Thanks to its many advantages, the SBA 504 loan is the most popular small business loan if you want to own your business property. While it’s most commonly used for single-use properties, it can also work for mixed-use properties, if it meets the owner-occupancy usage requirements. However, there’s a way to use the program so that more buildings fit the criteria. This can be a game-changer for your mixed-use property, especially in areas like the New York City boroughs.
In this guide, you’ll look at the SBA 504 loan program, including why it’s such a beneficial option for small business owners and special considerations to make your dream mixed-use property work for your business.
What is the SBA 504 loan program?
The SBA 504 loan program was developed by the U.S. Small Business Administration (SBA) to help small business owners gain commercial property ownership for their businesses. There are many advantages to owning your business property instead of leasing:
- You never need to worry about rent increases, losing a lease, or relocating your business, because you own the property.
- You can gain many tax advantages to lower your tax liability. Make sure to ask your accountant for details on the types of deductions and credits available when your business owns its commercial property.
- Every improvement you make to the property will strengthen your investment, not someone else’s, and you can make the space what you want it to be without worrying about what your landlord will allow.
- With every monthly payment you make, you build long-term equity that improves your financial position and financial security. Over time, you could use the equity you build to finance additional business growth or fund your retirement.
- When you invest in a mixed-use property, as long as 51% or more of the building is used for your business, you can do as you see fit with the remainder, like generating additional income or revenue by renting or leasing the remaining space or using it for your own living space.
The SBA 504 loan program puts those benefits within your reach.
How does the SBA 504 loan program work?
SBA 504 loans are offered in partnership with a bank to fund up to 90% of the total project cost, which may include purchasing existing real estate or construction, renovations and other improvements, and major equipment.
Let’s say there’s a building you want to purchase for your business with a sale price of $1,000,000. Here’s how this breaks down:
- You make a 10% down payment ($100,000) on the project.
- A bank funds 50% of the project cost ($500,000) with a traditional commercial mortgage.
- A Certified Development Company (CDC), like Pursuit, funds 40% of project costs ($400,000) with SBA 504 financing.
How the SBA 504 loan program can be used for a mixed-use property
To leverage the power of the SBA 504 loan program for a mixed-use property, it’s important to understand one of the program’s requirements: For any property purchased, at least 51% of the building’s square footage must be used for the business (or 60% if the building is a new construction project).
If you’re purchasing a building with only a single commercial space, then meeting this goal is easy. But what happens if you find the perfect building and only need part of it for your business? That’s when understanding the flexibility of the SBA 504 51% requirement can help you meet your commercial-property ownership goals.
Here’s how it works: By including basement space in the owner-occupied commercial-use requirement. For most buildings, basements have several mechanical systems, like water heaters, electric panels, and water lines. For SBA 504 purposes, if you use this space for any business-related need, such as for storage or as an office, it can count towards the ownership percentage.
Let’s take a look at an example:
- You find a two-story building in one of New York City’s boroughs you want to purchase for your café business. It has a commercial space on the first floor and an apartment on the second floor.
- If you’ll only need the street-level portion for your business, then you’ll only be using 50% of the building, which would knock the property out of SBA eligibility.
- However, because the SBA allows you to include the basement as part of your commercial use, the building is now eligible for an SBA 504 loan, as long as you use it for your business. You’ll also be able to use the apartment as your living space to save money or rent it out for additional income. See how Élan Flowers is doing just that!
What to do for your SBA 504 mixed-use property loan request
To make this tactic work for you, the SBA requires the proposed occupancy percentage is in the property appraisal report. It’s important for the appraiser to understand how your business will use the space and to add that narrative in the appraisal report. On your loan application, the total square footage used for owner occupancy and other uses must match the total square footage in the appraisal, including the basement for business-related uses.
An unfinished basement or a mixed-use property without a basement but with an outside space may also be eligible for meeting the space requirements, as long as:
- The space is actively used for business operations
- The space is considered “rentable property”
The SBA 504 loan program is a great way to own your business property and with this flexibility, it can fund your dream mixed-use property.
Pursuit can help you find the right property, uses, and financing
If you’re looking at properties for your business or would like to learn more before you start, talk to Pursuit. Our experienced team can help you determine whether a property may meet your needs and the SBA requirements before you apply.
With loan options from $10,000 to $5.5 million, including SBA 504 loans, Pursuit has funding options that can help you get the financing you need for commercial property, equipment, working capital, to acquire a franchise or refinance high-cost business-related debt, and much more. Take a look at more than 15 small business loan programs to learn more.
Start your application today so we can help you finance your business dreams.
