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Mixed Use Property Loans

SBA Loans For Mixed Use Properties

SBA loans for mixed use property are available with both the SBA 7a and the SBA 504 loan programs.

Mixed use properties include both commercial and residential space and both the 7a and 504 allow low or no down payment loans for businesses that occupy at least 51% of the “net rentable square footage”  of the building.  (In some cases basements and even outdoor space can be counted in the total square footage).

100% financing is possible with the SBA 7a with some lenders and the 504 requires at least a 10% down payment or equity injection.  See the following post for more info on using an SBA loan to buy a commercial property with no down payment: 100% commercial real estate financing and keep in mind that the SBA is flexible re: how you can come up with a down payment.

Conventional Loans for Mixed Use Property

Conventional loans for mixed use property typically require a lot of equity or a large down payment of 25% to 30% and there are some excellent conventional lenders that offer that type of financing (including some that still do stated income loans), but if you own a business, have good credit and your business has a track record of solid cash flow then you might qualify for an SBA loan that would allow you get 90% to 100% financing for a mixed use property.

To Qualify Your Business Must Need & Use the Space 

The SBA loan programs are fairly unique due to the ability to little or nothing down.  Most commercial loans require anywhere from 20% to 35% down to get attractive terms for almost any type of commercial property and this is the case with conventional mixed use property loans as well.

The primary difference between an SBA loan and a traditional commercial loan for mixed use property is that SBA loans are NOT for real estate investors, they are purely for business owners who need slightly more than half of the building for their business operations.

Combined Commercial & Residential Property Loans

A very common, SBA-acceptable mixed use scenario would be a building or office condo with a retail business, restaurant, delicatessen, dry cleaner, laundromat, etc. on the first floor and an apartment or residential units upstairs.

These types of properties are very commonly found in urban areas and cities, but a mixed use property could be anywhere and these loans are not restricted to the typical business on first floor and apartment upstairs set-up.

In fact, we frequently see transactions where a borrower is purchasing a property with multiple buildings or even single or multi-unit rental properties on the same lot, and these types of properties are acceptable under the SBA mixed use property loan program IF (and only if) your business will legitimately occupy/use at least 51% of the square footage of the property AND in almost all cases be able to cash flow the loan “on it’s own” without help from tenant income.

One exception to this rule however, is that some SBA 504 lenders actually will allow the use of approx 75% of rental income from tenants to help you qualify but again, if and only if, the owner occupying business can service the debt on a “1 to 1” basis – meaning, that if the payments for the loan are $100K for the year, then the NOI* of the business needs to be at least $100K as well.

*NOI defined as net income plus “addbacks” of interest, depreciation, amortization, one time expenses and rent paid at previous location the business is moving from).

Other types of “mixed use property loans” that are common and SBA eligible:

  • Strip Center – as long as your business will occupy at least 51% of the space – we frequently see this with a locally owned grocery stores, carpet businesses, furniture showrooms, etc.
  • Medical Offices where this one large tenant like a physical therapy practice or a large dentist office.
  • Mini-storage businesses where there are “extra” buildings on the property like a rental home or a few retail offices that are rented

SBA Definition of Owner Occupied Space/Net Rentable Sq Ft

Net Rentable Square Footage for the purpose of an SBA loan for mixed use property is defined by the Small Business Administration as:

“Rentable Property” is the total square footage of all buildings or facilities used for business operations excluding vertical penetrations (stairways, elevators, and mechanical areas that are designed to transfer people or services vertically between floors), and including common areas (lobbies, passageways, vestibules, and bathrooms).

“Rentable property” may also include exterior space (except parking areas) that is actively used in Borrower’s business operations. Examples of exterior space that is actively used in Borrower’s business operations include outdoor storage yards for general contractors, trucking companies and moving and storage companies or boat slips and docks for marinas.

Construction Financing for Mixed Use Property

In the case of ground up construction or major renovation the occupant business must occupy at least 60% of the space initially AND you cannot use SBA guaranteed funds to build out space for a tenant, so practically speaking, a mixed-use property loan with residential or commercial tenants might be better suited to an existing building without much need for renovation.

SBA Loans for Mixed Use Properties (Business With On-Site Manager)

If the business is a type that requires an on-site manager who lives on the property, the residential space that the on-site manager occupies can also be counted towards the business’s 51% occupancy but the residential space cannot exceed 49% of the total property.

Typically the following scenarios would qualify for this caveat:

  • a funeral home with living space for the funeral director and his or her family
  • a dentist who takes care of patient emergencies after normal business hours
  • a horse breeder who needs to be on premises 24/7 to take care of the horses

In these cases, lenders are allowed to count the residential square footage towards the business sq ft percentage for qualifying purposes.

Please contact me at jking (at) green commercial capital (dot) com if you need further info on SBA loans for mixed used property.  Or visit our main site:

SBA 7a and SBA 504 Loans

 

John King:
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