Commercial real estate loans with no down payment

It is tough to buy any kind of commercial real estate without putting some cash into the deal. Lenders want to see you have ‘skin in the game’ to reduce their risk and show your commitment to the long-term stability of the transaction. However, just because it’s tough to buy commercial property without supplying a down payment does not mean it’s impossible. Here are some creative tactics to help you avoid paying a cash deposit on that business property you want:

Rent to own

In a ‘rent to own’ deal, you’ll need the property seller to work with you in a transaction that can be a win/win for both parties. To start, you ask if the seller is willing to lease the property instead of selling it for cash. If they agree, you arrange a lease that gives you control of the real estate with an option to buy at fixed time in the future – say 3 to 7 years. During the period of the lease a set percentage of your rent payments go towards buying the property when you exercise your option. Effectively, you build a down payment over time instead of paying it all upfront. (You also get the chance to test the real estate out, making sure it meets your business needs without a major financial commitment).

When you execute your purchase option the accumulated down payment funds are applied to the property price as your cash deposit. This will allow you to seek a commercial mortgage that is less than 100% of the value of the property and meet the lender’s ‘skin in the game’ requirement.

Note – This option will only work if the seller does not need to sell the property immediately and is prepared to wait, collect rent and sell when you execute your purchase option. 

SBA 7(a) loan

SBA 7a loans are provided by banks, credit unions and online lenders who are part of the federal Small Business Administration (SBA) lender network. Partially backed by the US Government, these loans can provide up to $5million to qualifying borrowers with repayment terms as long as 25 years. Some SBA lenders may be willing to provide 100% loans to buyers of commercial property, which eliminates the need for a down payment. However, meeting the rules of eligibility for SBA loans can be tough. As well as an approval process that can take several months, organizations will typically need to have been in business for at least four years and have annual revenues over $180,000. Your personal FICO credit score will also need to be at least 680.

Seller financing

‘Seller financing’ is exactly what it sounds like – the seller acts as the bank, financing your acquisition of their property. This means they hold the note on the property and retain the mortgage while you make loan payments to them. Seller financing can also be a good option for buyers with credit issues, as sellers may not perform the extensive background and credit checks that traditional lenders demand.

The downside of this tactic is that you’ll likely need to pay above market interest rates or agree upon a higher purchase price in order to make the seller comfortable with no down payment. 

What is the cheapest way to buy commercial real estate?

Commercial real estate mortgages are typically the most economical way to buy commercial property. These types of loans are long term – often up to 30 years – and often come with the lowest interest rates of any type of business financing. Some commercial mortgages may be obtained with down payments of 10% or less, whilst others may be available as interest only for a set number of years before reverting back to full amortization. 

Types of commercial real estate mortgage

There are three basic types of commercial real estate mortgage:

• Owner-occupied commercial mortgages are provided to businesses that trade from and own the property they wish to borrow money against. This type of financing is often used to support the organization’s working capital or to cover the cost of property renovations and major repairs.
• Commercial investment property mortgages are provided to property owners who are investors and receive a rental income from a third-party tenant or licensee. In most scenarios the rental income the property generates is used to repay the loan over time.
• Property portfolio loans are provided to property professionals and investors. The lender will take some or all of the client’s property investments as security (this may be residential, commercial or mixed-use property, or a combination of all within the portfolio) and provide one umbrella loan. The lender calculates the borrower’s ability to meet scheduled loan payments by combining the total income from the portfolio – usually a mix tenants’ rent payments, service fees, interest income and profit-sharing revenues.

Other types of business loan to buy commercial real estate:

• Term loan: The most common type of business loan., You receive a single, lump-sum cash injection and then pay it back in regular instalments over a fixed period of up to 25 years.

• Business line of credit: Withdraw as much as you want when you want from a loan facility up to the limit of your borrowing. You only pay interest on the sums you withdraw, not the whole credit line. This can significantly reduce the cost of borrowing.