Many small business owners struggle with the decision whether to buy or lease real estate for their business operations. Now is one of the best times to shift your small business real estate arrangement from a lease agreement into full ownership. In this comprehensive guide to using SBA loans for commercial real estate, you will learn about: What is an SBA Loan? The Pros and Cons of Business Real Estate Ownership vs. Leasing How to Qualify for a Small Business Real Estate Loan

2. What is a Small Business Loan?
SBA government-guaranteed loans are small business loans with partial
government guaranties from the U.S. Small Business Administration. SBA loans are
offered by state and nationally chartered banks and credit unions, as well as by a
handful of licensed, non-bank SBA lenders. Since they are available to small
• What is an SBA Loan?
• The Pros and Cons of Business Real Estate Ownership vs. Leasing
• How to Qualify for a Small Business Real Estate Loan
Many small business owners struggle with the decision whether to buy or lease real estate for
their business operations. Now is one of the best times to shift your small business real estate
arrangement from a lease agreement into full ownership. In this comprehensive guide to
using SBA loans for commercial real estate, you will learn about:
SBA Loans for Commercial
Real Estate: Making the Right Choice
for Your Small Business

3. businesses in amounts up to $5 million per borrower, they are a great way to finance
real estate for your small business.
The participating lender provides loan funds from their own assets. In the case of
depository institutions, they are lending out their depositors’ money. In the case of
licensed, non-bank SBA lenders, they are lending out investors’ money. Both types of
lenders can offer more leeway on their credit decisions for small business borrowers
requesting SBA loans, due to the partial government guaranty which reduces the
lending risk for their depositors and investors. For the small business borrower, this
usually means lower down payments, longer repayment terms, and easier qualifying
criteria than they will receive from conventional bank financing.
Small Business Real Estate Ownership
vs. Leasing
As with many small business decisions, the choice to move from a leasing agreement
into a contract for property ownership is one that should be carefully considered.
Each small business owner has his or her own unique situation and circumstances
when it comes to the business, all of which should be factored into the ultimate
decision. Here are some of the pros and cons of small business ownership that
should be considered:

4. In summary, SBA “real estate” loans are actually “long-term small business” loans
available for any legitimate business spending category. They provide lower down
payments, longer repayment terms, and easier qualifying criteria than conventional bank
financing. SBA loans allow small businesses to take advantage of growth opportunities
in earlier stages of business development than a conventional bank lender can, due to
the partial government backing on the loan. The multiple eligible uses of loan proceeds,
along with the more liberal underwriting criteria, make the SBA loan program a most
versatile financing option for small businesses with growth opportunities.
Pros:
• An owner can accumulate equity with long-term real estate ownership
through paying down the mortgage and experiencing market appreciation in
the value.
• A landlord cannot dictate rent increases or uses of the property. The property
owner can lock in a fixed overhead cost for his or her facility.
• Excess space may be used to produce incremental income from rent.
• There may be significant income tax savings from depreciation.
• Financing options are more numerous for real estate than for other capital
assets.
• The business owner can establish a separate real estate holding company to
own the real estate asset.
• When the business is closed or sold for retirement, the real estate asset will
retain important, appreciated value and rental income potential in a separate
holding company.

5. Cons:
• Being tied to a facility with limited space and a specific location may not be
the best strategy for a rapidly growing company.
• A down payment is required to finance a building purchase. A business
that is still in its early stages of development, may not want to sacrifice cash
which can be used for growing the business.
• A property owner must be ready to take on responsibilities for maintenance,
security, remodeling, and other property management issues.
• For an owner who is growing his business in order to sell it, cash used to
buy a building may not be its best use. Since businesses are bought and sold
based on cash flow, the value created by the cash flow may far exceed the
likely appreciation of the real estate during that time frame.
• Personal guarantees are required for most small business property
mortgages.
The prudent business owner should consult with his accountant and his
attorney to help weigh the benefits and drawbacks of owning the small
business real estate before making any decisions. To reach a decision, the
business owner needs a good understanding of real estate value versus

6. business value, as well as a formula for comparing the financial and legal aspects
of leasing to those of owning a business property.
Additionally, the small business owner should seriously consider contacting
and hiring a qualified commercial real estate expert to protect the interest of the
buyer (or lessee). These benefits may include full coverage of the commercial real
estate opportunities in the small business’ market, a needs analysis, identifying
opportunities and scheduling tours, protection from common real estate buying
errors, managing the transaction among all parties involved, and savings of time
and effort through their professional expertise.
How to Qualify fo a Small Business Real
Estate Loan
If you ultimately decide that commercial real estate ownership is the right choice
for you and your small business, you will need to begin considering the steps you
will take to procure an SBA real estate loan.
Qualifying for a small business real estate loan is different than qualifying for
an investment real estate loan. With investment real estate, the lender focuses
upon the quality of tenants in the project along with the quality of the location.
With small business real estate financing, the lender focuses upon the health and
viability of the small business which will own and occupy the real estate. A small
business lender uses five components in his analysis of a small business loan
request.

7. Business Management Experience
The foremost reason for business failure, and therefore a loan default, is the lack
of sufficient management experience in the industry in which the small business
owner participates. A lender will gather information about the business owners to
evaluate the education and business track record of the owners to ascertain their
likelihood of continued success in the subject business. The more education and
successful industry experience the business owner has, the less risk is perceived in
lending money to that business.
Equity
While a small business lender becomes a partner in the business by extending
credit, they are not an owner. A business owner (or equity partner) invests in the
business, assumes risk, and he or she is rewarded for that investment risk with
dividends and other forms of compensation. A small business lender, however,
receives only a stated rate of interest on the money they have invested, and their
risk should be commensurate with limited return on their investment. The small
business lender expects to see a small business borrower with sufficient “skin in the
game” to work hard and achieve success. Once again, the lender will employ ratios
to ascertain safe levels of owner equity when making loan decisions. The most
common ratio is the debt-to- equity ratio. Small business lenders have access to
statistics for various industries which indicate an appropriate level of leverage for
the type of business for which a loan is being considered.

8. Not only can the SBA lender recognize cash dollars invested in the business by
its owners; but also, assets outside the business pledged as additional collateral
for the loan, will enhance what the lender considers equity. Finally, if a small
business owner is buying business assets, and the seller agrees to subordinate
standby financing, the SBA lender can enhance its debt-to-equity ratio this way. For
instance, a seller of real estate may not be willing to negotiate a lower sale price;
however, they are willing to carry a second lien note to help the buyer qualify for
financing with a lower down payment requirement. If that seller agrees not to
require payments before the SBA loan is paid, the SBA lender can add that amount
to the buyer’s qualifying equity.
Credit History
Lenders love statistics. The best indications of how a borrower will meet his loan
obligations in the future are the statistics reflected on a credit investigation that
shows how other creditors have been paid by the borrower in the past. Small
business lenders evaluate the repayment records of the individuals who own the
business, as well as for the business itself. Credit reports are available from credit
reporting agencies, as well as from direct contact with previous creditors. The more
debts which reflect satisfactory payments in accordance with the loan terms, the
more comfort the small business lender will derive from them.

9. Collateral
We have established the fact that a lender is not an owner, and the lender should
only assume a level of risk which is appropriate for the limited income they will
receive from lending money. It should be evident, therefore, that the lender will
look for other ways to decrease their lending risk when approving loan terms.
Besides evaluating risk based upon management experience, “skin in the game”,
cash flow repayment ability and credit history, the business lender will also look
at collateral offered for the loan. Collateral is represented by assets which can be
sold to recover losses if loan payments can no longer be made by the small business
borrower. Typically a lender will use the assets being financed as collateral. Other
business assets and personal assets can be added to the collateral package to
decrease the lender’s risk and to enhance a borrower’s chances for loan approval. .

10. About Bruce Hurta
Bruce Hurta has extensive experience in Small Business Lending. He served in a number of
commercial lending and banking capacities in his career including President of a Houston-area
community bank for 6 years. Bruce also established and managed the Houston office for a non-bank
small business lending company where he specialized in SBA lending for 14 years.
Bruce spent 4 years as a bank examiner for the Texas Banking Department, 7 years in executive
management at two community banks, and 18 years as a specialty SBA Lender. He is active in the
commercial realtor and business brokerage communities, along with various business and industry
organizations. Bruce is the 2013 president of the Houston Association of Government Guaranteed
Lenders.
In July 2009, he joined Members Choice Credit Union as the Business Lending Manager to lead their
new SBA Lending Program.
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