suddenly have a manageable debt load and it can be the difference between an approval and getting turned down.

A Word of Caution

You do need to be careful with loans like these, however, because if you borrow in this fashion you need to be sure that it is the right thing for your business.  Should your business have a significant drop in revenue then a construction loan like this could put you in a precarious position, so like anything else, you need to really evaluate your business and decide if this is the right thing to do.

Commercial Construction Loan Rates

Some SBA construction lenders offer excellent terms even above 100% loan to cost while others charge a premium/higher rate if you do not want to put down the "normal" SBA down payment of 10%.   In either case, these loans can be the right fit for a lot of small businesses so they are definitely worth a look.

Most 100%+ commercial construction loans are priced between Prime and Prime plus 1.5% and can typically be fixed for up to 5 years at a time.  If your transaction is not of the stronger variety due to cash flow, credit or some other reason, it still may be possible to get a 7a construction loan but you could end up with a higher rate, however in no case would it be higher than Prime + 2.75% on a floating rate with the same 25 year amortization and no balloon.

If you have a 10% down payment (or 10% 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 SBA construction loans including the ability to borrow the down payment, gifts, investors, some retirement programs and in some cases, seller financing.

504 Commercial Construction Rates

The SBA 504 program is quite a bit more restrictive than the 7a with regard to use of proceeds, but it does offer more attractive terms.

Most 504 construction lenders will offer a 5 year fixed with a 25 year amortization and some will offer a 30 year amortization.  This loan is paired with the 504 2nd mortgage which is always a low rate 20 or 25 year fixed rate.

Admittedly, each scenario is different and small busness construction lending can be complicated so an in depth discussion about the best construction loan for your project is is usually warranted.

Loans of $5 Million or More

The SBA allows lenders to offer surprisingly large commercial construction loans.

The 7a is limited to $5 million with most lenders, but some are willing to put a 2nd mortgage behind the first in order to finance larger projects for solid businesses.  This can be very helpful in that the 7a is a more flexible type of loan than the 504 and the lender can essentially finance whatever they feel is necessary for the borrower.

The 504 is an excellent program for borrowers in need of a commercial building construction loan and it can be used for the financing of larger projects up to and over $12 million with as little as 10% down.

Historically, many borrowers have used the SBA 504 program to finance hotel construction as hotels are expensive to build especially where land values are high.

Self storage is another area where SBA loans provide an excellent option for borrowers looking to conserve cash when applying for a commercial construction financing.

Manufacturing facilities of almost any type also use the 504 progam to get very good long term financing for a commercial construction project.  The 504 can also be used in conjuction with Industrial Revenue Bonds to make for even more attractive terms.

Larger assisted living facilities and all types of senior care construction projects are also a good fit for the 504.

10% Down Commercial Financing - 90% Loan to Cost

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

And as mentioned above, the 7a is a very flexible type of loan.  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

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 + Flexibility

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

As stated above, 5 year fixed rates with a 25 year amortization are readily available for 100%+ financing with the 7a and in some cases even 25 year fixed rates are possible.  The 504 requires a minimum of 10% down and at most would be 20% down for new construction for a startup "special use" property.  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 (typically using the 7a) 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, SBA construction loans offer long term financing, 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 are the right loan for many small and mid-sized businesses.

Please call us for more info at 1-800-414-5285 or for more info about commercial construction financing and if you need more info about 100% commercial real estate financing click here.

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.

* Some lenders will put a small (conventional/non-SBA) 2nd mortgage behind a 7a first mortgage in order to finance larger projects. This structure may require additional collateral to get to a high loan to cost. 

**The 7a program allows extremely high loan to cost commercial construction loan financing.  The 504 still allows very high leverage, but at lower fixed rates.