Purchasing commercial real estate is one of the largest financial decisions a business owner can make. Whether you’re buying the building your business operates from, acquiring an investment property, or financing a mixed-use project, the loan structure, qualification requirements, and long-term implications differ significantly from residential mortgages and from other types of business financing.

This guide breaks down the two primary financing paths — SBA 504 loans and conventional commercial real estate loans — along with the key metrics lenders use to evaluate applications, and the strategic question of whether buying or continuing to lease is the right move for your business.

Owner-Occupied vs. Investment Commercial Real Estate

The first distinction lenders draw is whether the property will be owner-occupied or held as an investment. This classification drives everything: which loan programs are available, what down payment is required, and how the property’s income is evaluated.

Owner-Occupied CRE

A property is considered owner-occupied when the business using the loan proceeds occupies at least 51% of the rentable square footage. This is the most common scenario for small business owners financing their own operating space — a medical practice buying its clinic building, a manufacturer purchasing its warehouse, or a restaurant owner buying the building it operates from.

Owner-occupied properties qualify for SBA 504 and SBA 7(a) programs in addition to conventional commercial mortgages. These SBA programs carry significant advantages including lower down payments (as low as 10%) and longer amortization periods (up to 25 years) compared to conventional CRE loans.

Investment / Non-Owner-Occupied CRE

If you’re purchasing a property primarily to lease to tenants — a strip center, office building, or apartment complex — the property is investment CRE. SBA programs are generally not available for pure investment properties. Lenders underwrite these loans based heavily on the property’s income-generating ability (net operating income vs. debt service) rather than your business’s cash flow. Conventional lenders and CMBS (commercial mortgage-backed securities) lenders are the primary sources for investment CRE.

SBA 504 vs. Conventional CRE Loans

For owner-occupied commercial real estate, business owners have two primary financing structures. Understanding the tradeoffs is critical to choosing the right path.

SBA 504 Loan

The SBA 504 program is specifically designed for owner-occupied real estate and major equipment acquisitions. The structure involves three parties: a conventional lender (typically a bank) provides 50% of the project cost, a Certified Development Company (CDC) provides 40% backed by an SBA debenture, and the borrower contributes 10% as a down payment.

Key 504 features include fixed rates on the CDC portion (tied to 10-year Treasury rates), terms up to 25 years for real estate, and the 10% down payment requirement — making it the lowest-down-payment CRE option available. The tradeoff is a longer and more documentation-intensive process compared to conventional CRE loans.

Conventional Commercial Real Estate Loans

Conventional CRE loans are offered directly by banks, credit unions, life insurance companies, and CMBS conduit lenders. They typically require 20–35% down, have shorter amortization periods (15–25 years with 5–10 year balloon structures), and close faster than SBA loans. For established businesses with strong financials and the ability to put more down, conventional loans often offer greater flexibility in deal structure and faster closing timelines.

LTV Ratios and DSCR Requirements

Two metrics dominate commercial real estate underwriting: Loan-to-Value (LTV) and Debt Service Coverage Ratio (DSCR). Understanding what lenders are looking for in these numbers before you apply is essential.

Loan-to-Value (LTV)

LTV is the loan amount divided by the appraised value of the property. A $1,500,000 loan on a property appraised at $2,000,000 is a 75% LTV. Lenders use LTV to assess how much equity cushion exists if the loan goes into default and the property must be sold.

• SBA 504: Up to 90% LTV (10% borrower equity)
• SBA 7(a) CRE: Up to 85–90% LTV in some structures
• Conventional bank CRE: Typically 65–80% LTV (20–35% down)
• Investment CRE / CMBS: Typically 65–75% LTV

Debt Service Coverage Ratio (DSCR)

DSCR measures whether the property (and/or business) generates enough income to cover the loan payments. It is calculated as Net Operating Income divided by Annual Debt Service. Most CRE lenders require a minimum DSCR of 1.25, meaning the property generates $1.25 in income for every $1.00 of debt service. Investment properties must meet DSCR requirements based on lease income; owner-occupied properties are underwritten on business cash flow.

Property Types That Qualify

Not all commercial property types are treated equally by lenders. The property type affects loan availability, LTV limits, and interest rate.

• Office buildings: Eligible for most programs; lenders scrutinize occupancy rates and lease terms, particularly in markets with high vacancy.
• Retail / strip centers: Eligible; tenant mix and anchor tenancy affect lender appetite.
• Industrial / warehouse: Highly desirable collateral; strong lender appetite across bank, SBA, and CMBS channels.
• Medical / dental offices: Excellent collateral class for SBA 504 and conventional; specialized healthcare lenders also available.
• Mixed-use (commercial + residential): Eligible for SBA and conventional if commercial use meets occupancy thresholds; more complex underwriting.
• Special-purpose properties: Car washes, gas stations, restaurants, hotels — higher lender scrutiny; specialized lenders often required. SBA eligible in many cases.
• Raw land: Generally not eligible for SBA CRE programs; conventional land loans exist but at lower LTVs (50–65%) and shorter terms.

Down Payment Expectations

The down payment required in commercial real estate varies significantly by loan program, property type, and borrower strength. Here is a practical breakdown:

• SBA 504 (owner-occupied): 10% standard; 15% for businesses under 2 years old; 15–20% for special-purpose properties
• SBA 7(a) (owner-occupied): 10–20% depending on loan size and structure
• Conventional bank CRE: 20–30% for standard property types; 25–35% for special-purpose
• Investment CRE: 25–35% standard
• CMBS conduit loans: 25–35%, minimum loan sizes typically $2M+

Injection of equity can also come from seller financing, gifts, or business retained earnings — lenders will require documentation of the source of funds. Borrowing the down payment from a business line of credit or personal loan is generally not permitted under SBA guidelines.

Appraisal and Environmental Requirements

Commercial real estate transactions require a formal appraisal and, in most cases, environmental due diligence. Both are third-party requirements ordered by the lender — the borrower typically pays for them.

Commercial Appraisal

A commercial appraisal is performed by a state-certified general appraiser (as opposed to a residential appraiser). The appraisal establishes the “as-is” value of the property and, if applicable, an “as-stabilized” or “as-improved” value for construction or renovation projects. Appraisals typically cost $3,000–$6,000 and take 3–5 weeks. The loan amount is based on the lower of the purchase price or appraised value.

Environmental Assessment

Virtually all commercial lenders require at minimum a Phase I Environmental Site Assessment (ESA). The Phase I is a records-based review (no soil or groundwater sampling) that identifies potential contamination concerns based on historical site use, regulatory records, and a site inspection. Cost is typically $1,500–$3,500 and takes 2–3 weeks.

If the Phase I identifies a “Recognized Environmental Condition” (REC), a Phase II assessment — which involves physical sampling — may be required. Phase II can add weeks to the timeline and several thousand dollars in cost. Properties with prior industrial use, dry cleaning operations, or fuel storage are common triggers for Phase II review.

When to Buy vs. Lease

The decision to purchase versus continue leasing your commercial space is strategic, not just financial. Both options have legitimate advantages depending on where your business is in its lifecycle.

Arguments for Buying

• Payment certainty — no lease renewals, rent escalations, or landlord decisions affecting your occupancy
• Building equity over time; the property appreciates as you pay down the loan
• Ability to customize or renovate without landlord restrictions
• Potential rental income if you occupy less than 100% of the space
• SBA 504 monthly payments often comparable to or lower than market lease rates

Arguments for Leasing

• Capital preservation — the down payment and closing costs stay in the business
• Geographic flexibility if your business may need to relocate or scale
• No exposure to property market downturns or major capital expenditures (roof, HVAC, structural)
• Better fit for early-stage businesses or those in industries with rapidly shifting space needs

As a general rule, buying makes the most sense when you have a stable, established business with predictable location needs, when you can comfortably meet the down payment requirement without straining working capital, and when you intend to occupy the space for at least 7–10 years. If any of those conditions don’t hold, leasing may be the more prudent near-term choice.

Frequently Asked Questions