As a savvy commercial real estate investor, you’re likely well-versed in maximizing your investments through market insights and financial analysis. You’ve built a network of attorneys, property managers, contractors, and agents to support your ventures. However, there’s another resource that you may not be fully utilizing: the federal Small Business Administration (SBA) loan, which can help fund and enhance your commercial real estate projects. These loans offer favorable terms and low-interest rates, making them an attractive financing option.
Here’s a closer look at SBA loans, what qualifies you for one, and how to apply.
Who Can Qualify for an SBA Loan?
SBA loans may seem more suited to small businesses than real estate investments. However, you might qualify if you meet the SBA’s criteria for a small business. If you’re a sole proprietorship, partnership, or incorporated entity, and your business generates annual receipts under $15 million (for real estate businesses), you’re in the right range. Additional requirements include operating for profit, being primarily based in the U.S., and being independently owned.
Most importantly, your real estate project must be owner-occupied, with 51% occupancy for existing properties and 60% for new construction. Meeting these qualifications makes you eligible to apply for SBA loans through traditional financial institutions, such as banks and credit unions.
How to Apply for an SBA Loan
Applying for an SBA loan is similar to other loan applications, requiring comprehensive personal and business financial information. You’ll need to submit:
- Personal and business tax returns
- A business financial statement
- A business license
- A property appraisal, environmental report, and any purchase agreements if you’ve already chosen a property
Approval can take up to 90 days, so you’ll need to plan accordingly.
Types of SBA Real Estate Loans
There are two primary types of SBA loans for commercial real estate: the 504 Loan and the 7(a) Loan.
The SBA 504 Loan
This loan is ideal for purchasing real estate, buildings, or large equipment. It requires a 10% down payment (up to 20% for new businesses or “special purpose” properties) and offers up to $5.5 million. The loan is divided into three parts: 10% from you, 50% from a conventional lender, and 40% from a Certified Development Company (CDC). Interest rates are based on U.S. Treasury notes, and repayment terms range from 10 to 25 years, depending on the loan purpose.
The SBA 7(a) Loan
The 7(a) loan is the more common option, with no job creation or policy requirements. It can be used for real estate, equipment, or even working capital. The maximum loan amount is $5 million, though most are smaller. Unlike the 504 loan, the 7(a) loan is fully funded by a participating lender, and interest rates are based on the prime rate plus a premium.
Should You Use SBA Loans for Commercial Real Estate?
SBA loans offer a compelling option for commercial real estate investors, providing low-interest rates and flexible terms. Understanding the qualifications and differences between the 504 and 7(a) loans allows you to make informed decisions about your real estate investments. With careful planning, SBA loans can be a strategic tool to grow your investment portfolio and achieve long-term business success.
