In the commercial real estate (CRE) world, banks often care more about how you plan to use a building than the building itself. For investors, especially those new to the game, the first major fork in the road is determining property status. Is it owner-occupied or non-owner-occupied?
This distinction dictates many things, including:
- Your down payment.
- Your interest rate.
- Which government programs you can leverage to grow your wealth.
As Josh Donovan, SVP commercial business development officer at Bank of America, said, “The landscape is shifting. It’s become pretty standard that larger banks aren’t going to do owner-occupied or non-owner-occupied real estate except for existing clients.”
If you’re hoping to break into CRE as an investor, understanding these paths is key to unlocking the right capital.
Defining the owner-occupant
At first glance, the definition seems simple and obvious: you work there, so you occupy it. But banks need a more granular metric to mitigate risk.
A building is typically considered owner-occupied if the owner’s business uses at least 51% of the square footage. However, as Donovan explains, there’s some flexibility depending on the lender’s appetite and the specific loan product.
“Generally, it’s 50% of the building’s footprint,” he said. “Some lenders will also say the owner-occupant bears 50% of the mortgage cost. For example, you could be working in 30% of a building’s square footage but be paying 50% of the mortgage, with rent covering the remaining 50%.”
For government-backed loans, such as those offered through the Small Business Administration (SBA), the 51% rule is usually the gold standard and significantly stricter.
The cash flow catch-22
Here’s the area that trips up many new investors. In a non-owner-occupied scenario (like a landlord purchasing a shopping center where they don’t run a store), the bank reviews the rental income to determine whether the building can pay for itself.
The math flips in owner-occupied CRE. The bank primarily cares about the health of your core business.
“I think the important thing to understand,” said Donovan, “is that when a bank evaluates cash flow, it only looks at what the occupant—the business owner—can generate, not the rental income, when it’s owner-occupied. It’s great that there’s rental income there, but the entire onus falls on the owner. If they can’t do it on their own, the deal won’t happen.”
However, while Donovan agrees that many banks aren’t doing investment real estate for non-clients, he believes prospective borrowers can still get owner-occupied commercial real estate (OOCRE) more easily. “In fact, many banks are specifically seeking this out,” he said, “like mine and my former employer.”
If your business can’t cover the debt service on its own merit, the fact that you have a dream of renting out the other 49% of the building won’t save this deal. The rental income is the cherry on top, but your business is the sundae.
Leverage and the 10% edge
Why deal with the headache of occupying a space if your main goal is investment? The answer is leverage.
- Non-owner-occupied: Expect to put down 30% to 40%, said Donovan. Banks view these buildings as passive and, thus, riskier during economic downturns.
- Owner-occupied: You can often secure a loan with as little as 10% to 20% down. This difference is significant for a growing company. Keeping more cash in your pocket lets you fund payroll, inventory, or equipment while still owning your building.
Small business association loan options
While conventional commercial loans may feel designed to keep smaller investors on the sidelines, the SBA offers two paths that level the playing field. They can help align your overhead with your long-term growth strategy. One offers a lower fixed interest rate, while the other offers flexibility for your business operations.
The power of the 504 program
When investors think of commercial loans, what often comes to mind are short-term balloon payments or adjustable rates. But for owner-occupants, the SBA 504 program offers a unique, long-term stability that’s rare in the commercial world.
This 504 program is often a better alternative to the more common 7A loan for many users because it lacks the heavy guarantee fees and offers competitive fixed rates.
“The 504 refi provision allows you to go out to 90% of the value of the building,” said Donovan. “For example, if you have a million-dollar mortgage and your building’s worth $3 million. You can borrow up to $2.7 million and take out $1.7 million for working capital and spread it out over 25 years.”
While the low 4% interest rates of the pandemic are behind us, the government portion of a 504 loan sits at about 5.75% fixed for 25 years. In a market where commercial rates are often volatile, locking in a 25-year fixed rate is a significant de-risking move for business owners.
The 7(a) loan, or Swiss Army Knife of commercial capital
Whereas the 504 is a specialist for brick-and-mortar businesses, the 7(a) is a generalist designed for total business support. If your expansion requires more than a deed (like purchasing an existing medical practice, buying out a retiring partner, or purchasing additional inventory), the 7(a) can wrap those costs into a single package. Consider this loan a bridge for complex real estate and business operations.
That flexibility does include a convenience fee. Unlike the fixed-rate security of the 504, the 7(a) typically features a variable interest rate and an SBA guarantee fee. Donovan said the 504 is generally the more affordable route for pure real estate, but the 7(a) remains the go-to for owners who need a pool of capital that does more than secure a building.
SBA 7(a) loan vs. 504 loan programs
| Feature | SBA 7(a) Loan | SBA 504 Loan |
| Primary Use | Versatile: Real estate, working capital, equipment, debt refinance | Specific: Fixed assets (real estate, land, long-term machinery) |
| Max Loan Amount | $5 million | No project limit (SBA portion capped at $5M-$5.5M) |
| Down Payment | Typically 10% | Typically 10% (can be 15-20% for start-ups) |
| Interest Rates | Usually variable (pegged to Prime + a spread) | Fixed (for 10, 20, or 25 years) |
| Fees | Higher: Includes a guarantee fee based on the loan amount | Lower: No guarantee fee; lower overall closing costs |
| Structure | One loan from a single lender | Two loans: 50% from a bank, 40% from a CDC (SBA), 10% from you |
| Term length | Up to 25 years for real estate | Fully amortized over 20 or 25 years |
Donovan said, “It’s important to note that in NY State, the Mortgage Recording Tax (MRT) is waived on the SBA second mortgage. That tax can be over 2.5% in New York City, effectively making the government loan free.”
Refinancing as an expansion engine
For investors who already own their building, the owner-occupied status is a latent gold mine. If your building has appreciated, you can refinance up to 90% of the current value to access working capital.
This strategy allows you to use your real estate as a bank to fund your next expansion, buy out a competitor, or upgrade your technology. Spreading a loan over 25 years makes the monthly impact on your cash flow more manageable than a high-interest, short-term business line of credit.
The “Monopoly” strategy: Mixed-use success
One of the most effective ways to enter the market is through the buy-and-sublease model. Donovan frequently works with clients who buy more space than they currently need.
“I’ve worked with someone buying a 20,000 square-foot building when they really only need 11,000 square-feet, but their goal is to get 9,000 square-feet and become Mr. Monopoly,” Donovan said. “That happens frequently.”
By occupying 11,000 square feet (55%), the owner qualifies for high-leverage, low-down-payment owner-occupant financing. Meanwhile, the 9,000 square feet of rental income helps pay down the mortgage principal faster, so the tenants essentially buy the building for its owner.
Choose your path wisely
Big banks, like JPMorgan Chase, Bank of America, Wells Fargo, and U.S. Bank, value relationships—not just transactions. Whether you’re an investor looking for a non-owner-occupied play or a business owner who wants to be their own landlord, the choice comes down to your capital and capacity.
- Choose non-owner-occupied if you have deeper pockets (35%+ down) and want a purely passive investment.
Choose owner-occupied if you have a thriving business, want better leverage (10% down) and desire the long-term security of a 25-year fixed rate.
Are you a commercial real estate investor seeking a specific property or financing to meet your company’s needs? We invite you to talk to the professionals at CREA United, an organization of CRE professionals from over 90 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
