Commercial Real Estate Loans

3 Replies

Hi everyone,

Can anyone explain how commercial loans work. Is there such thing as an owner occupied commercial real estate loan? What steps do I have to take to get approved for a loan?

I am very interested in a commercial property in my area. It currently has two businesses that don't really have business. I plan on being an owner occupant of the property by putting in my business. I hope with the information I receive, I can apply this and get the ball rolling on the property.

Thank you,


@Felix Torres

Commercial loan programs can differ greatly from institution to institution. For example; some banks love multifamily, some don't lend on it. Some don't like commercial unless it is owner occupied. I would start checking with local banks and credit unions in your area to see what programs they have. If you spend the time reaching out, you will find out how rates and terms can vary. Lastly, your relationship with the institution will matter in the decision, costs etc.

"Can anyone explain how commercial loans work. Is there such thing as an owner occupied commercial real estate loan?"

Sure, if you're occupying >50% of the building get a SBA loan.  Great rates and banks love them (since SBA guarantees 50% of the principal).

@Felix Torres As Steve said, if you occupy more than 50% of the square footage of the building, then you will be able to at least be eligible for SBA financing, though it will really come down to whether your business EBITDA and any other personal income can support your loan payments (look up debt coverage ratio) and your personal expenses. You would probably be looking into a 7a or 504 loan. These are both SBA products. 

The way it works is that you would go to a bank or non-bank lender that does SBA loans. You would apply directly with the lender. If approved, you get a loan that is guaranteed by the SBA. This guarantee mitigates much of the risk from making a loan to small businesses, however, in exchange you pay a fee to the SBA (typically between 2.5-3.5% of the loan).

I would recommend finding a local lender in your area that does SBA loans that is an SBA Preferred lender (this means they have authority to approve loans in house as opposed to sending it to the SBA for approval, which can take a long time). Usually they will have more favorable rates, though they can take longer so be prepared for that in your purchase contract.

Some of the main differences between an SBA loan and a traditional conventional loan for commercial real estate are:

- Generally you are only required to put about 10-15% down on a business/real estate acquisition

- 7a loan rates: WSJ Prime + 1-2.75% (right now prime is at 3.25%), mostly quarterly adjustable, though some lenders can offer fixed, but it is typically higher than what is offered as quarterly adjustable. Term is 10 years for non real estate loans, and 25 years for real estate loans.

- 504 loan rate/term: Look up SBA CDC rates. The rate will be a blend of the CDC rate and a bank rate (sometimes 4-6%). Term is usually 20 years, though some will do 25.

- 100% financing for working capital/expansion loans