Real Estate vs Business Value: How to Secure 25-Year Financing?

September 12, 2024

by an investor from Purdue University in San Francisco, CA, USA

Is there a strategic way to structure a purchase so that 51% of it is allocated for real estate, allowing for extended payments over 25 years instead of 10?

For example, if the total purchase price is $6.5M but the real estate is valued at only $3.2M, how would you approach this? I understand that in order to qualify for a 25-year payment term, real estate needs to make up at least 51% of the transaction. Is that correct?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Unfortunately the only way you can secure 25 year financing on the entire purchase price would be to have the real estate purchase be at 51%. The SBA always looks at the total financing being provided in determining what is real estate related and what is business related. If the real estate is not 51% or more, you would end up with a blended amortization where they would assign 10 years to the portion that is related to the business purchase and 25 years to the portion related to the real estate, and you end up with a blended amortization between 10 and 17.5 years. This will reduce your monthly payment (depending on how large the real estate piece is) typically between 5% to 15% versus doing separate loans.

If the property value is close to the business value, you do run a risk that the property might under appraise. If this happens then you would either need to reduce the business purchase price as well to stay above 51% on the real estate or you would end up getting stuck with the blended amortization.

If you are going to exceed the $5 million SBA cap between the real estate and business purchase, then you could look to do the business with an SBA 7A loan and the real estate with an SBA 504 loan. That way you can still get 25 years on the real estate purchase and you would have a much lower interest rate with the SBA 504 than you would with the SBA 7A. However, when you do an SBA 504 loan at the same time you have a change of ownership in the business (business purchase), you have to put 15% down on the real estate purchase with the SBA 504 loan.

If you have additional questions, you can reach me here or directly at redacted Good luck.

Reply by a searcher
from Emory University in Tucson, AZ, USA

^redacted‌ wrote an excellent post on SBA lending and real estate here: https://www.searchfunder.com/post/sba-loans-involving-real-estate-and-business-purchase. (My partner is awaiting a response from SBA clarifying if stock transaction vs asset sale would qualify for similar treatment - a rule change may have been made.)

If you have not already obtained an opinion for the value of the property, that may be your next step. The bank will conduct a property appraisal and that will drive the determination.

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