Buying Real Estate Pre and Post Close with SBA Loan
February 07, 2023
by a searcher from University of Virginia-Darden - Darden School of Business in Charlottesville, VA, USA
A seller I am in early-ish stages of negotiations with is waffling between whether he wants to sell or retain the real estate that the business sits on. The RE profile seems ideal - Class B industrial, in a huge suburb just outside of a major/growing city, and plenty of empty land to expand. However, I think the seller is leaning towards holding onto the RE.
I want to make sure I am aware of my post-close options here so that I know how to effectively negotiate. I plan on using SBA financing for the transaction. If I do not buy the real estate at close, can I buy it two years post-close and use the favorable SBA leverage/terms that I would get for it if I bought it now? If so, is that a fairly easy process? Or would I need to buy it with a separate loan later on?
Thank you for any insight.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
First, you are limited to a $5 million total SBA limit. However, some lenders will go over that limit with an A & B note structure, so even though that limit exists you might have some flexibility there.
Second, if you buy the real estate and fund it in the SBA loan, there is a potential benefit. If the real estate is more than 50% of the overall acquisition cost you can secure a 25-year amortization on the entire acquisition. This will greatly reduce the required monthly debt payments. If the real estate is less than 50% of the total acquisition cost, then you can do a blended amortization where you get 10 years on the business portion of the debt and 25 years on the real estate portion of the debt and end up with a blended amortization on all of the debt between 10 and 17.5 years. Depending on the size of the real estate portion of the deal, extending out the amortization with the real estate on the business debt will usually provide for a savings of between 10% and 20% on your monthly payments versus having done them both separately.
Third, if you cannot do both in the SBA loan due to limits, you could do an SBA 7A loan to acquire the business and an SBA 504 loan to acquire the real estate. Only 40% of the acquisition of the real estate on an SBA 504 loan would hit your SBA exposure.
Lastly, you do not need to buy it at the same time. You can lease it with an option to buy it at a later date. This would save you equity at time of closing. You can always go back and look at either the SBA 7A, SBA 504, or even a conventional financing option at a later date. Conventional financing for owner-occupied properties usually requires 20 to 25% down though. But you could use the SBA options at any time in the future so long as you still have availability.
I hope this helps. If you would like to discuss options in more detail please feel free to shoot me a note here or you can reach me directly at redacted Good luck with your decision.
in United States