ALSO CALLED OWNER-OCCUPIED FINANCING, owner-user loans can be used for most business and real estate purposes, such as:
- Acquiring or expanding a business
- Buying, building, improving, and refinancing land and structures
- Purchasing equipment, furniture, inventory and supplies
- Securing working capital
- Repaying existing business and real estate loans
AN ADDITIONAL BENEFIT OF THESE LOANS is that they help a business to respond quickly to changing needs and opportunities such as unexpected large orders, marketing expenses, renovations and improvements, working capital requirements, partner buyouts, increasing cash flow, and new product development.
OWNER-USER LOANS MAY COME FROM traditional banks, credit unions, and private lenders, and they can sometimes come with guaranteed loans from the Small Business Administration (SBA) 7(a) (general business loan) program and 504 (real estate and equipment) program.
BANKS AND OTHER LENDERS LIKE OWNER-USER LOANS because they are low-risk and can be repaid from income the business generates. Additionally, they help the lender form a lasting relationship with the business.
BROKERS LIKE OWNER-USER LOANS because they are relatively simple and easy for eligible borrowers to qualify for.
COMPARED TO OTHER TYPES OF LOANS, owner-user loans often have
- lower interest rates
- higher loan-to-value (LTV) ratios
OWNER-USER FINANCING SHARES SOME FEATURES with hard money loans, but depends more heavily on the business and its owners.
TO PUT AN OWNER-USER DEAL TOGETHER, you need a business that rents more than half of a building's space. Ideally, the business will own the property where it's located. If the business rents out part of the building to someone else, that's even better.
AS WITH ANY BUSINESS OR REAL ESTATE LOAN, the borrower must furnish the lender with personal and business financials, property details, tax returns, a description of the business's products and services, and other standard loan application information.
HERE'S AN EXAMPLE OF ONE LENDER'S owner-user financing offer:
Property Type: Office, Retail, Warehouse,
Light or Heavy Industrial, Mixed Use
Loan Amounts: $500,000 to $100,000,000
Loan-To-Value: Up to 90%
Lending Area: Worldwide
Documentation: Full or Stated Doc
Target Terms: Several Options available, up to 30 year fixed;
Fixed and Variable Rates
Recourse: Full Recourse
Special Notes: SBA 504 and SBA 7a loan programs and Bank Financing available
Close: Fast Closing
ONE BUSINESS SCENARIO that creates an opportunity for an owner-user loan is where a business acquires property to house the business and buys a building larger than it needs.
THE BUSINESS OWNERS CAN THEN LEASE PART OF THE SPACE to third-party tenants to generate additional income. If the business needs to expand at a later date, it can take over the rental space for its own use, or it can use the building and the rental income to help secure an owner-user loan.
ANOTHER ADVANTAGE of owner-user property is that, if problems occur and the business needs to raise money quickly, it can sell all or a portion of the space and, if desired, lease back what it needs for its own use.
EITHER WAY, THE OWNER-USER SETUP makes lenders feel more secure, so they're more likely to make the loan the business seeks.
OBTAINING AN OWNER-USER LOAN usually involves a hybrid approach. It uses the value of the real estate, the rental income, and the finances of the business and its owners.
EACH CASE IS DIFFERENT and presents its own opportunities. Often, the borrower and broker can persuade a lender to make the loan by highlighting the right mix of strengths—whether these strengths reside in the building, the rent, the business or the personal qualities of the business owner. A down payment may be required, particularly if the business is new.
IF THE LENDER LIKES THE PROPERTY WHERE THE BUSINESS is located and the business has money coming in, an owner-user loan can often be arranged.
This article was originally published in the May 2014 issue of Money Watch Bulletin. Subscriptions to Money Watch Bulletin are available in print or downloadable PDF for $95/year (12 issues).