100% Commercial Loans
You read that headline correctly. 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…
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.
Major conditions for 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 1.25x, but there are exceptions.
- All business owners must have good credit and good credit scores. Poor past credit must be old, explainable and isolated. Many borrowers who had credit issues during and after the recession have qualified for 100% financing.
- Typically you must already have a history of ownership of the business seeking financing as new business acquisitions require 10% down by SBA rule,* however, in some cases 100% financing is possible for an existing business buying another business (and building) of the same type.
Ideal candidates would be businesses with current lease payments close to what their new proposed mortgage payment would be, but many borrowers can certainly qualify for larger loans with significantly more expensive payments as long as their business is profitable enough and the debt service coverage ratio is where it needs to be.
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 the loan, 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 on “standby” (no payments to be made while you have the SBA loan) for the 5% of the sales price.
100% LTV 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 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”
This program allows for well over 100 percent financing because if your business is strong enough you can also roll in renovation costs, closing costs, other business debt and working capital.
100% Construction Financing
It is also possible to do 100% construction financing if you need to construct a new building from the ground up.
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.
Business Expansion – No Down Payment
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 all 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.
Borrowing the Down Payment
For transactions where 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 less frequently, but if your business is solid then it is possible and this may allow you to get excellent terms.
Retirement Account Rollover for Down Payment
It is also possible to rollover a 401k from a former employer or use a self-directed IRA for the down payment and their are ways to do it tax and penalty free.
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 the program on our website: here.
*60% in the case of ground up construction.