SBA Tip # 5

How some “rental income” can help your deal!


By Stephen Mariani


With most of the businesses we see these days having tighter cash flow in some previous years this is one of the ways we push them to the finish line. If they are including the CRE (Commercial Real Estate) in the transaction you should be considering the big picture when determining cash flow.


What many lenders and brokers don’t know about rental income

 The first and single most important thing to remember when exploring this option is that if the business that’s being financed with an SBA loan has a CRE component then it MUST occupy 51% or more of the building. Don’t be caught presenting the deal with your buyer and business only utilizing 50% or less, this is an SBA SOP rule and the lender has no options to include it in the financing.


               Why you need to know this and how to truly present it to a lender


 Typically, if the building option is available to your buyer it is something you want to explore in depth and here’s why. The biggest thing to consider is the longer SBA loan term (which could extend the loan all the way to 25 years) and the decreased annual debt service to your buyer. The second is the effects on the business cash flow as the company no longer has a lease and the rent then becomes a full add back to cash flow, again, very attractive to a buyer. With the downturn in revenues that many businesses experienced in previous years the lenders “Debt Service Coverage Ratios” may fall slightly short in 2011 or 2012 by a bit even though they have fully recovered in 2013. Many lenders require 2 or sometimes 3 years of coverage which can possibly put your deal just outside of their internal policies. Well, if they rent any portion of the building and if the lease written to a tenant exceeds 12 months, you CAN add that to the actual business cash flow and many times bring the ratios back into conforming to a lenders policy requirements. This must be presented to the lender correctly as understood by you in full prior to doing so. Keep in mind to never represent the business not occupying more than 51% and never expect a month to month lease to be accepted as cash flow. The lease must be 12 months or longer to utilize this and have lenders include it in cash flow calculations. What you may have to explore is the common areas of the building, empty parts or offices of the building (that may be used as storage by the business you represent) and actual square footage as it applies to all tenants. Keep in mind that an SBA loan cannot be utilized for rental properties and thus the reason for the 51% rule stated above. Many times we find lenders able and very willing to consider this option on loans they like to help with the approval process internally. They use this rule and you should too whenever possible.  Just another tool to keep in mind when your transaction includes CRE. is always available for specific questions regarding this or other SBA rules.