Programme rules6 min read
The occupancy rule decides more of your deal than the rate does
Fifty-one percent is not paperwork. It is the line between two entirely different lending markets, and most borrowers meet it after they have already made an offer.
Every conversation about owner-occupied commercial finance eventually arrives at one number, and it is not the interest rate. It is the share of the building your business will actually use. Under the SBA programmes, an existing building must be at least fifty-one percent owner-occupied. New construction must be sixty percent. Below those lines you are not a candidate for the programme at all — you are an investor, and investors are underwritten on a rent roll rather than on an operating business.
This matters because the two markets price and size differently in almost every respect.
| Owner-occupied | Investment | |
|---|---|---|
| Underwritten on | The operating business | The rent roll |
| Typical equity | 10–15% | 25–35% |
| Longest amortisation | 25 years | 25–30 years |
| Fixed for the full term | Available on the debenture | Rare |
| Decided by | Global cash flow | LTV, DSCR and debt yield |
Where borrowers get caught
The common shape is a two-storey building where the business takes the ground floor and two existing tenants stay upstairs. On a square-footage basis the business occupies forty-four percent. Nothing about the business has changed, the price is the same, the cash flow is the same — but the file has moved into a different market and the equity requirement has roughly tripled.
The second common shape is a plan to grow into space. A company signs a purchase agreement for a building it will fully occupy in three years, and occupies a third of it on day one. That is a legitimate plan and it is a conversation worth having early, because the test is applied at closing, not at the point the plan comes true.
The occupancy test is applied to the building as it will be used on the day the loan funds — not to the building as you intend to use it in year four.
Measure it before you write the offer
Occupancy is measured on rentable square feet, and the arithmetic is unforgiving about common areas, mezzanines and unheated storage. A building that looks comfortably over the line on a floor plan can land under it once the measurement standard is applied properly.
- Get the rentable area from the appraisal or a measured survey, not from the listing.
- Count the space your business will genuinely use on funding day, not the space you have earmarked.
- If a tenant is staying, read their lease term before you sign anything — a five-year lease upstairs is a five-year constraint.
- If you are at fifty-two percent, treat that as failing. There is no margin in a test that gets audited.
What to do when you are under the line
There are usually three routes, and none of them is a workaround. Restructure the space so the business genuinely occupies more of it; buy the building conventionally with the equity that market requires; or buy it as an investment and lease space to your own operating company on arm’s-length terms. That third structure is legitimate and common, but it changes the underwriting, and it should be designed at the start rather than discovered at underwriting.
The point of raising this first is simple: it is the cheapest question in the process to answer and the most expensive one to get wrong. Everything else — rate, amortisation, prepayment, timing — can be negotiated. Occupancy is a rule.