Owner-Occupied Commercial Real Estate Explained

The purchase of commercial properties is often a real estate investment model to increase business asset value. When considering the purchase of a commercial property, specialized mortgage financing adds value to the investment. Property investors can benefit from specialized owner-occupied commercial real estate loan products when purchasing a property for business, as well as rental income.

What is an Owner-Occupied Property?

Owner-occupied commercial properties are those used for business purposes by the owner of the building. A property that is large enough to accommodate other business tenants is an income producing asset. The decision to select a property that suits the needs of an owner’s enterprise, and generates rental income from renters, makes multi-tenant commercial property an excellent investment decision.

The Commercial Real Estate Marketplace

Most commercial properties are investor opportunities for rental market income; therefore,when shopping for commercial property, review municipal zoning to determine if an industrial or professional office building meets the criteria. It is important to note that although multi-family units are not eligible for business owner-occupied commercial property financing, hotels and mixed-use commercial buildings typically qualify.

Why Commercial Property Investment?

Commercial real estate is one of the most popular assets owned by business investors. As with other real estate purchases, commercial properties are generally selected for resale value. In other words, the rationale for selecting one property over another is the potential return on the investment from the property itself after it is sold in the future. Other reasons for commercial property investment, aside from owner occupancy and rental revenue, may be tax write-off, or participation in community development.

The Limits of SBA Borrowing

The U.S. federal government Small Business Administration (SBA) offers business borrowers loans for commercial property financing. The SBA definition of “owner-occupied” property falls under the same Internal Revenue Service (IRS) tax treatment rules for capital gains on investment income, Pub. 550, Topic 551. Tax-deductible basis points are attributed to the mortgage loan amount, plus the market value of the property to be paid by the owner.

SBA borrowing requirements include the condition of proportional occupation. Borrowers must evidence their business will occupy at least 51 percent of the property purchased in order to meet lending requirements. If a borrower is eligible for an SBA loan, additional financing may or may not be needed, based on the terms of the loan and list price of the property considered as SBA loans do not provide the total amount of the purchase price.

Specialized Commercial Real Estate Loans

Smart property investors who are preparing to purchase commercial real estate can substantially benefit from loan finance. While mortgage loans are the most popular for purchase of real estate, a business loan may also be used to effectively cover the costs of the agreement if secured prior to purchase.

Depending on the terms and conditions of the loan, a borrower can save money on a low-fixed or adjustable lending agreement. Review different loan product offerings available for commercial property purchase. In addition to  real estate loans, specialized mortgage loan products can be used to finance commercial real estate investments:

  • Construction Loans – cover the cost of construction or rehabilitation of a building.
  • Investment Mortgages – investment mortgages are designated loan products for investment property purchases.
  • Jumbo Loans – For purchases exceeding standard mortgage lending borrowing caps, a jumbo loan can provide the financing required to purchase a property with a more expensive list price. This type of loan is usually more expensive to obtain and has more requirements to be met for approval.
  • Lot Loans – Land purchases for commercial development and other business land use projects can be funded with a lot loan; also known as a land loan.
  • Physician Loans – Loans that usually don’t require a downpayment or private mortgage insurance are made available to doctors with applicable medical degrees.
  • VA Loans – U.S. federal government public service members and veterans are eligible for VA loan applications. Some of the benefits include zero to low down payment requirements when making a purchase of an owner-occupied property.

Other Benefits of Commercial Borrowing

In the world of commercial property investments, a loan will sometimes improve the chances that an investor can “buy up.” A commercial business loan enhances liquidity for the purpose of adding a new addition or refurbishing an existing building, increasing the total return on investment when the property is sold.

By making an investment in a commercial real estate venture, investors can build equity asset appreciation that will also produce rental income in the process. Once a loan is paid off, commercial rental property can be used for estate or trust transfer at time of retirement, or a tax-deductible asset for a beneficiary gift.

Full-Service Lending Options for Commercial Business

Woodsboro Bank is a full-service lender of special loan financing products for commercial real estate investment and business use. We are committed to supporting the communities we serve and provide customized borrowing solutions, taking the guesswork out of financing or refinancing a property purchase. Schedule an appointment to speak with one of our local loan experts today.

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