Purchasing commercial real estate for your small business is complicated. There are many things to know before beginning the process to help you reach your goals without making any major mistakes.
The first thing you need to know is there are landmines every where and if one or more of these landmines blow up it can be disastrous for you, your partners, shareholders and employees and ultimately for the future success of your business.
But don’t worry, the information contained in this article will help you successfully navigate the entire process like a pro! So grab a cup of coffee, notepad and pencil and dive in!
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Experience On Your Side
What you’re about to read is the culmination of our years of experience helping business owners and entrepreneurs like you obtain financing to purchase commercial real estate for their business.
That means when you’re finished reading this article you will be equipped to determine whether to buy your building or continue leasing, how to find the right office space for your needs, how to find the right real estate broker and oh yes, how to successfully obtain a loan.
Commercial Loan Options
There are essentially four options to purchasing real estate for your business. A conventional mortgage, SBA mortgage, private money mortgage or seller carry also known as an installment sale.
Depending on your situation all of these have advantages and disadvantages. For instance, conventional mortgages typically have the lowest rates and fees but also require a minimum 20% equity injection and fixed rates up to 10-15 years for prime borrowers. The fixed rate period can be as short as 5 years.
An SBA guaranteed mortgage has the advantage of only requiring a 10% equity injection for mixed-use properties and competitive fixed rates up to 20-25 years. The downside of an SBA loan is the 2.5% – 3.0% guarantee fee. On the bright side, these fees can be financed into the loan which mitigates the out of pocket expense to the borrower.
Private notes and seller carry notes are typically taken in special circumstances where the mortgage either needs to be obtained in a hurry or there is difficulty qualifying for a conventional or SBA loan.
Private money loans are expensive and installment sale or seller carry notes aren’t always the most stable.
Most buyers choose to obtain a mortgage through the SBA 504 program due to the low equity injection requirement, competitive rates and fees ability to be financed into the loan for its duration.
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How To Prepare To Own
If you’re set on purchasing real estate for your business start saving for the down payment. Also, manage your year end profit and loss statement and balance sheet and file accurate tax returns which demonstrate your companies true financial status. It may be obvious but you must be able to demonstrate your companies ability to repay the loan. I’ll go more in depth on this topic in another post.
SBA Real Estate Financing
The first thing you need to know is there are two SBA guaranteed loan programs to purchase commercial real estate, the SBA 504 and 7(a).
SBA 504 Guaranteed Loan Program To Purchase Real Estate
The SBA 504 guaranteed loan program to purchase commercial real estate is comprised of two loans. The first loan also referred to as First Trust Deed is provided by an SBA Preferred Lending Partner up to 50% of the purchase price and the second loan refereed as a 2nd Trust Deed by an SBA Community Development Corporation (CDC) up to 40% of the purchase price. The borrower is required to inject 10% equity into the purchase. This is their skin in the game.
Generally, multi-purpose properties may be financed up to 90% loan to value while special purpose properties may be financed up to 85% loan to value.
Loans are fully amortizing, with relatively long prepayment penalty periods up to 10 years, low fixed rates and no covenants on the CDC portion which means that as long as the loan is paid as agreed, there is no concern of the loan being accelerated or called.
Fees are approximately 1.5% of the guaranteed portion of the CDC loan and may be financed into the CDC’s 2nd Trust Deed.
The 504 program should be used for strong credit clients seeking long term, low fixed rates options who are not planning on moving, growing beyond their square footage or selling their business within the next ten years from purchase.
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SBA 7(a) Guaranteed Loan Program To Purchase Real Estate
The SBA 7(a) guaranteed loan program to purchase commercial real estate is comprised of one loan provided by an SBA Preferred Lending Partner which means more flexibility in determining eligibility and qualifying loan applicants.
Similar to the 504, multi-purpose properties may be financed up to 90% loan to value while special purpose properties may be financed up to 85% loan to value.
Loans are fully amortizing, with both fixed or variable rate options, three year prepayment penalty periods and no covenants which means that as long as the loan is paid as agreed there is no concern of the loan being accelerated or called.
Fees are approximately 3% of the guaranteed portion of the loan and may be financed into the First Trust Deed.
The 7(a) program to purchase real estate is primarily suited for clients requiring more flexible underwriting guidelines. This program is also preferred by prime borrowers when a bank is offering low fixed rate options.
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What is a Multi-Purpose Property?