Investment real estate is defined by SBA as property that is owned for resale or for rental income. SBA financing eligibility is attributable to real estate that is “owned and occupied” by a small business. If buying an existing property, the small business operating company must occupy at least 51% of the square footage under roof to be eligible for SBA financing. If constructing new buildings, the small business operating company must immediately occupy at least 60% of the square footage under roof to be eligible for SBA financing.
A developer is generally a person or company that prepares a land site for new construction. His costs for site development are not eligible for SBA financing. If he constructs buildings, his construction costs are not eligible for SBA financing as long “as he owns the real estate.” He can, however, sell a building that has not yet been constructed to a small business owner who qualifies for SBA financing, to purchase and construct the building.
How does the small business qualify for SBA financing on a building he purchases which is not yet built?
An SBA lender is permitted to provide interim construction financing, as part of the same loan with the permanent financing, and with only one loan closing. The SBA lender is saving the developer his cost of financing by allowing the developer’s “build-to-suit” buyer to carry the financing in their name instead of being the developer’s liability. The developer is then able to leverage their new development costs much more effectively for infrastructure development without the debt for new construction.
How does the SBA lender lend on property which is not yet built?
The answer is “with solid controls in place to manage the construction project.” A third-party, professional construction management company (CMC) is hired by the SBA lender to monitor the job and control disbursements for construction to the contractor. The cost of the job is increased by the SBA lender to also include loan closing costs, construction management fees, a 10% reserve for contingencies (for cost overruns and change orders), and an interim interest cost estimate. The interest that accrues during construction is treated as part of the construction costs which the lender funds in progress payments during construction. The small business borrower does not have any payment requirements until the construction is completed to his, the lender’s, and the regulatory authorities’ satisfaction.
The foregoing information points out why a commercial real estate developer would be interested in SBA financing as well as some of the benefits to the small business owner. Additionally, the small business owner obtains SBA financing in a permanent mortgage for 25 years!
The small business does not have loan renewal risk like they would have with a conventional bank loan. Because banks by nature are short term lenders, a conventional bank loan is typically scheduled with a balloon balance that matures and must be renewed by the bank in one year, three years, or five years. Finally, with an SBA loan, the small business owner may be able to qualify for financing with a lower down payment and easier qualifying criteria than with a conventional bank loan.
SBA loans may be used for financing small business real estate, equipment, business acquisition, partner buyout, business expansion, and debt consolidation. SBA loans almost always have lower down payment requirements, longer repayment terms, and easier qualifying criteria than conventional bank loans. Brokers welcome.
Reviewed July 2023
All loan subject to credit approval