Understanding 100% LTV Commercial Real Estate Loans
100% LTV commercial real estate financing is possible for successful small businesses.
Commercial real estate loans with no down payment are available for purchase, refinance or construction of a building for your business with nothing down and you can possibly finance all closing costs and even some other business debt and working capital using an SBA loan, but like all commercial lending programs there are caveats.
SBA Loan Requirements for No Down Payment Financing
100% LTV commercial real estate financing is purely an SBA offering from a small percentage of preferred lenders. These are real estate loans for “owner occupied” commercial properties which means that your business must occupy at least 51% of the property. These loans are NOT for investment properties, although there are some industries like self storage that are “investment-like” that are eligible and RV park financing is possible, although both of those industries require at least 10% down.
Major conditions for 100% financing eligibility:
Established businesses only.
Business must have solid, consistent cash flow showing enough income to qualify.
Small business typically has to meet a DSCR (debt service coverage ratio) of 1.15x or better, but there are exceptions.
All business owners must have good credit and good credit scores. Poor past credit must be old, explainable and isolated, but we have helped many clients get an SBA loan after bankruptcy including a Chapter 7).
Typically you must already have a history of ownership of the business seeking financing as new business acquisitions usually require 10% down, although there are a (very) few lenders who will allow you to buy a business with no down payment if you are buying a business just like the one you currently own.
Ideal candidates for 100% commercial real estate financing would be businesses with current lease payments close to what their new proposed mortgage payment would be, but this is definitely not a requirement as many borrowers can certainly qualify for larger loans with significantly more expensive payments as long as their business is profitable enough and the lender can get comfortable with the request.
Tenants Can Help Pay the Loan
Keep in mind that SBA requires a business “owner occupy” at least 51% of a building* and that the cash flow of the business be strong enough to qualify for 100% financing, but the other 49% of the building can be rented out. So…it is possible that you could purchase a building that currently has one or more tenants or you could take on tenants and significantly reduce the amount of your monthly expenses.
* Technically, the SBA allows a borrower to put down just 5% on a business acquisition IF the seller of the business is willing to hold a second mortgage for the other 5% as long as it is on “full standby” for the life of the loan. (Full standby means no payments to be made while you have the SBA loan).
100% Commercial Real Estate Financing
100 percent commercial loans are not a new thing for SBA lenders. For many years, lenders have recognized that the down payment has been one of the biggest impediments to buying small business real estate, and many SBA and some conventional lenders have made no down payment loans available to certain types of businesses (typically dentists, doctors and veterinarians).
This post is about a more recent development where some lenders are allowing 100% financing for ESTABLISHED SBA-eligible businesses that are otherwise solid but do not have (or do not want to part with) the larger down payment that many lenders require.
Generic Buildings Preferred But Not Required
There are more options if the building to be financed is a multi-use or “general purpose” building that almost any type of business could occupy, but we have seen 100% commercial mortgage transactions where non-traditional buildings have been approved, for instance, a dog daycare business with a building and a little bit of acreage, assisted living facilities, residential board and care homes and franchised restaurants.
100% Financing “Plus”
Some lenders also allow for well over 100 percent financing and if your transaction is strong enough you can also roll in renovation costs,closing costs, other business debt and working capital.
In this case, you can purchase the land and construct the building all in one loan and one closing, although we have occassionally seen lenders offer a bridge loan for the land if there is a hard deadline to close on it first AND IF the lender has already issued a commitment for the construction/permanent loan.
Finance First 2 Years of Payments
One unique feature about SBA construction loans is that not only can you roll in all the closing costs and construction interest, but in some cases, lenders will allow you to finance some of the new mortgage payments if you have a business that requires some lease up/ramp up like an assisted living facility or a self storage. In this case, it is actually possible to finance up to the first 2 years of payments for an expanding business constructing a new facility.
SBA Loan With No Down Payment For “Business Expansion”
Another way to acquire a property with no down payment is to leverage equity that exists on the balance sheet or in a property of an existing business. The key is having enough equity on your balance sheet or enough equity in another property that you can leverage in lieu of a down payment. Not many lenders are on board with this option, but it is available for stronger businesses/stronger borrowers and can result in some very good terms.
For this to work, the existing business must be solid and must purchase the new business/building using the same corporate structure with the same borrowers/guarantors.
This technique can also be used for a business expansion with no commercial property. In this case, a lender may require a business valuation to substantiate that there is enough equity in your business to leverage your balance sheet to buy another business and the acquired business must become a part of the existing business, however, non-real estate deals are typically limited to a 10 year term and amortization rather than the usual 25 years.
SBA Loan No Down Payment – Other Options
Borrow the Down Payment
For transactions where it is not possible to get 100% commercial real estate financing (and a down payment is required), or in cases where it makes sense to borrow the down payment in order to get more attractive terms, the SBA allows you to get a loan for the required equity. There are a few ways to do this:
if you have another source of income or a spouse with income then as long as you can prove the ability to repay the borrowed money from that other source then it is allowable. We have helped numerous clients do this as there are many types of businesses that with proper management do not require you to be 100% hands on, so if you have another source of income, a spouse with income or another job or business you can make this happen.
In some cases, the business itself can borrow the money for the down payment. This happens far less frequently, but if your business is solid then it is possible and this may allow you to get excellent terms. As an alternative to true 100% financing, it might be possible that you could put down 10% and the lender might “give you back” roughly the amount of the down payment in working capital. This is possible with businesses with strong enough cash flow and typically results in even better terms for the loan.
Retirement Account Rollover for Down Payment
SBA loans also allow (tax and penalty free) rollovers of certain retirement accounts such as SEP IRA’s or a 401k from a former employer to be used for the down payment.
Gifts and “Investors”
Gift funds are allowed with the SBA programs as well and you can also have “investors” – typically friends or family who would give you part of down payment in exchange for some ownership in the business.
Please contact me at jking (at) green commercial capital (dot) com if you have any questions or if you would like to see if you qualify.
You can also find out more about 100% commercial real estate financing on our website: here.
