Many small business owners struggle with the decision whether to buy or lease real estate for their business operations, and ultimately, the decision must be made after evaluating the credentials and circumstances of each business. However, some small business owners have unique challenges that make using an SBA loan for commercial real estate seem like an ill-fitting solution. In this eBook, we'll discuss some of these special situations, and how small business owners should approach small business financing as a result.

2. Many small business owners struggle with the decision whether to buy or lease real estate for their
business operations, and ultimately, the decision must be made after evaluating the credentials and
circumstances of each business. However, some small business owners have unique challenges that make
using an SBA loan for commercial real estate seem like an ill-fitting solution. In this eBook, we’ll discuss
some of these special situations, and how small business owners should approach small business financing
as a result.
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
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.

3. What can a small business loan be used for?
SBA loans are available for small businesses to finance any legitimate business expenditure. Here is a
complete listing of how SBA loan proceeds may be used by a small business:
•
Purchase real estate in which at least 51% of the square footage is occupied by the small business
•
Construct a new building in which at least 60% of the square footage is occupied by the small business
•
Renovate and/or expand an owner-user small business property
•
Purchase a business
•
Start up a new business
•
Purchase business equipment
•
Buy out a partner or shareholder
•
Consolidate debts
•
Provide working capital for expansion of the business.
Below, we’ll discuss some special circumstances for new business construction, as well as the purchase of
existing small business space.
Using a Small Business Loan for
Commercial Construction
For small business owners, it’s one thing to buy a building; however, it is an entirely different challenge to
construct a new one. The business decision to construct a building brings with it many additional variables
which translate into more potential risks.
What kind of structure should I build, and who is best qualified to design it? Will construction costs remain
stable throughout the project? How do I select a reliable contractor? How do I navigate the permitting
process? Will the weather cooperate with my time line? These are just a few of the dilemmas which

4. can be experienced by the business owner who needs to focus on his business rather than managing a
construction project. On the flip side of the coin, a newly constructed building will have exactly what the
business owner needs to accommodate a growing business, since it is a custom design.
The Process
The typical scenario in financing small business construction involves obtaining one loan for interim
financing and another loan for the permanent financing. The small business owner must find a lender with
an appetite for, and expertise in, construction lending. Even in the best economic environment, this task is
not always easy. Due to many years of experience in small business construction lending, my associate, Pat
Harris, and I understand the benefit of one-stop shopping for the construction and permanent financing of
a small business building. We also understand the borrower’s need for us to qualify the contractor and to
monitor and control the project.
With the SBA 7(a) loan program, we are able to accommodate both the interim construction and the
permanent financing of a small business property with only one loan and a one-time closing. We are able
to structure loan terms such that the small business has no payment obligations until the construction
is completed and the building is occupied. The interest that accrues, while we advance funds to the
contractor, is treated as part of the construction costs which we fund with the loan. We use a thirdparty, professional, construction management company (CMC) to qualify the contractor’s credentials, to
monitor the job, and to control our loan disbursements. The CMC establishes a draw schedule which the
contractor adheres to when requesting funding, and the CMC inspects the job for percentage completion
in accordance with the draw schedule and construction contract before advancing loan funds to the
contractor. Ten percent of each draw is retained by Members Choice Credit Union (MCCU), until the
construction is completed to the small business borrower’s satisfaction, all subcontractor bills are paid, and
the Certificate of Occupancy is issued. The borrower is well-protected by this process, and “what’s good for
the borrower is also good for the lender!”
As an added benefit, SBA construction loans exhibit the same characteristics as all other SBA loans. SBA
loans have lower down payment requirements, longer repayment terms, and they are easier to qualify for
than with conventional bank loans.

5. Purchasing Commercial Real Estate with an
SBA Loan
For many business owners, small business loans provide an excellent alternative to conventional bank
financing when purchasing a business or small business real estate. However, due to the relatively complex
nature of commercial real estate transactions, small business owners can become overwhelmed or unsure
of the best way to utilize their SBA loan. Here are a few of the special circumstances a small business owner
may find his or herself in:
Seller Second Lien Financing
If a small business finds itself marginally qualified for SBA financing, a small amount of seller second lien
financing can make the transaction happen. In general, seller second lien financing is used to supplement
the buyer’s qualifying equity in cases where the buyer is providing at least a ten percent down payment.
Many business lenders do not allow second liens behind their primary loan, but most SBA lenders do allow
it. The most common form of second lien financing is from a seller who wants to help the buyer qualify
for primary financing where a business is being acquired, or business real estate is being purchased. Small
business borrowers usually want to preserve cash for business operations, and they are reluctant to part
with down payments sufficient to satisfy equity requirements of their business lender. In these cases, if the
seller agrees to subordinate their second lien to the SBA lender, and if the seller agrees not to take payments
until the terms of the loan satisfied, the Small Business Administration allows that second lien financing to
be treated as part of the buyer’s qualifying equity.
Why would a seller of a business, or a seller of business real estate, agree to carry some second lien
financing on a standby basis? In many instances, the seller is anxious to sell the business or business
real estate as soon as possible. Since the seller is receiving a large amount of cash from the buyer’s down
payment, plus the buyer’s loan proceeds, they may be willing to carry a small amount of second lien
financing. This action allows the seller to delay some of their income tax liability and provide them with a

6. better than market interest-earning asset. If the seller believes the buyer will continue to be successful with
their business, they know they will be repaid on the seller financing when the primary loan is satisfied. For
a business acquisition scenario, the buyer and the lender like to see seller second lien financing, because
the seller still has some “skin in the game” to make sure the ownership transition is smooth and successful.
Also, the seller often enjoys offering seller second lien financing, so they don’t have to negotiate further
with price reductions.
Non-Conventional Small Business Space
While many US real estate markets have seen and continue to see losses in commercial real estate, office
condominiums have emerged with the potential for continued growth. This innovative use of traditional
condominium property has many advantages over leased office space.
The concept of using a condominium as an office is similar to residential condominium use. Instead of
renting a suite of offices, a company purchases an individual unit in an office or retail building. Common
areas are co-owned by all tenants and a board oversees landscaping and maintenance.
Office condos are uniquely positioned to meet the needs of small- and medium-sized businesses such as
medical and dental practices, lawyers, engineers, accountants, architects, real estate and mortgage brokers,
general contractors, boutique investment firms, and many other small businesses.
Perhaps the greatest advantage of purchasing office space in the form of a commercial condominium is the
safety of a long-term mortgage - especially at current low rates-versus the uncertainties of the commercial
rental market; rental properties are under the control of a landlord, and monthly rent can be raised or the
lease terminated with short notice. Ownership of office space helps small business owners to avoid these
surprises.
For more information about small business loans and commercial real estate financing, please contact our
Business Lending Manager, Bruce Hurta.

7. For more information about small business loans and
commercial real estate financing, please contact our
Business Lending Manager, Bruce Hurta.
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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