Commercial Loans and Fun Blog

Commercial Loans and Lease Options to Buy

Posted by George Blackburne on Thu, Jun 12, 2014

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Most borrowers, when exercising a lease-option on a commercial property, will use an SBA loan.  There are times, however, when an SBA loan won't work, and a private money commercial loan from Blackburne & Sons can help.  Today we cover those situations, but first, some background:

A lease-option-to-buy is an agreement between a landlord and his tenant, whereby the tenant agrees to lease the real estate, but only if the tenant is also granted the right to buy the property for a certain price during the term of the lease.  In the typical lease-option agreement, the tenant pays a monthly rent that is more than than fair market rent of the property.  The amount in excess of fair market rent is credited towards the buyer's eventual downpayment.  If the tenant decides not to exercise his option-to-buy, the landlord keeps the excess rent as his option fee.

When a commercial tenant chooses to exercise his option to buy, he will need a commercial loan.  Most of the time commercial borrowers, with a lease-option-to-buy, are eligible for an SBA loan because the property is owner-used.  By the way, the expression, owner-used, is actually more precise than owner-occupied because a commercial tenant does not actually live in the property.

By the way, did you know that all SBA lenders are not the same?  Even though the SBA guarantees 70% to 90% of an SBA loan, the bank originating the SBA loan still has to retain the risk of loss on the remaining 10% to 30% of the loan.  Therefore, because commercial lending is subjective (determined by the judgement, experience, economic optimism, and prejudices of Loan Committee), one SBA lender might turn you down, while another SBA lender might approve the exact same loan.  The first bank just might not be willing to take the risk of loss on the 10% to 30% portion that the bank has to retain.

Therefore just because one SBA lender turns you down doesn't automatically mean that you do not qualify for an SBA loan.  It could very well be that the SBA lender who turned you down was pessimistic about the widgets industry (your industry) or recently took a loss in your area of the city.  Another SBA lender might be wildly optimistic about the widgets industry or may enjoy three other performing loans in your neightborhood.

If you are exercising a lease-option, be sure to submit your commercial loan application to several different SBA lenders.  You can submit your commercial loan to over 200 different SBA lenders in just four minutes by using


"A slipping gear could let your M203 grenade launcher fire when you least expect it. That would make you quite unpopular in what's left of your unit." -- Army's magazine of preventative maintenance 


Okay, so when would it make sense to use a private money lender, like Blackburne & Sons, rather than an SBA lender?

  1. Maybe the buyer's credit is spotty because he went through a divorce.
  2. Maybe the buyer's company really got beat up financially during the Great Recession.
  3. Maybe the seller has offered to carry back a second mortgage.  SBA lenders won't allow a second mortgage.
  4. Maybe the buyer's downpayment is a little light.  By taking additional collateral (or not), Blackburne & Sons can often make the deal work.
  5. We see the following situation a lot:  The tenant pours $125,000 into upgrading the property, but when it comes time to buy the property, he lacks the 10% downpayment in cash needed to satisfy the SBA.  The smart private money lender will still make this deal.  The purpose of a downpayment is to make sure than the buyer has some skin in the game.  In this situation, the buyer has clearly made a serious economic commitment to the property.
  6. Commercial real estate fell by 45% during the Great Recession.  Suppose a lease-optionee (the tenant) executed his lease-option during the nadir (lowest point) of the Great Recession.  Since then commercial real estate has recovered significantly (but far from all of the way).  An SBA lender is not going to give the lease-optionee any credit whatsoever for that appreciation, while Blackburne & Sons will strongly consider it.


"If you see a bomb technician running, try to keep up with him." -- USAF Ammo Troop


Blackburne & Sons is extremely bullish on commercial real estate right now.  The Great Recession is over, and in my opinion the United States is facing the largest and most wonderful economic expansion in its 230-year history.  I genuinely believe the future is so bright, we gotta wear shades.

A lot of good things happen when banks are willing to make loans to businesses.  To a very large extent, the Great Recession was so cataclysmic because banks stopped making new business loans.  See my 2006 book, The Reverse Multiplier Effect

That's why I felt like dancing when I read the following:  Bank loans and private-sector credit grew "very slowly" until January, he explains. "Since then the Fed's weekly data show that bank loans to private businesses have accelerated sharply and are on track to grow by $700 billion in 2014 after only growing $140 billion in 2013."  Folks, this is immensely bullish news for the economy.

It also helps to explains why Blackburne & Sons is so bullish on commercial real estate and is currently willing to consider new commercial loans that we would never have considered during the Great Recession.


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If you need a private money commercial loan, please be sure to submit your deal to Blackburne & Sons.

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If you need an SBA loan, you can submit your commercial loan mini-app to over 200 different SBA lenders using C-Loans.

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We have an employee whose full-time job is to call commercial lenders and to invite them to join  Those that decline are added to The Blackburne List.  You can either buy The Blackburne List for $39.95 or trade us one banker and get the entire list for free.

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Topics: Lease-option commercial loans