SBA 7(a) Loans for Businesses and Real Estate Investors

SBA 7(a) loans are an ideal financing option for purchasing or building owner-occupied commercial real estate. Unfortunately for real estate investors, SBA 7(a) loans generally cannot be used for solely non-owner-occupied commercial real estate such as multifamily properties like apartment buildings, 1-4 unit rental properties like duplexes, triplexes, quadplexes, and single-family rentals (SFRs).

However, this doesn’t mean that SBA 7(a) loans don’t have some flexibility when it comes to creating profit-generating real estate investments with some multifamily units. SBA rules state that 51% of the net rentable square feet of purchased properties and 60% of the net rentable square feet of newly constructed properties must be owner-occupied.

This means that up to 49% of a purchased building or up to 40% of a newly-constructed building can be rented out to tenants. An SBA borrower can therefore use a 7(a) loan to build or purchase a commercial-residential mixed-used property. However, there are some further limitations when it comes to new construction.

Specifically, SBA-financed new construction properties can only permanently lease 20% of the property, as long as the business “plans to permanently occupy and use some of the remaining space within three years and permanently occupy and use the remaining space not permanently leased within ten years.”

For example, a borrower could use their loan to build or purchase a structure with their business occupying the bottom floors, and residential rental units occupying the top floors, provided they stay within the square footage guidelines provided by the SBA.

In addition to the SBA 7(a) program, the SBA also offers the SBA 504 loan program, which is specifically designed for owner-occupied land and real estate development.

In this comprehensive guide, we’ll review everything you need to know about SBA (a) loans for commercial real estate, including SBA 7(a) loan terms, how SBA loans work, who qualifies, how the SBA defines rentable square footage, SBA loan documentation, requirements, and the top SBA 7(a) lenders for commercial real estate.

The typical terms for SBA 7(a) loans for real estate include:

• Loan Size: No technical minimum, $5 million maximum loan amount (some lenders may set a minimum of $10,000-$50,000). Some 7(a) loans have been issued in amounts as low as $5,000.

• LTV: Up to 90% LTV/LTC

• Loan Term: 7-10 years for working capital and 25 years for real estate.

• Interest Rates: Vary by loan size and term. Rates are typically between 6.25% and 8.75% (as of June 2022).

• Uses: SBA 7(a) loans can be used for working capital, equipment, purchasing a business or franchise, refinancing higher interest debt, and buying or building majority-owner-occupied real estate.

• Credit Score Requirement: 680+ is required in most situations.

• Down Payment: Typically 10% to 20% down payment as well as a certain amount of collateral.

• Timing: SBA 7(a) loan approval timelines vary based on several factors.

The SBA is not a lender and does not actually lend money to businesses. Instead, an SBA-approved bank or lender issues the loan. The SBA guarantees a portion of the loan, which means that they will pay back the lender a pre-defined amount of the borrower defaults on their loan. This allows banks and lenders to provide small business loans at rates and terms that they would previously avoid due to the risk of lending money to small businesses.

The SBA places strict limits on the types of businesses that can qualify for SBA financing. The first limit is based on the size of the company. The second limit is based on the specific type of operations the business is conducting. In general, most businesses do qualify for SBA loans, with some exceptions. Major exceptions include:

• Firms Conducting Illegal Activities: While it may seem obvious, companies engaged in illegal or questionably legal behavior are not eligible for SBA loans. This means that the company’s activities must be legal in the city, county, and state where it operates, as well as on the federal level. For example, cannabis-based businesses, while they may be legal in certain states, are not eligible for funding from the SBA. In addition “the firm and all its principals must show good character,” so if owners are conducting questionably legal activities outside the business, or as part of a separate business, they may also be disqualified.

• Lenders and Loan Packaging Firms: Banks, factoring and merchant cash advance operations, finance companies, leasing companies, and insurance companies are all ineligible for SBA financing, as the SBA considers this to be a conflict of interest and in direct competition with the SBA.

• Government-Owned Organizations: Much like lenders and loan packaging firms, government organizations present a conflict of interest for the SBA. More importantly, the SBA is intended to encourage private small business owners, not government institutions, so funding government-related organizations aren’t allowed.

• Businesses Involving Gambling: Businesses earning more than one-third of their gross income from gambling-related activities, such as racetracks and casinos, are not eligible for SBA financing, as this would violate the SBA’s “good character” guidelines. However, some businesses that incorporate gambling activities (such as hotels with very small casino operations) may still be eligible.

• Non-Profits: Much like government-related organizations, non-profits are also barred from SBA loans. As one might imagine, many non-profits are often not profitable (most rely on grants or government assistance), and many do not generate independent income that would allow them to repay their loan.

• Rare Coin and Stamp Dealers: Rare coin and stamp dealing is considered a form of “speculation” by the SBA, therefore, these businesses are also ineligible.

• Multi-Level Marketing Businesses: According to the SBA, multi-level marketing businesses are not “built on a strong foundation” and are therefore not eligible for funding. Many of these businesses hawk low-quality products and acquire profit through recruiting new distributors that are forced to purchase products, rather than selling quality products directly to consumers or businesses.

• Religious Institutions: Due to the fact that the SBA is a government-sponsored program, separation of church and state is a key requirement. This is why the SBA disallows groups “principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs” from getting financing from the SBA.

• Real Estate Investment Firms: Real estate investment firms often passively own real estate and usually use debt to do it, meaning that they are typically already leveraged and unlikely to contribute to job growth. Real estate also fluctuates in value, adding to the risk of lending to these firms. Thus, they are ineligible for SBA loans. Property management companies, real estate agents, and many other actively-managed businesses, however, are eligible for SBA financing.

• Consumer and Marketing Cooperatives: Since cooperatives are owned by a variety of members, there isn’t a single owner to take responsibility for potential debts, making these types of organizations too risky for the SBA to finance.

• Speculation-Based Businesses: Organizations that speculate on the price of assets, such as hedge funds, oil wildcatting firms, or companies that aggressively use high-risk financial instruments (such as options or futures) in order to generate profit are all ineligible for SBA loans.

SBA loans can take from 60-90 days to be approved. SBA Preferred Lenders can often process and close loans faster. SBA Express Loans, a version of the 7(a) loan that maxes out at $350,000, can be approved significantly faster, often in as little as 30-45 days, though some loans will still take 60-90 days to close. SBA 504 loans take the longest, with some closing in as little as 6-90 days, and other loans taking as long as six months to close.

In most cases, the cash flow from the borrower’s core business must be more than enough to repay the loan in full, without counting in the cash flow from tenants. For SBA 7(a) loans, most lenders require a DSCR (debt service coverage ratio) of at least 1.15x.

However, SBA 504 lenders often allow the use of 75% of the rental income from tenants to in the qualification process. However, the core business must still have enough income to make at least 100% of the loan payments. This can boost up the borrower’s DSCR from 1.0x to 1.20x or more. 1.20x is generally the minimum DSCR required for SBA 504 loans.

The SBA has a very specific definition of net rentable square feet, so it’s essential to keep this in mind if you’re considering applying for SBA 7(a) financing to purchase or construct a mixed-use multifamily or commercial property.

When it comes to net relatable square footage, this is what the SBA has to say:

“Rentable Property” is the total square footage of all buildings or facilities used for business operations excluding vertical penetrations (stairways, elevators, and mechanical areas that are designed to transfer people or services vertically between floors), and including common areas (lobbies, passageways, vestibules, and bathrooms).

“Rentable property” may also include exterior space (except parking areas) that is actively used in Borrower’s business operations. Examples of exterior space that is actively used in Borrower’s business operations include outdoor storage yards for general contractors, trucking companies and moving and storage companies or boat slips and docks for marinas.”

-SBA Control Notice 500-1252

If you want to develop owner-occupied or owner-occupied mixed-use properties, the SBA 504 loan program may be a superior option. However, it may be more difficult to get than an SBA 7(a) loan. Unlike SBA 7(a) loans, SBA 504 loans are issued via a partnership between a lender and a Certified Development Company (CDC), a local or regional non-profit intended to help finance and support small businesses. A loan from a conventional lender for at least 50% of the total amount, while the CDC will pitch in the remaining 40%, assuming an LTV of 90%.

The terms for SBA 504 loans include:

• Loan Size: Loans range from $125,000 to $20 million

• LTV: Up to 90%

• Interest Rates: Fixed

• Loan Terms: 20 years for real estate and land, 10 years for heavy equipment

SBA 7(a) loans can also be used to purchase or build an owner-occupied building with living space for the owner and their family. For instance, a restaurant owner could buy or build a two-story restaurant space with a living area for them and their family on the second floor. They could also lease out additional multifamily units, as long as they follow the SBA’s net rentable square feet guidelines.

As a government-guaranteed loan program, SBA borrowers typically need to fill out quite a few forms during the lending process. Here is a basic list of forms required by the SBA for 7(a) loan program applications.

Some of the core required forms include:

• 7(a) Guaranty Application Submission Checklist

• SBA Eligibility Questionnaire for Standard 7(a) Guaranty

• SBA Form 4: Application for Business Loan SBA Form 4-1: Lenders Application for Guaranty or Participation

• SBA Form 4, Schedule A: Schedule of Collateral - Exhibit A

• SBA Form 413: Personal Financial Statement

• SBA Form 912: Statement of Personal History

If Applicable:

• IRS Form 4506T: Request for Transcript of Tax Return

• USCIS Form G-845: Document Verification Request Addendum B from Standard Eligibility Questionnaire for Standard 7(a) (For any required explanations of SBA form 912)

In addition to these standard documents, there will be a wide array of additional documents required for SBA 7(a) loans that fund the construction or purchase of real estate. In general, these include:

• Full Appraisal

• Phase I Environmental Assessment

• Title Search Documentation

For construction projects, architectural and engineering reports, along with other relevant third-party reports, will also be required.

As of mid-2022, the top SBA lenders (as reported by the SBA) include Live Oak Banking Company, Newtek Small Business Finance, Inc., The Huntington National Bank, Celtic Bank Corporation, Byline Bank, Wells-Fargo, and Readycap Lending LLC.

1. Live Oak Banking Company

North Carolina-based Live Oak Banking Company issued 931 SBA loans between mid-2021 and mid-2022, totaling $1,327,050,700, with an average loan amount of $1,425,403.

2. Newtek Small Business Finance, Inc.

New York-based Newtek Small Business Finance, Inc. issued 1,365 SBA loans between mid-2021 and mid-2022, totaling $817,445,800, with an average loan amount of $598,861.

3. The Huntington National Bank

Ohio-based Huntington National Bank issued 4,479 SBA loans between mid-2021 and mid-2022, totaling $754,821,100, with an average loan amount of $168,524.

4. Celtic Bank Corporation

Utah-based Celtic Bank Corporation issued 551 SBA loans between mid-2021 and mid-2022, totaling $523,106,400, with an average loan amount of $949,376.

5. Byline Bank

Illinois-based Byline Bank issued 292 SBA loans between mid-2021 and mid-2022, totaling $340,973,000, with an average loan amount of $1,167,715.

6. Wells-Fargo Bank, N.A.

South Dakota-based Wells Fargo Bank, N.A. issued 1,596 SBA loans between mid-2021 and mid-2022, totaling $311,481,300, with an average loan amount of $195,163.

7. Readycap Lending, LLC

New Jersey-based Readycap Lending, LLC issued 620 SBA loans between mid-2021 and mid-2022, totaling $307,640,000, with an average loan amount of $496,193.

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