Loan type
Commercial real estate loans for owner-occupied property
Buying the building your business operates from changes the economics of the business. Here is how the financing works and what underwriting looks at.
At a glance
| Typical amount | $250,000 to $20 million and up |
|---|---|
| Rate | 6.5% - 9.5% APR |
| Term | 10 to 25 years, often with a 5 or 10 year fixed period on conventional |
| Amortization | 20 to 25 years |
| Down payment | 10% with SBA; 20% to 30% conventional |
| Owner-occupancy | 51% of an existing building for SBA; 60% for new construction |
| Key metrics | Debt service coverage of 1.20x to 1.35x, loan-to-value of 65% to 90% |
| Time to funding | 45 to 120 days |
A good fit when
You have been leasing, you plan to stay in the location for a decade, and the payment on owning is close to or below your rent.
A poor fit when
You are buying property to lease out. SBA financing is off the table and conventional investment-property terms are materially tougher.
Three routes to the same building
| SBA 504 | SBA 7(a) | Conventional | |
|---|---|---|---|
| Down payment | 10% to 20% | 10% typical | 20% to 30% |
| Rate structure | Fixed 25 years on the CDC piece | Usually variable on prime | Fixed 5 to 10 years, then reprice |
| Max size | No hard project cap | $5 million total | No cap |
| Can include working capital | No | Yes | No |
| Balloon risk | None on the CDC piece | None | Yes, at the end of the fixed period |
| Closing time | 45 to 90 days | 45 to 90 days | 30 to 60 days |
The balloon row is the one people underweight. A conventional commercial mortgage fixed for five years with a twenty-five year amortization means you refinance in year five at whatever rates are then, with whatever your financials look like then. That is a real risk that the SBA 504's twenty-five-year fixed rate simply removes.
What underwriting actually looks at
Debt service coverage ratio
Net operating income divided by total debt service. Most lenders want 1.20x to 1.35x on commercial property. This is calculated on the business's cash flow for owner-occupied deals, not on market rent.
Loan-to-value
Based on an appraisal the lender orders, not on your purchase price. If the appraisal comes in low, you cover the difference in cash. Budget for that possibility.
Property type and marketability
A flex-industrial box in a decent submarket is easy. A single-purpose building — a car wash, a bowling alley, a funeral home — means a bigger down payment because the lender is asking who else could ever use it.
Environmental
A Phase I Environmental Site Assessment is standard on nearly every commercial deal. If it flags anything, a Phase II follows and both your timeline and your budget move. Former gas stations, dry cleaners, and any industrial site deserve early attention.
The business itself
For owner-occupied property the business is the borrower's credit. Two years of returns, interim financials, a debt schedule, and personal financial statements from every guarantor.
The rent-versus-own arithmetic people get wrong
Comparing a mortgage payment to your rent is the wrong comparison, in both directions.
- Add to the ownership side: property taxes, insurance, maintenance, capital reserves for the roof and the HVAC, and the opportunity cost of your down payment.
- Add to the ownership side's benefit: principal paydown, which is savings not expense; depreciation; and the fact that your payment is roughly fixed while rent is not.
- The structural argument: owning the building converts an unavoidable operating expense into an asset you can sell, and it eliminates the single largest existential risk many small businesses face, which is a landlord not renewing.
Questions people actually ask
Can I get a commercial mortgage with 10% down?
Through the SBA, yes — both the 504 and the 7(a) commonly work at 10% down for owner-occupied property. Conventional commercial lenders generally want 20% to 30%. That gap is the single biggest reason small businesses use SBA financing for real estate.
Do I have to occupy the whole building?
No. SBA requires 51% occupancy of an existing building, or 60% immediately for new construction with a plan to reach 80%. You can lease the balance to tenants, and the rental income can often help the deal's coverage ratio.
What is a Phase I environmental report and do I need one?
It is a records-and-site review looking for evidence of contamination. Nearly every commercial lender requires one, and both SBA programs have specific environmental policies. It typically costs $2,000 to $4,000 and takes two to four weeks. Order it early — it is the single most common cause of a delayed commercial closing.