Small-business owners and entrepreneurs have a new alternative to leasing space for their business: owning it.
While low down-payments are standard for residential mortgages, some commercial lenders are offering programs for as little as 3 percent down – a dramatic shift from the standard 25-30 percent usually required. The availability of those loans is making commercial property ownership more accessible to people who may have never considered buying their business location.
One lender, Miami-based Silver Hill Financial, recently launched www.just3percentdown.com, which offers “financially strong borrowers” 3 percent-down loans on owner-occupied properties up to $1 million. Among the commercial properties eligible for purchase include mixed-use, multifamily, office, retail and warehouse. In addition to building equity and a valuable financial asset for their businesses, owners benefit from the ability to eliminate future rent increases and deduct mortgage interest and real estate taxes, Silver Hill officials said. The program is available through licensed mortgage brokers nationwide.
Silver Hill modeled its approach after the residential mortgage where zero-to-low down-payment programs are widely available. Like lenders who concentrate on home loans, the firm promises a “faster process with quicker closings and more flexible loan options” compared to traditional commercial financing sources, the company said.
Silver Hill is not alone. The nation’s largest banks have recognized the niche market that could be lured with smaller down payments. Bank of America also is offering commercial loans up to $2 million with minimal down payments.
For more than two decades, commercial lenders have been competing with the Small-Business Administration’s (SBA) 504 loan program, which was launched to provide low down-payment, fixed-interest rate, long-term financing for eligible small businesses to expand. The program allows small businesses to pool their requests and receive interest rates comparable to large international corporations on Wall Street’s bond market.
The SBA calls 504 “the number one” source in America for small-business owners looking to purchase commercial real estate and equipment with a small down-payment and a low, fixed interest rate.
Created in 1953 as an independent agency of the federal government, the SBA’s mission is to assist and protect the interests of small-business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation.
Since its inception, nearly 20 million small businesses have received direct or indirect help from SBA programs, as the agency has become a cost-effective instrument for economic development, according to SBA officials. The agency’s business loan portfolio of 219,000 loans worth more than $45 billion makes it the largest single financial backer of U.S. businesses in the nation.
Under the terms of a loan, a bank lends up to 50 percent, SBA 504 lends up to 40 percent and the business contributes about 10 percent. The minimum project size is $200,000. Eligible borrowers are any for-profit business with a net worth of less than $7 million and an average net income, after taxes, of $2.5 million or less.
These loans can be made for terms of 10 or 20 years depending on the components of the project and the desire of the borrower. The loan’s interest rate is fixed for the life of the mortgage.
The low 10 percent down payment is the big attraction of the program. It is possible to require even less from the business if a city, town or the state trying to attract businesses to their area is willing to provide a portion of the financing.
Because of the lower down payment required and the ability to finance the soft costs, the small business will realize upfront cash savings of approximately $100,000 on a $1 million project.
The maximum SBA debt can be up to $2 million. Certain manufacturing entities are eligible for up to a $4 million loan. For example, a community development corporation can collaborate with the borrower to finance a $10 million project with the bank providing a $5 million first mortgage, $4 million coming from the SBA 504 with only 10 percent equity.
A 504 loan may be used to: purchase fixed assets such as land and improvements, including owner-occupied buildings, grading, street improvements, utilities, parking lots and landscaping; construct new facilities, or modernize, renovate or convert existing facilities; or purchase long-term machinery and equipment with a useful life of at least 10 years. Soft costs like architectural and legal fees, environmental studies, appraisals, and interest and fees on the construction and/or interim bank financing also can be rolled into the loan.
Financing sources for commercial real estate include mortgage banking firms, savings and loan institutions, banks, insurance companies and private investors. Such financing can take on very different terms, and the way deals are structured is based on a number of factors, including the use of the property, anticipated returns from the property, location, type and size of real estate, perceived risk to lender and market conditions, according to AllBusiness.com.
While some lenders specialize in specific types of commercial ventures, such as warehouses, retail operations or apartment complexes, others provide across-the-board financing to a wide variety of commercial ventures. For the business owner, the key to starting the process is to have the necessary paperwork in order. Despite the many types of financing and types of commercial real estate, lenders are primarily concerned with the level of risk they’ll be taking.
Typically, lenders require income and expense statements for the property demonstrating a solid income stream; financial statements on all principals involved as owners of the property; profiles of the management team; property appraisal; financial statements on the borrowing entity; and plans, including construction blueprints for the use of the property, according to AllBusiness.com.
