Renovation and Buildout Financing: Funding Your Space Improvements

Commercial renovations and buildouts are major capital projects. A restaurant buildout might cost $150 to $300 per square foot. Office renovations run $50 to $150 per square foot. Retail stores fall somewhere in between. These costs add up quickly, and financing them properly is crucial.

Several options exist depending on whether you own or lease your space, the scope of improvements, and how the renovations affect property value.

Types of Commercial Improvements

Financing Options

SBA 504 Loans

For owner-occupied properties, SBA 504 loans can finance major renovations:

• Eligible improvements: Permanent improvements to real property
• Structure: 50% bank, 40% CDC, 10% down
• Terms: Up to 25 years
• Advantage: Long terms reduce monthly payments
• Requirement: Must own the property (or be purchasing it)

SBA 7(a) Loans

More flexible for various improvement situations:

• Eligible: Leasehold improvements, owned property improvements, equipment
• Terms: Up to 10 years for leasehold improvements, 25 years if tied to real estate
• Rates: Prime + 2.25-4.75%
• Advantage: Works for leased spaces

Landlord Tenant Improvement Allowance

For leased spaces, landlords often contribute to buildout costs:

• Typical amounts: $10-$50 per square foot depending on lease terms and market
• How it works: Landlord funds improvements; you pay through higher rent
• Negotiation: Longer lease terms typically yield higher TI allowances
• Advantage: No debt on your books
• Disadvantage: Higher rent over lease term may exceed financing costs

Equipment Financing

Some improvements qualify as equipment rather than real property:

• Eligible items: Commercial kitchen equipment, manufacturing machinery, IT infrastructure
• Advantage: Equipment serves as collateral, often easier approval
• Terms: 3-7 years typically
• Consider: Can combine with separate financing for non-equipment improvements

Real Buildout Example

Scenario: Opening a 2,500 SF restaurant in leased space

Leasehold vs. Owned Property Considerations

Financing decisions differ based on ownership:

Construction Budget Management

Renovation projects typically exceed initial budgets. Plan accordingly:

• Contingency: Add 15-25% to contractor estimates
• Permits and fees: Often underestimated; verify with municipality
• Change orders: Have process and budget for changes
• Soft costs: Architect, engineering, permits, inspections add 10-20%
• Timing buffer: Delays happen; budget for extended rent or carrying costs

ROI on Renovations

Calculate whether renovation financing makes sense:

• Increased revenue: Will improvements enable more sales?
• Operating efficiency: Will new layout reduce costs?
• Rent vs. own math: For owned property, does improved value exceed cost?
• Lease value: Will improvements allow you to negotiate better renewal terms?

Example: $100,000 renovation enables $200,000 additional annual revenue at 15% margin = $30,000 additional profit. Financing cost ($100K at 10% over 5 years) is ~$25,000 total interest. Payback: less than 2 years. Clear positive ROI.

The Bottom Line

Renovation and buildout financing varies significantly based on whether you own or lease your space. For owned property, SBA 504 loans offer excellent terms. For leased space, negotiate TI allowances first, then use SBA 7(a) or conventional financing for the remainder.

Always build contingency into your budget. Renovations virtually always cost more than estimated, and running short mid-project creates expensive problems. Finance conservatively, complete the project, and enjoy the improved space knowing the numbers work.