Are you considering buying your own commercial space? Doing so offers a wide range of benefits to business owners, including building equity, predictable payments, tax savings and the ability to make additional income from renting out the space.
If you're ready to move forward, your next move may be to submit a loan application for the purchase of the building. Knowing what factors lenders consider when financing owner-occupied commercial real estate can help improve your chances of success.
In this blog post, we take an in-depth look at these financing requirements. Plus, we reveal how you can purchase or refinance your next income-producing property with a simplified financing process.
Owner-occupied vs. investment commercial real estate
First, you may be wondering what the difference is between owner-occupied and investment commercial real estate, as well as how financing differs for each of these.
- Owner-occupied properties are commercial buildings the owner operates their own business out of and for which they are the majority or sole tenant.
- Investment properties, on the other hand, are those in which a third-party tenant occupies or leases the property.
There are several differences between owner-occupied and investment commercial real estate, particularly when it comes to obtaining financing. These include:
Loan structure
Generally, owner-occupied loans will have some additional flexibility with their terms to suit a business owner’s individual needs. Investment property loans, however, often match the term of the loan to the lease’s average maturity date.
Return
Commercial owner-occupied and investment loans also offer different returns, with a number of factors being taken into consideration. Business owners must ask themselves:
- How much rent am I currently paying to operate within this space?
- Will I be getting a better return on my capital if I invest my funds back into my business or in holding property?
Cash flow consideration
Owner-occupied commercial property loans are financed based on the operating business’s revenue and financial ratios, as well as its collective assets as collateral. Therefore, they are not solely funded on the value of the building.
Investment property loans are quite the opposite. Most financial institutions will take a close look at cash flow when determining whether to approve a new loan or extend an existing one. The cash flow is initially defined by the rents and if those rents can cover the debt service on that property.
Financing requirements for owner-occupied commercial real estate
When evaluating financing for an owner-occupied commercial space, lenders will scrutinize several factors related to business performance, financial stability and credit risk. As you prepare your loan application and present your case to a lender, be sure to focus on the following criteria:
Owner-occupied commercial real estate financing options
Now that we’ve discussed the financing requirements of an owner-occupied commercial real estate loan, let’s take a closer look at the various funding options available.
Conventional financing
Conventional financing for owner-occupied commercial real estate is available in a variety of loan terms, with amortization of up to 25 years. There are both competitive and fixed rates available, while business owners can also opt for balloon or non-balloon payment options, depending on their needs. Finally, conventional financing is available with flexible prepayment programs, allowing commercial owner-occupiers to manage their payments in a way that suits them most.
SBA financing
Some business owners may also qualify for SBA 7(a) or SBA 504 financing, which offers up to 90% financing for up to $10 million (under SBA's 504 loan program). This financing includes loan terms up to 25 years, as well as full amortization with no balloon payments (under SBA's 7(a) program and many SBA 504 loans). Finally, business owners can enjoy reduced equity requirements with SBA financing, allowing them to keep more working capital working in their company.
Learn more about your SBA 7(a) and SBA 504 loan options, specific requirements, and which may best meet your needs.
Need help navigating the next steps? At California Bank & Trust, our lenders are attuned to local commercial real estate markets and we can be your guide throughout the process. If you decide to buy, we have owner-occupied financing options including conventional and SBA loan programs.
Do you require investor real estate financing?
We’ve also introduced New Express Commercial Real Estate Financing, which offers a simplified loan application, as well as timely loan approvals and funds disbursement. Term loans up to $2 million are available to purchase or refinance income-producing office, retail, industrial, multi-family or mixed-use commercial property.