The difficulties of securing an SBA loan if you’re a real estate investor or developer
SBA loans are not permissible for businesses whose main revenue stream comes from real estate investment. Specifically, SBA loans are designed to finance owner-occupied real estate that will primarily benefit the borrowing business.
What is classified as owner-occupied?
Understanding Owner-Occupied Properties
An owner-occupied property is a piece of real estate in which the person who holds the title (or owns the property) also uses the home as their primary residence. The term “owner-occupied” is commonly associated with real estate investors who live in a property and rent out separate spaces to tenants.
Typically, a business is required to occupy a minimum of 51% of the purchased property, allowing the possibility of renting out the remaining space to other tenants for additional income.
For businesses seeking financing to construct a new building, there are stricter criteria. In such cases, a minimum of 60% of the building must be occupied by the borrower, leaving 40% or less available for lease to other tenants. These guidelines are applicable to both SBA 7(a) and SBA 504 loans.
What is the SBA 7 (a) Loan Program?
The SBA 7 (a) loan program is the most popular and widely used loan program offered by the Small Business Administration (SBA). The SBA does not lend money directly to borrowers, but rather guarantees a portion of the loan made by a participating lender.
This reduces the risk for the lender and encourages them to lend to small businesses that may not qualify for conventional loans. The SBA 7 (a) loan program can be used for a variety of business purposes, such as:
Working capital
Inventory
Equipment
Debt refinancing
Business acquisition
Owner-occupied commercial real estate!
The maximum loan amount for an SBA 7 (a) loan is $5 million, and the maximum loan term is 10 years for most purposes, and 25 years for real estate. The interest rate is negotiated between the borrower and the lender, but it cannot exceed the SBA maximums, which are based on the prime rate plus a markup.
The SBA also charges a guarantee fee, which is a percentage of the guaranteed portion of the loan, and it varies depending on the loan amount and the maturity. The guarantee fee can be financed as part of the loan.
Who is Eligible for an SBA 7 (a) Loan for Real Estate Investment?
To qualify for an SBA 7 (a) loan for real estate investment, you need to meet the following criteria:
You must be a for-profit small business that operates in the U.S. or its territories.
You must meet the SBA size standards, which are based on your industry, number of employees, and annual revenue.
You must have a good credit history and demonstrate the ability to repay the loan.
You must have invested some of your own money into the business.
You must not be delinquent on any existing debt to the government.
You must use the loan proceeds for a legitimate business purpose.
Additionally, there are some specific requirements for using an SBA 7 (a) loan for real estate investment, such as:
You must use the property primarily for your own business operations, and occupy at least 51% of the space. If you are building a new property, you must occupy at least 60% of the space.
You must not use the property for passive income generation, such as renting it out to other tenants. However, you may be able to rent out a portion of the property that you do not occupy, as long as it does not exceed 49% of the space.
You must not use the property for speculative purposes, such as flipping it for a quick profit.
You must not use the property for illegal or restricted activities, such as gambling, adult entertainment, or marijuana production.
What are the Benefits and Drawbacks of Using an SBA 7 (a) Loan for Real Estate Investment?
Using an SBA 7 (a) loan for real estate investment can offer several advantages for small business owners, such as:
Lower down payment: You may be able to finance up to 90% of the purchase price of the property, which means you only need to put down 10% or less. This can help you conserve your cash flow and leverage your capital.
Longer repayment term: You can amortize the loan over 25 years, which means you can enjoy lower monthly payments and more manageable debt service.
Competitive interest rate: You can benefit from a market-based interest rate that is capped by the SBA, which can help you save on interest costs over the life of the loan.
Flexible use of funds: You can use the loan not only to buy the property, but also to make improvements, renovations, or expansions, as long as they are related to your business operations.
Tax benefits: You may be able to deduct the interest and depreciation expenses from your taxable income, which can reduce your tax liability and increase your cash flow.
However, using an SBA 7 (a) loan for real estate investment also has some drawbacks, such as:
Higher fees: You have to pay a guarantee fee to the SBA, which can range from 0.25% to 3.75% of the guaranteed portion of the loan, depending on the loan amount and the maturity. You may also have to pay other fees to the lender, such as origination, appraisal, closing, and servicing fees.
More paperwork: You have to provide more documentation and information to the lender and the SBA, such as your business plan, financial statements, tax returns, lease agreements, and environmental reports. The application process can take longer and be more complex than a conventional loan.
More restrictions: You have to comply with the SBA rules and regulations, which can limit your options and flexibility. For example, you have to obtain the SBA approval before making any changes to the ownership or the use of the property, or before taking out any additional financing that uses the property as collateral.
How to Apply for an SBA 7 (a) Loan for Real Estate Investment?
If you are interested in applying for an SBA 7 (a) loan for real estate investment, you need to follow these steps:
Find a lender: You need to find a lender that participates in the SBA 7 (a) loan program and is familiar with the real estate industry. You can use the SBA Lender Match tool to connect with potential lenders in your area.
Prepare your application: You need to fill out the SBA loan application form and provide the required documents and information to the lender. The lender will review your application and perform a credit analysis and a property appraisal. The lender will also determine the loan amount, the interest rate, the guaranty fee, and the other terms and conditions of the loan.
Get the SBA approval: The lender will submit your application to the SBA for approval. The SBA will verify your eligibility and the loan details, and issue a loan authorization if everything is in order. The loan authorization will specify the amount of the SBA guaranty and the conditions of the loan.
Close the loan: The lender will prepare the loan closing documents and coordinate with you and the seller to finalize the transaction. You will sign the loan agreement and the promissory note, and pay the closing costs and fees. The lender will disburse the loan proceeds to the seller, and you will receive the title to the property.
Conclusion
Using an SBA 7 (a) loan for real estate investment can be a viable option for small business owners who want to acquire, refinance, or improve commercial property for their own use. However, you need to be aware of the eligibility criteria, the benefits and drawbacks, and the application process of the SBA 7 (a) loan program.
If you need more information or guidance, you can contact us at SBA7a.loans. We are a team of experts who can help you find the best SBA lender and loan for your real estate needs.
