As companies grow, their needs often surpass the current space they’re leasing. Business owners then face a key decision: choose to find a larger space to lease or invest in a property of their own. An owner-occupied commercial real estate loan provides businesses with financing to purchase a building they will use. Many growing companies turn to owner-occupied commercial real estate loans because they combine property ownership with long-term operational stability.

This guide explores how owner-occupied loans work, when they make sense, and how they compare to investment loans. The goal of this guide is to help business owners determine if owner-occupied commercial real estate (OOCRE) loans are an appropriate strategy for their company’s growth. By understanding these options, business owners can make more informed decisions about their company’s future and physical footprint. 

What is owner-occupied commercial real estate?

In simple terms, an owner-occupied commercial real estate loan is financing used by a business to purchase property it will primarily occupy. The business must physically occupy 51% or more of the building within 60 days of closing and continue to do so for at least 12 months thereafter.

Owner-occupied commercial real estate loans provide businesses with more stability, control, and long-term savings compared to leasing. These loans are taken out in the business’s name to purchase qualifying properties. 

How do owner-occupied real estate loans work?

Businesses can use owner-occupied real estate loans to purchase, improve, or refinance a qualifying property. Eligible property types include: 

• Industrial buildings
• Retail or flex space
• Professional and medical offices
• Mixed-use buildings (such as hotels or commercial buildings)

Special-use facilities, such as daycare centers, assisted living or skilled nursing facilities, event venues, and storage units, also qualify. However, multi-family buildings are not eligible for this type of loan. 

Businesses must also qualify for an OOCRE loan based on the following requirements:

• Property type and condition
• Business plan and financials, including available collateral
• Loan-to-value (LTV) ratio
• Market conditions
• Business creditworthiness, including credit score and debt-to-income ratio

Interest rates typically depend on credit score, property location and use, loan term, and the LTV ratio. Lower LTV ratios generally reduce lender risk and may result in more favorable terms. 

When should you consider an OOCRE loan?

If one or more of the below apply to your business’ current state or future goals, then an OOCRE loan may be a good fit for your business.

• You want to diversify your assets.
• You want more control over one of your largest operational expenses.
• You plan on staying in the same location long-term.
• You want to build equity instead of paying rent.
• Your business has outgrown your leased space, and you need more physical room to expand or operate. 
• You want more control over the property (such as customizations, renovations, or subleasing).
• You want to take advantage of tax deductions.

OOCRE loans can also make financial sense when commercial lease rates are higher than property values. 

OOCRE loan financing options.

When it comes to financing OOCRE loans, business owners have several options to choose from. The right financing option for your business will depend on factors like your credit profile, goals, and the type of property you plan to purchase. Below are two common forms of OOCRE loan financing options. 

Conventional loans

Conventional OOCRE loans typically offer 5- to 10-year terms. Businesses should have a debt-service coverage ratio (DSCR) of 1.25x, a minimum credit score of at least 650 for guarantors, and a down payment of 10% to 20%. Conventional OOCRE loans often close faster but may provide fewer borrower protections. 

SBA loans

The Small Business Administration (SBA) guarantees certain OOCRE loans, including the SBA 7(a) and SBA 504 loans can be used for real estate purchases, business expansion, working capital, and more. These loans offer fixed interest options, terms of up to 25 years, and a maximum loan amount up to $5 million. Collateral is required for loans over $50,000. 

SBA 504 loans are usually used for real estate purchases, like buildings or land, construction, and renovations. This loan type also offers fixed interest options, with terms of 10 to 25 years, and a maximum loan amount from the SBA of up to $5.5 million. The assets being financed serve as collateral.

Pros and cons of owner-occupied real estate loans.

As a financial tool, OOCRE loans can be a powerful way for business owners to invest in their own growth. However, like any major financial commitment, these loans carry risks that shouldn’t be overlooked. Owners should heavily weigh their options before moving forward with an OOCRE loan. 

Pros

• More favorable loan terms than investment loans
• Lower interest rates and monthly payments
• Tax benefits (interest, depreciation, expenses) 
• Equity building and asset appreciation 
• Rental income potential from unused space
• Greater control over business space
• Fixed monthly payments improve budgeting practices
• Property can be used as collateral for future financing
• Long-term operational stability

Cons

• Responsibility for tenant management if leasing space
• Ongoing maintenance and building upkeep
• Higher upfront capital investment
• Risk of property depreciation
• Zoning limitations may affect use or expansion 
• Tenant-related insurance and liability considerations

Owner-occupied vs. investment real estate loans.

OOCRE loans are generally lower risk than investment real estate loans because the business occupies the property. An investment real estate loan, by contrast, involves leasing to tenants, which increases risk if tenants default on their lease agreements. Below are the key differences between OOCRE and investment loans:

• Down payment: 10% to 20% for OOCRE vs. 25% to 40% for investment loans
• Risk: Lower for OOCRE and higher for investment loans 
• Loan-to-value ratio: Higher for OOCRE (more financing available) and lower for investment loans
• Interest rates: Lower for OOCRE and higher for investment loans 
• Credit requirements: More flexible for OOCRE and stricter for investment loans

How to prepare for an OOCRE loan application.

The first step in preparing to submit an OOCRE loan application begins with evaluating your business’s financials. Your review should include your company’s credit score and history, recent tax returns, balance sheets, and income statements. You’ll also need to assess the business’s cash flow, ongoing costs, and the largest down payment amount possible. 

Next, define your space requirements. How much square footage does the company require and for what purposes? Ensure that your business operations will occupy 51% or more of the property you’re considering. 

Now it’s time to develop or update your business plan. Craft the wording to reflect your plans for the space and any necessary improvements, including your projected growth, revenue forecasts, and how acquiring this property will support your long-term goals. If you plan on leasing one or more sections of the property, include how you’ll handle acquiring tenants, performing maintenance, and enforcing lease agreements. 

Finally, identify potential properties that align with your business needs based on location, zoning, and expansion potential. Once you’ve identified a favorable lender, review their eligibility requirements, application process, and loan terms before gathering the necessary documents to apply. 

OOCRE loans: A strategic move toward long-term success.

Lenders evaluate OOCRE loans based on business performance, property use, and long-term stability, which is why working with an experienced commercial real estate lender is important. If you’re ready to explore how an OOCRE loan can support your growth goals, connect with us to discuss your financing options. Take the critical next step forward in expanding your business today.