Think it's feasible for small businesses to buy commercial buildings? Think again.

Owner occupant underwriting conventions make it easier for investors, not business owners, to finance commercial real estate purchases, and that's a huge threat to Main Street

Ghosts of South Tacoma past standing across from Fernseed’s building, which I tried to buy last year. You can see its reflection in the window behind them.

A Tale of Locked‑Out Ownership

Last year I tried, and failed, to purchase the building Fernseed currently rents, a two-story brick structure in the historic South Tacoma business district. Then I tried, and failed, to purchase another commercial building—this one just down the road, a stand-alone two-story wood frame building surrounded by a gravel lot, which would have been ideal for expanding our business to sell more outdoor greenery.

The reason I couldn’t purchase either property was that I couldn’t secure financing. Even though my husband and I could make a substantial down payment, and he makes a high enough salary that he could cover the mortgage on either building based solely on his W-2, we couldn’t get a loan because my business had two years of loss on its books.

Those losses weighed us down like an anchor, no matter how strong the rest of our case was.

These were buildings we could afford! They were risks we were willing to take! Owning these properties would have transformed my throw-away rent payments into equity-building deposits and given me further reason to invest in a neighborhood and community I love. My business has rarely paid me a salary, let alone delivered profit. But it could make a mortgage payment—turning five years of rent into five years of equity, toward something I might one day sell or retire with. But we were locked out of all that because my business wasn’t performing strongly enough the two years prior.

This isn’t a situation where the answer is simply getting the business back to profitability and applying again next year. I hope by the time you’re done reading this post you’ll understand that most Main Street businesses will never make enough to qualify for a commercial mortgage, especially as every year, real estate prices increase, in part due to the rent payments these small businesses are making.

By analyzing the challenges I faced in depth, I hope I can explain just how hard it is for any mom and pop shop to buy commercial property. Today I’m going to write about what I learned trying to purchase commercial real estate—a process that is for me still ongoing—and just how hard it is for owner occupants to finance from nearly every angle. I’ll also explain how this red tape doesn’t stop investors from buying up one property after another, transforming our neighborhoods into real estate portfolios that benefit only themselves.

Why owner-operators face an uphill battle

DSCR Hurdles and the Rent Trap

Let’s just start by saying we want locals to own our Main Street buildings, ideally those who operate businesses in them. Of course not every business renter wants to own a building, but if we agree that a mix of small, independently owned, owner-occupied properties is a hallmark of a healthy city, then it follows that we want to encourage business owners to at least consider real estate ownership and be qualified for it. My hunch, informed by dozens of informal conversations, is that most operators today believe owning their building is laughably out of reach. They are not wrong!

Most small shops simply don’t generate enough spare cash to qualify for a commercial mortgage, because lenders typically underwrite deals assuming a 1.25×–1.35× debt service coverage ratio (DSCR) as the absolute minimum. DSCR is the ratio of net income to total debt payments, and it shows how many times cash flow can cover those obligations. Some banks even insist on a 1.5× buffer to protect against downturns.

While this seems reasonable in the banking industry, to give you an idea of just how out of reach this is for a mom and pop shop, imagine a shop with $400,000 in annual revenue and a 15% margin—that’s $60,000 in net operating income—with an existing EIDL payment of $365/month (≈$4,380/year). If they applied for a new SBA‑backed mortgage with payments around $4,500/month (≈$54,000/year), their total annual debt service would be $58,380. That yields a DSCR of only $60,000 ÷ $58,380 ≈ 1.03×, barely above 1.0× and well below the 1.5× cushion lenders want—effectively disqualifying an otherwise healthy, profitable business.

Consider that the $4,500 monthly mortgage payments this business is applying for are equal to what they are already paying in rent, maybe less. A bank is saying: we don’t believe you can make these payments, it’s too risky. Yet the business has already made those payments, and their EIDL loan payments, faithfully, for half a decade.

No one is doing that well

If we examine the most recent Main Street America survey results, a majority of Main Street business owners operate below $200,000 in revenue, face shrinking or flat profits, lack sufficient personal cash flow for living expenses, and are overwhelmed by existing rent and debt burdens. Under those conditions, not only is accumulating a $100,000–200,000 for a down payment untenable, demonstrating a strong enough P&L to support a mortgage payment is as well, even though owning the building would help stabilize the business just by transitioning what they are already paying in rent to an equity-building mortgage payment.

In short, even a modest, well-run Main Street business must outperform typical industry margins or carry no other debt in order to clear today’s underwriting hurdles. That’s why outside investors—who can underwrite based on projected rent from multiple tenants—often breeze past these requirements, while a local shop owner gets locked out.

Banks only underwrite based on P&L performance, not projections

If you own a business, banks use only your corporate return or income statement to assess your ability to service debt. While this makes sense in theory, it’s not how things work in the real world.

In the real world, mortgage payments aren’t only supported by income your business generates. You may rely on rental income from other tenants in the building, or personal income, or savings. But banks don’t underwrite this way. On owner-occupied properties, where your business operates in 51% or more of the building, your business’s P&L alone must cover the debt service; other money sources are not considered.

This is almost always the case with SBA 504 loans. You must occupy 51% of the building or more to even qualify for those loans—they’re only available to owner-occupants, which makes sense—but the strict underwriting process means SBA lenders won’t consider a “global” view, which would include all ways you might be able to make your mortgage payments.

Ironically, SBA’s rigid P&L underwriting disqualifies the very entrepreneurs who’ve already shouldered their business’s ups and downs by tapping personal savings to cover expenses and debt obligations. Try finding a Main Street business owner who’s been operating for 5 years or more and hasn’t at least once bailed out their business by injecting personal cash or collateralizing their home—yet the SBA underwriting process effectively says these people can’t be trusted to handle a mortgage, even after years of personal sacrifice.

This just doesn’t reflect reality, especially not in a post-COVID, tariffs, recession landscape. We have people out here who have given everything to keep their businesses afloat, their teams employed, and their rent payments flowing, but the rough macro environment of the last 5 years, over which they had no control, has made their businesses appear, on paper, too risky to lend to.

Opaque, Inconsistent Bank Rules

What if you have enough cash to forgo SBA funding? The reason most businesses borrow from the SBA is to take advantage of the limited down payments they require, usually not more than 10 percent. Maybe you can afford to put down more? If you’re not borrowing from the SBA, can’t you just put down, say, 20 percent on a conventional loan and finance that way?

From what I gather, and the landscape isn’t exactly clear, different banks treat owner occupancy differently. Some will look at the full (or “global”) financial picture and underwrite based on revenue streams outside the business, others won’t. This might depend on how interested banks are in adding owner-occupied commercial mortgages to their lending portfolio. I don’t operate in the commercial lending world full time, and even when I asked people who did they couldn’t give me a straight answer, but in my experience, it’s a 50/50 chance that even if you can afford to purchase the property by factoring in other revenue streams, the bank you’re applying with won’t underwrite your loan globally because opaque internal rules often require DSCR metrics based solely on business financials.

You won’t know this when approaching each bank. You’ll find this out when the loan you’re applying for won’t underwrite.

Brokers

This is where brokers come in. At some point, a realtor might suggest you connect with a broker who understands what banks are looking for. In essence, a broker will “shop you around.” Banks need to diversify their lending portfolio, so when they’re audited by the FDIC it doesn’t look like they’re overexposed in a particular area. If your business, needing a specific type of loan, is the puzzle piece a bank is looking for, they’re more likely to lend to you. But you won’t know this, because you don’t regularly lunch with bankers. Brokers do.

For this reason, a broker might know about how a certain bigger, corporate bank isn’t currently lending for commercial real estate in certain neighborhoods, and how this isn’t a written rule—because that would be redlining (would have been the joke the corporate banker made over lunch)—but that it would ultimately be fruitless for you to seek a loan for a building in that bank’s “off-limits” neighborhood.

You might wonder if that’s a violation of some regulation, and later you’d do some research and find that yes, that would probably run afoul of the Equal Credit Opportunity Act, or the Community Reinvestment Act, which require banks to meet the credit needs of all communities they serve, but the broker, someone who can best be described as what happens when someone who sells payment processing door to door cross breeds with a sea lamprey, won’t realize the apparent violation of federal law they may have just disclosed, and will instead be rambling on about, “looking for a mezzanine fund for a bridge loan on a value‑add mixed‑use that stress‑tests to 1.25× DSCR on a 65% LTV.” These aren’t terms you’re familiar with. The brokers use them to demonstrate just how friggin’ hard they know cool terms that make deals. You don’t, which kind of means, “Go home, loser.”

If you work with a broker, you’ll pay them 1% of the purchase price of the building for essentially packaging your financial information into an RFP and sending it to an email list of these bank people. You’re paying them $7,000-10,000 to navigate the concealed landscape, to save you the time of applying to a bank that may or may not be only thinly drawing outside the lines of the letter of the law, to find you a lender—that special Jeremy, or Brad, or Zach, or Chad, or Eric—who might lend globally on an owner occupied loan with an 80% LTV. In which case you’ll get another secure link to send your PFS, 3 years of tax returns, 3 years of corporate returns plus balance sheets and P&Ls, and proof of funds if it comes to that.

Investors Play by a Different Rulebook: Understanding Pro Forma

Because banks are less likely to lend globally to an owner occupant, it’s actually easier for someone you have never met, someone who has never set foot in your business, to purchase the commercial property you rent in than it is for you to buy it.

When you’re not the owner occupant, banks underwrite using what’s known as pro forma assumptions. They factor in the future building income—based on projected rents—when underwriting the loan.

With pro forma underwriting, lenders accept a “stabilized” or projected net operating income (NOI) which factors in standard vacancy rates, rents, and operating expenses once the building is leased. Banks calculate projected rental income based on the rent roll, a list of all businesses renting in the property. If investors can furnish signed leases from the tenant businesses, banks won’t ask for proof that those businesses can pay the rent; they don’t examine those businesses’ P&Ls. For investors, banks simply accept the projected rents as submitted, so long as the applicant has no connection to the business on the rent roll.

The same lease—Fernseed’s lease—will suffice as proof that Fernseed can pay $4,500 per month when an investor who doesn’t own Fernseed applies for a loan. But when Fernseed applies, banks open our books—and suddenly, we’re not qualified. The same lease in the same property is an asset to an investor, a liability to a business owner.

In determining property value, Fernseed’s lease, and the rent payments Fernseed makes, not only stabilize the property, but increases its value. Person A, with no relation to my business, submits Fernseed’s lease to a bank and gets a loan to buy the building, but when I try to buy the same building and the bank cracks open Fernseed’s P&L, now we don’t believe Fernseed can make the payments. We believe it when Person A is underwriting, but not when I am.

By simply renting space, Fernseed helps push a building’s value higher. But when rising rents outpace merchants’ sales, Main Street operators get locked out of ownership. They faithfully make rent payments—often equal to the full mortgage—yet lenders disqualify them under the assumption that they can’t afford those same payments as a mortgage.

Real Life Example: The Fernseed Rent‑Roll Paradox

As I mentioned, I tried to purchase the building Fernseed currently occupies last year. The real estate company that owns it bought it in 2020 for $480,000. I’ve leased it for 5 years, and paid them close to $260,000 in rent. When we asked for a selling price last year at the start of our negotiations, the owners told us they believed it could fetch $1.5 million if listed, so they “gave me a deal” at $1.3 million. I felt this price was outrageous. Based on comps in the area and what I knew they had purchased the property for, plus the rent I had paid, I knew they’d be walking with a 30-35% return if I paid $925,000, even assuming they put in $200,000 for remodeling.

I was willing to counter at $1.275 million mainly because it would mean I wouldn’t have to move my business from its current location and I could start building equity in the neighborhood I’ve invested 5 years into. However, I couldn’t wrap my head around how the rent roll, which included Fernseed’s rent, defined the cap rate, which defined the value of the property. I kept asking my realtor, “Doesn’t it feel like they are using Fernseed’s rent as a selling point to me, the owner of Fernseed?”

I wasn’t trying to buy the building based on the income the building could produce, I was trying to buy it so I could build equity instead of paying rent. The full mortgage would have been only $3,000/month more than my rent, and there were two other renting tenants in the building. Even at that price, the building was financially viable—with rental income from other tenants—but we were still rejected because Fernseed’s P&L alone couldn’t cover the full $7,000-ish mortgage payment.

I’ve run a business in this building for 5 years. I have a pretty good idea of how much money anyone can make by selling widgets to the people who walk down the street here. I walked around these streets in 2018 thinking, “What if…” just like the investor who owns my building did, I just didn’t think, “What if I flipped a bunch of commercial buildings?” I was imagining starting a real business here.

Because I do run a real business here, one that operates based on sales of products or services to the community, I know what I can afford to pay per square foot, and what I’m willing to pay upfront to stabilize those payments so they don’t outpace the neighborhood’s ability to sustain them. I was willing to go against everything I knew about real value, to pay extra so I wouldn’t have to relocate, but the bank wouldn’t finance that deal, and that is not how the real estate company who owns my building was pricing it, either. That’s what happens when the price of real estate is detached from the utility it has as a revenue generating tool for the businesses that actually serve the need of the neighborhood, and that’s exactly what’s happening in South Tacoma.

The company I rent from currently owns 16 commercial buildings in our tiny business district and counting. They’re borrowing against other cash-flow producing properties, then using 1031 exchanges to avoid paying capital gains taxes, to continue to “invest” here. (What they call “investing” I call “extracting.”) When they buy a building, they paint century-old brick white with black trim, and add street numbers in huge block letters to the side of each building. Over 5 years, the unique character of this historic district has transformed one parcel at a time into a block of buildings so uniform it reminds people of an amusement park streetscape or one of those fake mall complexes that pops out of a cornfield.

Each building purchase is rolled into the next, further locking out the potential for anyone to build equity in the neighborhood.

When I asked the landlords directly why they wouldn’t consider selling to me for $925,000, a price more in line with comps in the area and that would still net them a 30-35% return by my calculations, their reply had a couple of bullet points that I’m sharing almost verbatim because they so clearly spell out the dilemma for investors who are over-leveraged, which banks allow and even encourage, and why, through their schemes, investors trap themselves into deals that discourage them from selling to their tenants.

Here is what they said:

• “After closing costs we are at breakeven around $850,000.”

• The obstacle for them is that, at a $925,000 sale price, they’re not walking with enough money to “do anything with it.”

• They’re losing the cash flow and equity from the property, “but are not able to create much of anything else, because most of these acquisitions require for us no less than $300k to sink into the deal.”

• They are currently not profitable on any of their business ventures, so they’re not willing to “give away” the equity in this building because it’s been a “lifeline” for them in the past

What This Means for Main Street

I’m sharing this because I don’t think I’m in a unique situation. “Investors” aren’t selling anything, they’re not “in business.” They’re trapping capital, using sea lamprey tricks to park properties that have to generate huge returns on a resale or justify ever-increasing rents to boost cash flow for more acquisitions. Once this cycle starts, as it appears from these texts from my landlord, it’s really hard to slow down. Lending practices have allowed this cycle to continue.

What I find particularly disheartening about this whole process is that banks, brokers, and commercial realtors aren’t connecting the dots to the bigger issue here. It’s like everyone knows the system is stacked against the business owners, but everyone just shrugs.

Meanwhile, “investors” continue to use the tools they always have to hoard commercial real estate in our communities, blocking the people who do the real work from accessing one of the only tools they have to ensure the work they put in secures their financial future.

This isn’t investing. It’s extracting—squeezing value from the very people who built these neighborhoods and locking them out of the opportunity to share in the financial success their business helped generate.