Commercial Real Estate Loans: Buying Your Business Location

Owning your business location builds equity instead of paying a landlord. Commercial real estate typically appreciates over time, and ownership gives you control over your space. But commercial mortgages work differently than residential ones, with higher down payments, shorter terms, and more complex underwriting.

For owner-occupied properties, SBA loans often provide the best terms. But understanding all your options helps you make the right choice for your situation.

Owner-Occupied vs. Investment Property

This guide focuses on owner-occupied commercial real estate, where your business occupies at least 51% of the property. Investment properties (primarily for rental income) have different financing options and typically require 25-35% down.

Commercial Real Estate Loan Options

SBA 504 Loans: Best for Many Buyers

The SBA 504 program is specifically designed for owner-occupied real estate and major equipment. Its three-party structure often provides the best terms available.

• Structure: 50% bank loan, 40% CDC (SBA-backed), 10% down
• Maximum CDC portion: $5.5 million (up to $16.5M for some energy projects)
• Rates: Bank portion is market rate; CDC portion is fixed based on Treasury rates
• Terms: 10, 20, or 25 years
• Occupancy requirement: 51% for existing, 60% for new construction

Example: Purchasing a $1 million building with SBA 504:

SBA 7(a) Loans: More Flexibility

SBA 7(a) loans can also finance real estate, with more flexibility but typically variable rates.

• Maximum: $5 million
• Down payment: 10-20%
• Rates: Prime + 2.25-2.75% (variable)
• Terms: Up to 25 years for real estate
• Advantage over 504: Can include working capital, simpler single-lender structure
• Disadvantage: Variable rate, slightly higher total cost

Conventional Commercial Mortgages

Banks offer commercial mortgages outside SBA programs. These may work better for larger deals or borrowers who exceed SBA limits.

• Down payment: 20-30% typical
• Rates: 6-9% depending on market and qualifications
• Terms: 5-10 year balloon with 20-25 year amortization
• Advantage: Faster processing, no SBA guarantee fees
• Disadvantage: Higher down payment, balloon payment risk

Comparing Your Options

For a $1 million owner-occupied property purchase:

What Lenders Evaluate

Commercial real estate underwriting looks at both the borrower and the property:

• Debt Service Coverage Ratio (DSCR): Net operating income divided by debt payments. Most lenders want 1.20-1.25x minimum.
• Loan-to-Value (LTV): Loan amount divided by appraised value. SBA allows up to 90% LTV; conventional usually 75-80%.
• Personal credit: 680+ for SBA, often 700+ for best conventional terms.
• Business cash flow: Can your business afford the payments plus operating expenses?
• Property condition: Environmental assessment, building inspection, appraisal.
• Business experience: How long have you operated successfully?

DSCR Calculation Example

Lenders want to see that your business generates enough income to cover the mortgage payment with cushion:

• Your business net operating income: $150,000/year
• Proposed annual mortgage payment: $76,800 ($6,400 x 12)
• DSCR = $150,000 / $76,800 = 1.95
• Result: Strong DSCR, should qualify easily

If your DSCR is below 1.25, most lenders will decline or require a larger down payment to reduce the loan amount.

Buy vs. Continue Renting

Before pursuing commercial real estate financing, run the numbers to ensure buying makes sense:

• Current rent: What are you paying now?
• Ownership costs: Mortgage, insurance, taxes, maintenance, reserves
• Opportunity cost: What else could you do with the down payment?
• Appreciation potential: Will the property likely increase in value?
• Flexibility needs: Are you certain you will want this location for 10+ years?

Simple comparison: If you pay $8,000/month rent and ownership costs (mortgage, taxes, insurance, maintenance) are $7,500/month, you save $500/month plus build equity. If ownership costs $9,500/month, you need strong appreciation expectations to justify buying.

The Buying Process

Commercial real estate purchases involve many steps:

• Pre-qualification: Get lending parameters before property search
• Property identification: Find suitable properties meeting your needs
• Letter of Intent (LOI): Non-binding agreement on basic terms
• Due diligence: Environmental Phase I, building inspection, title search
• Appraisal: Lender-ordered valuation of property
• Loan application: Full documentation package to lender
• Underwriting: Lender reviews everything
• Closing: Sign documents, fund loan, transfer title

Timeline: From finding a property to closing typically takes 60-120 days, sometimes longer for SBA 504 due to CDC involvement.

The Bottom Line

Buying your business location can be an excellent long-term investment, building equity and providing control over your space. SBA 504 loans offer the best terms for most owner-occupied purchases, with just 10% down and fixed rates on the CDC portion.

But commercial real estate is a major commitment. Run the numbers carefully comparing total ownership costs to rent, consider the opportunity cost of your down payment, and make sure your business is stable enough to handle both the mortgage and the responsibilities of property ownership. When the math works and the timing is right, owning beats renting for established businesses with predictable operations.