An owner occupied commercial real estate loan finances a building your own business uses, such as a warehouse, clinic, shop or office. Lenders treat it differently from investment property because your operating business, not tenants, repays the loan, so they underwrite your company's cash flow first and the property second.
What counts as owner occupied
Most lenders call a property owner occupied when your business occupies at least half of it. The SBA sets its own tests: for an existing building, your business must occupy at least 51 percent, and for new construction, at least 60 percent at completion with plans to grow into more of it. You can lease out the remaining space, and that rent can help support the loan.
Ownership structure matters too. Many owners hold the building in a separate real estate company and lease it to the operating company. Lenders are comfortable with this, but they will usually require the operating company to guarantee the loan and to sign a lease that runs at least as long as the loan term.
Investment property, where tenants unrelated to you occupy most of the space, is underwritten on rental income alone and falls under a different set of lenders and terms. Residential mortgages are a separate trade entirely.
Who lends on owner occupied property
| Lender type | Typical loan | Strengths |
|---|---|---|
| Community and regional bank | Conventional loans for local businesses | Relationship pricing, flexible structure, local market knowledge |
| Credit union | Smaller buildings, member businesses | Competitive terms, patient underwriting |
| SBA lender | SBA 504 and SBA 7(a) | Lower down payment, longer amortization |
| Certified development company | The SBA 504 second loan | Long fixed rate portion of a 504 project |
| CDFI | Smaller loans in underserved markets | Flexible on equity and credit history |
| Canadian bank or credit union | Conventional loans and CSBFP term loans | Program backed financing up to the CSBFP limits |
Banks and credit unions make most owner occupied loans. Local and regional institutions tend to be the most active because they know the market and want your operating accounts as well. Specialist commercial real estate lenders also finance owner occupied property, often for larger or more complex projects.
Conventional, SBA 504 and SBA 7(a)
In the US, you have three main paths.
Conventional bank loan. The bank lends on its own balance sheet. Expect to put down 20 to 30 percent of the purchase price, with a term of 5 to 10 years on an amortization of 20 to 25 years and a balloon payment at maturity. Rates are fixed for a period or float over a benchmark.
SBA 504. The project is split into three parts: a bank first mortgage for about 50 percent of cost, a loan from a certified development company backed by the SBA for up to 40 percent, and your down payment of as little as 10 percent. New businesses and special purpose buildings, such as hotels or car washes, usually need 15 to 20 percent down. The CDC portion carries a long fixed rate with terms of up to 25 years. A 504 loan suits buyers who want a low down payment and long term rate certainty. See SBA 504 loans.
SBA 7(a). A single loan from an SBA lender with terms of up to 25 years for real estate. A 7(a) can combine the building with equipment, working capital or the purchase of the business itself, which makes it the natural choice when you buy a business and its premises together. See SBA 7(a) loans.
In Canada, conventional commercial mortgages from banks and credit unions are the main route. The Canada Small Business Financing Program can finance the purchase or improvement of commercial real property for businesses with up to $10 million in revenue, within its $1 million term loan limit and with up to 15 years of program coverage. Larger projects use conventional financing, sometimes paired with the Business Development Bank of Canada.
What lenders look for
Business cash flow. The lender's first test is whether your operating business earns enough to cover the new mortgage payment plus your other debts. They measure this with a debt service coverage ratio, and most want at least 1.20x to 1.25x, calculated from two or three years of tax returns or financial statements.
Down payment and loan to value. Conventional lenders typically lend 70 to 80 percent of the lower of purchase price and appraised value. SBA programs reach 85 to 90 percent. The down payment must come from your own funds or an acceptable source, and lenders will verify it.
Time in business and management. Two or more years of operating history is the usual threshold for conventional loans. SBA lenders will consider younger businesses with strong industry experience.
The property. An independent appraisal confirms value. Lenders also order an environmental review, which ranges from a database screen to a full Phase I report depending on the property's history. Gas stations, dry cleaners and industrial sites draw extra scrutiny. Special purpose buildings that would be hard to resell need more equity.
Personal guarantees and credit. Owners with 20 percent or more of the business usually sign a personal guarantee. Personal credit history and outside debts form part of the decision.
Deposits and relationship. Banks often expect your operating accounts to move with the loan. This can improve your terms.
Process and timing
Plan on 45 to 90 days from application to closing for a conventional loan, and 60 to 120 days for an SBA 504 or 7(a).
- Prequalify. Share three years of business returns, interim financials, a personal financial statement and the purchase agreement or project budget. The lender issues a term sheet or letter of interest.
- Underwriting. The lender analyzes cash flow and orders the appraisal, environmental review and title search. Most delays happen here.
- Approval. Credit committee signs off. For a 504, the CDC and SBA approve their part.
- Closing. Legal documents, insurance, title and the survey are finalized and funds are released.
Start the conversation before you sign a purchase agreement if you can, and build at least 60 days of financing contingency into the contract.
Which lenders to approach
For a building under $2 million in a market with active local banks, start with community and regional banks and credit unions where you already have accounts. If your down payment is limited or you want a long fixed rate, add an SBA 504 lender and a CDC to your list. If you are buying a business and its building together, an SBA 7(a) lender is the right first call. If you are in a lower income area or have thin equity, a CDFI may close a gap other lenders will not. In Canada, approach your bank and local credit unions in British Columbia, Ontario or wherever you operate, and ask whether the deal fits the CSBFP.
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