Financing requirements for owner-operated commercial real estate

We recently wrote a blog post discussing the pros and cons of buying commercial real estate for your company, whether to occupy or lease. There were certainly compelling reasons to buy as well as not to buy. Leasing is also an option. And as more businesses move to Salt Lake City, those who haven’t already entered the market may feel a greater imperative to do so. As a top commercial lender in Salt Lake City, we understand the imperatives businesses face when purchasing commercial real estate.

If you’re considering buying your own commercial space, know that doing so will offer a wide range of benefits. From equity growth to predictable payments and tax savings, there are a lot of benefits to buying. And if you’re ready to move forward, perhaps submitting a loan application is the next step. Just make sure you know what factors lenders like First Utah Bank must consider when financing owner-occupied commercial real estate. Understanding the details will ensure you succeed — and we’ll be here to help.

The first step is understanding there is a difference between owner-occupied and investment commercial real estate. You also need to make sure you understand the particulars of owner-occupied commercial real estate financing. Let’s first take a look at the definition of both. Owner-occupied properties are commercial buildings you run your company out of. Typically you’re the sole tenant or majority tenant. Investment properties are those where a third-party tenant occupies or leases the property.

Loan Structure, Cash Flow, and Financing

Let’s first examine the loan structure for owner-occupied commercial real estate holders. First, it’s important to note that owner-occupied loans provide greater flexibility when it comes to operational details surrounding your company. Conversely, investment property loans need to match the exact term of the maturity date on the loan agreement.

Owner-occupied property will also see a different return on investment when compared to investment loans. There are some important questions you need to consider as you evaluate these loan types next to each other. First, ask yourself how much rent you pay to occupy your current space. Then, figure out if you will get a better return on your capital if you buy to occupy or invest.

You’ll also need to consider your cash flow. Owner-occupied commercial property loans require financing contingent on the owner’s revenue and broader financial spreads and ratios. The commercial property owners will also need to demonstrate what their collective assets are and leave them as collateral. In other words, the business cannot be funded only on the equity in the building.

Investment property loans operate differently. Most banks, like us, dig into the company’s cash flow to decide on the qualifications for the commercial real estate loan. Under this arrangement, the cash flow when determining whether to approve the loan can be based on whether rents will cover the debt servicing on the property.

Financing Options for Owner-Occupied Commercial Real Estate Loans

There are various funding options businesses can draw from when applying for a commercial real estate loan. Generally, owner-occupied financing is available in a variety of loan terms, with the majority offering an amortization of the loan of up to 25 years. Although rates are on the rise, flexible rate loans are available. There are also balloon or non-balloon payback schemes. Flexible prepayment programs provide business owners with a way to pay back their loans in the manner that is best for their business.

Business owners can also opt for Small Business Administration (SBA) financing. The SBA has been stepping in quite a bit over the past couple of years to help small businesses weather the COVID crisis. But many do not know that they also offer SBA 7(a) or SBA 504 financing. These loans options are guaranteed by the SBA and provide up to 90 percent financing on commercial real estate purchases up to $10 million. Terms run up to 25 years and there are no balloon options. Small business owners also benefit from reduced equity requirements when financing through the SBA, which means they have more money in their pocket. These loan options are great for businesses who want to keep their cash flow high while still qualifying for the purchase of commercial real estate.

Businesses moving to Salt Lake or Utah County are coming to terms with a couple of truths. First, it’s becoming harder and harder to find appropriate commercial real estate in the area. And second, the real estate that is out there continues to rise in price. Many small businesses find themselves priced right out of the market. That’s why if you’re considering buying your own owner-occupied commercial real estate, now may be the time to take the plunge before prices go even higher. Need a qualified commercial real estate broker to get you through the process? Contact your friends at First Utah Bank at 801.308.BANK (2265).