Can I use an SBA loan for ground-up construction?
Yes, you can use an SBA loan for ground-up construction of a building your business will occupy, and 504 is the usual program: the bank funds an interim construction loan, and the CDC second mortgage funds at completion with a 20 or 25 year fixed rate. Expect 10 to 15 percent down, a fixed-price contract with a licensed contractor, a budget with contingency, and an occupancy plan of 60 percent at completion rising to 80 percent.
How an SBA construction loan works
| Phase | Who funds | Terms |
|---|---|---|
| Construction | The bank, as an interim loan covering its 50 percent and the future CDC 40 percent | Interest only on draws, bank rate, 12 to 24 months |
| Completion | The CDC debenture funds and pays down the interim loan to the bank's permanent 50 percent | CDC portion fixed for 20 or 25 years |
| Permanent | Bank first mortgage plus CDC second | 20 to 25 year amortization |
Under 7(a), a single lender funds construction and converts to the permanent loan, which is simpler but usually variable-rate. Ranges vary by lender.
What the lender requires
- Stamped plans and approved permits, or a firm date.
- A line-item budget with a contingency of 5 to 10 percent, reviewed by the lender's consultant.
- A fixed-price or guaranteed-maximum contract with a licensed, insured general contractor.
- Builder's risk insurance and performance and payment bonds on larger projects.
- An appraisal with as-completed value.
- A Phase I environmental report on the site.
- Business cash flow that covers the permanent payment by 1.25 or more, based on historical results plus a reasonable projection for the new space.
- An interest reserve for the construction period.
The occupancy rule for new buildings
Your business must occupy 60 percent at completion and reach 80 percent within ten years. Up to 40 percent can be leased to tenants at opening, which helps carry the payment during the early years.
Down payment
Typically 10 percent for an established business, 15 percent for a new business or a special-purpose building. Land you already own counts toward it at appraised value.
Timing
SBA construction loans take 60 to 120 days to close before ground breaks, then the build, then 30 to 60 days for the debenture to fund at completion. Start the loan process before the plans are final so approvals and construction line up.
Where SBA construction gets stuck
- Cost overruns beyond the contingency, which require your cash to keep the loan in balance.
- Environmental findings on the site.
- A completed appraisal below cost.
- Business cash flow that does not support the projection for the new space.
- Occupancy below 60 percent at completion.
How CommFi handles it
Our lending desk assembles the project package and prices the interim and permanent phases together. SBA construction loans fund through approved lenders with very different appetites for construction, so the desk searches a database of 7,000+ lenders and puts the file in front of the ones that do it, and they compete. Zero upfront fees.
Related reading
Related questions
- Can I build a new building with an SBA loan?
- Yes, if your business will occupy at least 60 percent at completion. SBA 504 is the usual program; 7(a) also works.
- How does a 504 construction loan fund?
- The bank funds an interim construction loan; at completion the CDC debenture funds the second mortgage at a fixed rate and the bank keeps the first.
- How much down payment does SBA construction require?
- Ten to 15 percent of total project cost. Land you own counts toward it.
- Does the SBA require a licensed contractor?
- Yes, under a fixed-price or guaranteed-maximum contract, with insurance and often bonds on larger projects.
- Can I lease part of a new SBA-financed building?
- Up to 40 percent at completion, falling to 20 percent within ten years as your business grows into the space.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.