The seven ways to finance a commercial property
The right loan depends on two things more than anything else: whether you will occupy the building yourself, and how stable the property's income is today. Here is how each option works.
Conventional bank or credit union loan
The most common loan for buildings under about $10 million. Local and regional banks in the Denver metro lend on office, retail, industrial and flex buildings, and they often want your deposit relationship as part of the deal.
- Down 20% to 35%
- Term 5 to 10 yrs
- Amortization 20 to 25 yrs
- Usually a personal guarantee
SBA 504 loan
Built for small businesses buying, building or improving the property they operate from. A bank lends about 50%, a Certified Development Company lends about 40% at a long fixed rate, and you bring as little as 10%. Your business needs to occupy at least 51% of an existing building, or 60% of a new one.
- Down 10% (15% to 20% for startups or special use)
- SBA fixed term 10, 20 or 25 yrs
- SBA portion up to $5M
SBA 7(a) loan
The flexible SBA loan. It can combine the building with buying a business, equipment, improvements and working capital in one loan. Rates are usually variable, which is the main tradeoff against SBA 504.
- Down 10% typical
- Term up to 25 yrs for real estate
- Loan up to $5M
CMBS (conduit) loan
Loans that are pooled and sold to bond investors. They are usually non recourse with a fixed rate, which investors like, but prepaying early is expensive and the loan servicer is hard to negotiate with later.
- Down 25% to 35%
- Term 5, 7 or 10 yrs
- Usually $2M and up
- Non recourse
Life insurance company loan
Often the lowest rates available, but life companies are selective. They want well located, stabilized buildings with strong tenants and lower leverage.
- Down 35% to 50%
- Term 10 to 25 yrs fixed
- Best for stabilized buildings
Bridge or private loan
Short term money for a building that a bank will not lend on yet: high vacancy, a renovation, a quick close, or a lease up. You pay more for speed and flexibility, then refinance into a permanent loan once the building is stable.
- Down 20% to 35%
- Term 1 to 3 yrs
- Interest only is common
Seller financing
The seller carries a note for part of the price. It is more common on smaller buildings and with owners who own free and clear and want monthly income or to spread out their capital gains. Terms are whatever the two sides agree to, often a 3 to 7 year balloon.
- Down negotiable
- Can be combined with a bank loan
Side by side
| Loan | Best for | Typical down | Rate | Recourse |
|---|---|---|---|---|
| Bank or credit union | Most buildings under $10M | 20% to 35% | Fixed 5 to 10 yrs | Usually |
| SBA 504 | Owner users, real estate | 10% to 20% | Long fixed on SBA part | Yes |
| SBA 7(a) | Building plus business | 10% | Usually variable | Yes |
| CMBS | Stable income, $2M and up | 25% to 35% | Fixed | No |
| Life company | Top quality, low leverage | 35% to 50% | Fixed, lowest | Usually no |
| Bridge or private | Vacancy, renovation, speed | 20% to 35% | Higher, short term | Varies |
| Seller financing | Smaller deals, flexible | Negotiable | Negotiable | Negotiable |
Ranges are typical for the Denver metro and change with the market and each lender. Your lender sets the final terms.
Which one fits you
Start with SBA 504
- Lowest down payment
- Long fixed rate on the SBA portion
- Compare with a bank loan if you have 20% or more down
- Use 7(a) if you are also buying the business
Start with a local bank
- Get CMBS or life company quotes on larger, stable buildings
- Use bridge money if the building is mostly vacant
- Ask the seller about carrying part of the price
What lenders will ask you for
- Two to three years of personal and business tax returns
- A personal financial statement showing cash after closing
- The rent roll and leases, or your business financials if you will occupy
- Operating expenses for the property, including taxes and insurance
- A debt service coverage ratio of about 1.20 to 1.25 or better
- An appraisal and an environmental report, ordered by the lender
Common follow up questions
How much do I need to put down on a commercial property?
Most investment property loans need 25% to 35% down. A business owner who will occupy at least 51% of an existing building can often buy with 10% down through SBA 504, or 15% to 20% for a startup or a special purpose building.
What is the difference between SBA 504 and SBA 7(a)?
SBA 504 is built for real estate and equipment, with a long fixed rate on the SBA portion. SBA 7(a) is more flexible: it can also cover buying a business, working capital and improvements, but the rate is usually variable.
What is a debt service coverage ratio?
It is the property's net operating income divided by the yearly loan payments. A ratio of 1.25 means the building earns $1.25 for every $1.00 of debt payment. Most lenders want at least 1.20 to 1.25.
How long does it take to close a commercial loan?
A bank loan usually takes 45 to 60 days from application. SBA loans often take 60 to 90 days. Bridge and private lenders can close in two to three weeks. Build that time into your contract's financing deadline.
This page is general information, not lending, legal or tax advice. Programs, limits and terms change, and every situation is different. Talk with your lender, attorney and CPA before you decide.