Hi guys, it’s Mo 👋

Today, we’re covering how to invest in real estate if you own a brick and mortar business! This is the commercial real estate version of “househacking”

Just a heads up…

This is a bit of a dry read as I referenced the SBA site heavily. It is filled with nuggets of gold, especially if you own a brick and mortar business. You have been warned

Owner Occupant Commercial Loans

Recently, one of my readers and I had an email exchange. This person, let’s call him Bob, owns a home services business and leases from a landlord. Bob was renting “small bay industrial” aka contractor garage for $$$.

Small bay industrial is an industrial park with suites ranging from 1,500-15,000 sq ft. They usually have space for a work truck and inventory to pull up in.

These are frequently used by contractors and other tradespeople.

Now, small bay industrial has grown very popular on Twitter recently. I credit it mostly to Chris Ramsey (great follow on Twitter).

But the main question is… how does a person like Bob buy real estate and use his business to occupy it?

It usually falls into 3 camps:

• Conventional financing

• SBA 7A

• SBA 504A

SBA is the Small Business Administration which offers a lot of different financing products to small business owners.

Conventional Financing

Conventional financing is a very easy loan product to obtain if you’re a business owner. The usual covenants are the business/borrower has to occupy 51% of the space or more, but certain lending institutions can flex on this and the borrower can occupy as little as 30% down.

The down payments are the same as most commercial loans – 30% down payment with a 70% loan-to-value.

Conventional vs SBA

Why would someone use conventional over SBA?

SBA usually has a very lengthy due diligence process on the business and/or may require you to personally guarantee the loan. Since the loan is also backed by SBA, a government entity, the actual loan timeline takes months.

The SBA may let you put less money down and sometimes conventional loans can be non-recourse.

Commercial Requirements

Obviously, the business and borrower still have to qualify akin to all commercial loans. This means an equivalent to a certain DSCR (usually 1.25x) and a credit score above 700. There are also net worth guarantees too, usually equivalent to the down payment of the loan.

The company has to be a for profit entity, usually a partnership or LLC. It wouldn’t apply for sole proprietorships. They will underwrite your financials and expect to have upward trending revenue and EBITDA.

Oftentimes, the borrower may have to have 3-4 years of relevant experience in the industry so it may not be applicable to startups. This could mean working for a competitor or being in business for yourself.

Multifamily DOES NOT count as owner occupy. However, mixed use and hotels could qualify.

Loan terms can be 1-10 years, but sometimes longer depending on which lending institution is issuing it.

SBA 7A

The SBA loves to help entrepreneurs and encourages small businesses in America. That’s what this country was built on (before private equity stepped in and did levered buy outs in the 80s).

The SBA 7A loan is there to facilitate acquisitions of small businesses, expansion, and partial buyouts.

The 7(a) Loan Program, SBA’s primary business loan program, provides loan guaranties to lenders that allow them to provide financial help for small businesses with special requirements. 7(a) loans can be used for: 

• Acquiring, refinancing, or improving real estate and buildings

• Short- and long-term working capital 

• Refinancing current business debt 

• Purchasing and installation of machinery and equipment, including AI-related expenses

• Purchasing furniture, fixtures, and supplies 

• Changes of ownership (complete or partial)

• Multiple purpose loans, including any of the above

(SBA 7A website)

The max loan amount for SBA 7A is $5mm. Some of the factors are income, credit requirements, and what state the business is in. Most SBA loans are administrated by lending institutions and not many banks.

SBA Eligibility

To be eligible for 7(a) loan assistance, businesses must:

• Be an operating business.

• Operate for profit.

• Be located in the U.S.

• Be small under SBA Size Requirements

• Not be a type of ineligible business

• Not be able to obtain the desired credit on reasonable terms from non-Federal, non-State, and non-local government sources.

• Be creditworthy and demonstrate a reasonable ability to repay the loan.

As you can see, it’s very similar to a conventional loan, but they want to be the lender of last resort.

Types of SBA 7A loans

There are several types of SBA 7A loans.

• 7(a) Small

• SBA Express

• Export Express

• CAPLines

• Export Working Capital Program (EWCP)

• International Trade loans

• Pilot Program loans.

Let’s get into detail.

7(a) Small

These are usually smaller than traditional SBA and quicker so the borrower can get their money faster. They are processed from the preferred lender’s guidelines.

SBA Express

This is sort of a “mezz” debt offering with less guarantees from SBA and more from the lending institution. It’s usually faster and the rules are dictated from the lender.

Export Express

This is a smaller loan to help companies obtain revolving lines of credit or working capital. This is higher leverage and helps people to increase their export business.

Export Working Capital

These are generally for businesses that export trade and need more working capital. Usually they require a lot of capital expenditures for manufacturing etc.

International Trade

Cap Lines

Cap lines are for short-term and working capital needs. In specific:

• Seasonal CAPLine: finances the seasonal increases of accounts receivable and inventory — or in some cases associated increased labor costs. The loan may be revolving or non-revolving.

• Contract CAPLine: finances the costs of one or more specific contracts, including overhead or general and administrative expenses, allocable to the specific contract(s). The loan may be revolving or non-revolving.

• Builders CAPLine: provides financing to small general contractors to construct or rehabilitate residential or commercial property for resale. This program provides an exception under specified conditions to the general rule against financing investment property. “Construct” and “rehabilitate” mean only work done on-site to the structure, utility connections, and landscaping.

• Working CAPline: provides an asset-based revolving line of credit for businesses unable to meet credit standards associated with long-term credit. It provides financing for cyclical growth, recurring and/or short-term needs. Repayment comes from converting short-term assets into cash, which is remitted to the lender. Businesses continually draw from this line of credit, based on existing assets, and repay as their cash cycle dictates. This line generally is used by businesses that provide credit to other businesses. Because these loans require continual servicing and monitoring of collateral, additional fees may be charged by the lender.

SBA 504A

The 504A provides long term, fixed debt “for major fixed assets that promote business growth and job creation”.

Eligibility

• For profit company in the United States

• Net worth less than $15mm

• Average net income less than $5mm

• Good character

• Qualified management experience

Uses for 504A loan

A 504 loan  can be used for a range of assets that promote business growth and job creation.

• Existing buildings or land 

• New facilities 

• Long-term machinery and equipment with a useful remaining life of a minimum of 10 years, including project-related AI-supported equipment or machinery for manufacturing products

Or the improvement or modernization of: 

• Land, streets, utilities, parking lots and landscaping 

• Existing facilities 

A 504 loan  cannot  be used for: 

• Working capital or inventory 

• Consolidating, repaying or refinancing debt 

• Speculation or investment in rental real estate

• The financing of AI-related working capital, intellectual property, or consulting services soft costs

Terms

• 10 year

• 15 year

• 25 year

Interest Rates

• T-Bill + lender spread (usually 150-250 bps)

• Lending costs are usually 3% of debt

• Can include closing costs rolled in with loan

Disclaimer:

If you’re looking for a lender to use conventional financing or SBA, email me. I can put you in touch with some of my contacts who can lend nationwide.

Summary

This was a very long and slightly dry read. If you’re a brick and mortar business owner, you may not have known about the possibility to buy your own real estate and get started.

Hopefully you found this useful! Please drop an email if you want to read more or if you have any suggestions of topics you want to be covered.

Thanks,

Mo