Owner-occupied versus investment
SBA 504 and 7(a) both require the business to occupy a majority of the building. That single test decides whether 25-year fixed-rate government-backed money is available to you or whether you are in the conventional investment market, where five-year terms with balloon payments are the norm.
Investment property is also where most state commercial mortgage broker licensing regimes bite. If someone is arranging your investment-property loan for a fee, checking their licence is worthwhile in the roughly ten states that require one.
The balloon problem
A conventional CRE loan is frequently amortised over 20 or 25 years but matures in five to ten, leaving a balloon payment that must be refinanced. That refinance happens at whatever rates exist on that date. Borrowers who financed in a low-rate window and refinanced into a high-rate one learned this expensively.
Commonly used for
- Buying the premises your business already rents
- Businesses paying above-market rent on a long lease
- Owners wanting to separate the property into a holding entity
What to check before signing
- Balloon maturities create refinance risk you cannot control
- Appraisal and environmental reports add cost and weeks before you know if the deal works
- Occupancy tests are strict and are verified
CRE loan: common questions
- What counts as owner-occupied?
- For SBA 504, the business must occupy at least 51% of an existing building or 60% of new construction. Conventional lenders use similar tests with their own thresholds.