Why Real Estate Due Diligence Matters in SBA Acquisitions
When you buy a business with an SBA loan, the physical location where that business operates is a critical piece of the puzzle. Whether the business owns its real estate or leases it, real estate due diligence can make or break your deal.
Many first-time buyers focus almost exclusively on the business’s financials — revenue, expenses, cash flow, customer base. But the property itself carries risks and requirements that can delay your closing, increase your costs, or create expensive problems down the road. SBA lenders know this, which is why they have specific real estate requirements that must be met before they’ll fund your loan.
This guide covers everything you need to know about real estate due diligence in SBA business acquisitions — from lease review to property inspections, SBA-specific requirements, and strategic decisions about including real estate in your deal.
Leased Property: What to Review Before You Sign
The majority of small businesses operate from leased space. When you acquire a business, you’re typically asking the landlord to assign the existing lease to you — or negotiating a new lease. Either way, thorough lease review is essential.
Lease Assignment Rights
The first question: does the lease allow assignment? Many commercial leases include provisions addressing what happens when the tenant sells the business:
- Freely assignable: The tenant can assign the lease without landlord consent. This is rare but ideal.
- Assignable with landlord consent (not to be unreasonably withheld): The most common provision. The landlord can approve or reject the new tenant but can’t refuse without a reasonable basis.
- Assignable with landlord consent (at landlord’s sole discretion): The landlord has full control over whether to approve the assignment. This gives you less leverage.
- Not assignable: The lease prohibits assignment entirely. You’ll need to negotiate a new lease with the landlord.
Action item: Review the lease assignment provisions early in due diligence. If landlord consent is required, begin the conversation with the landlord as soon as possible — this process can take weeks and shouldn’t be left until the last minute.
Remaining Lease Term and Renewal Options
SBA lenders typically require that the lease term (including available renewal options) covers at least the term of the SBA loan — usually 10 years. If the lease has only 3 years remaining with no renewal options, you have a problem.
- Review remaining term: How many years are left on the current lease?
- Renewal options: Does the lease include options to renew? How many years do they cover? Are renewal terms preset or subject to negotiation?
- Total available term: Current remaining term plus all renewal options should equal or exceed 10 years for most SBA loans.
If the available term is insufficient, you’ll need to negotiate a lease extension or new lease with the landlord before closing.
Rent Terms and Escalations
Understanding your rent obligations is critical for financial projections and cash flow planning:
- Base rent: What’s the current monthly rent? How does it compare to market rates for similar space?
- Escalation clauses: How does rent increase over time? Common structures include fixed annual increases (e.g., 3% per year), CPI adjustments, or periodic market rate resets.
- Triple net (NNN) obligations: In NNN leases, the tenant pays property taxes, insurance, and maintenance in addition to base rent. These costs can add 30%–50% to your effective rent.
- CAM charges: Common area maintenance charges in multi-tenant properties. Review historical CAM charges and understand what they cover.
Personal Guarantee Requirements
Most commercial landlords require a personal guarantee from the tenant. When you acquire a business and assume the lease:
- Will the landlord require your personal guarantee?
- Is the seller being released from their personal guarantee?
- What’s the scope of the guarantee (full lease term, limited period, capped amount)?
Note that SBA lenders also typically require a personal guarantee from the borrower. You’ll likely be personally guaranteeing both the SBA loan and the lease — understand the full extent of your personal exposure.
Use Restrictions and Exclusivity
- Permitted use: Does the lease restrict how the space can be used? Make sure the business’s current operations — and any changes you plan to make — are permitted.
- Exclusivity clauses: In multi-tenant properties, does the lease grant exclusive rights to operate a certain type of business? Conversely, could the landlord lease adjacent space to a competitor?
- Signage rights: Review provisions regarding exterior signage, monument signs, or directory listings.
Owned Property: Inspection and Due Diligence Requirements
When the business owns its real estate — or when you’re purchasing the real estate as part of the acquisition — due diligence becomes more extensive.
Environmental Due Diligence
Environmental contamination is one of the most serious risks in any real estate transaction. Under federal environmental laws, the current property owner can be held liable for contamination — even if they didn’t cause it. SBA lenders require environmental due diligence for virtually all transactions involving real estate.
Phase I Environmental Site Assessment (ESA)
A Phase I ESA is the standard first step in environmental due diligence. It includes:
- Historical review: Research into past uses of the property using historical records, aerial photographs, city directories, and databases.
- Site inspection: A physical visit to identify potential environmental concerns (storage tanks, chemical storage, staining, distressed vegetation).
- Regulatory database review: Search of federal, state, and local environmental databases for the property and nearby sites.
- Interviews: Conversations with current and past owners, operators, and local officials.
A Phase I ESA typically costs $2,000–$4,000 and takes 2–4 weeks to complete. SBA lenders require a Phase I ESA for any loan involving real estate collateral.
Phase II Environmental Site Assessment
If the Phase I ESA identifies potential contamination concerns (called “recognized environmental conditions” or RECs), a Phase II ESA may be required. This involves actual testing — soil samples, groundwater monitoring wells, or vapor intrusion testing — to determine whether contamination exists and to what extent.
Phase II assessments are significantly more expensive ($5,000–$25,000+) and can add weeks or months to the closing timeline. If a Phase II reveals contamination, remediation costs can range from tens of thousands to millions of dollars.
Industries with higher environmental risk: Gas stations, dry cleaners, auto repair shops, manufacturing facilities, printing operations, and any business that uses or stores chemicals or petroleum products.
Structural and Physical Inspection
Just like buying a home, buying commercial property requires a thorough physical inspection:
- Structural integrity: Foundation, roof, walls, and load-bearing elements
- Mechanical systems: HVAC, plumbing, electrical, fire suppression
- Roof condition: Age, remaining useful life, evidence of leaks or repairs
- ADA compliance: Accessibility requirements for commercial properties
- Building code compliance: Current code violations or non-conforming conditions
- Deferred maintenance: Repairs or replacements that the current owner has postponed
Hire a qualified commercial property inspector. The cost ($1,000–$3,000 depending on property size) is negligible compared to the cost of discovering major issues after closing.
Zoning and Land Use
Verify that the property is properly zoned for the business’s current use — and for any changes you plan to make:
- Current zoning designation: Does it permit the business’s operations?
- Non-conforming use: Is the business operating under a “grandfathered” non-conforming use? If so, what triggers loss of that status?
- Conditional use permits or variances: Are any special permits required? Are they transferable?
- Future zoning changes: Are there pending rezoning proposals that could affect the property?
- Parking requirements: Does the property meet current parking requirements for the business’s use?
SBA Requirements for Real Estate in Business Acquisitions
SBA lenders have specific requirements when real estate is part of an acquisition. Understanding these upfront prevents delays and surprises.
Appraisal Requirements
The SBA requires an independent appraisal for any real estate collateral. Key requirements:
- The appraisal must be performed by a state-certified or licensed appraiser
- It must comply with the Uniform Standards of Professional Appraisal Practice (USPAP)
- For SBA 7(a) loans, the appraisal must not be more than 12 months old at closing
- The appraised value — not the purchase price — determines the loan amount for the real estate component
- Typical cost: $2,500–$5,000 for commercial property, depending on size and complexity
Environmental Requirements
As noted above, a Phase I ESA is required for virtually all SBA transactions involving real estate. The SBA also requires:
- The environmental assessment must meet ASTM E1527-21 standards
- If the Phase I identifies RECs, a Phase II may be required before the lender will proceed
- The lender may require environmental insurance in some cases
- Properties in flood zones require flood insurance
Title Insurance
The SBA lender will require a title insurance policy protecting their lien position. The title search should reveal:
- Clear ownership by the seller
- Any existing mortgages, liens, or encumbrances
- Easements, restrictions, or covenants affecting the property
- Property tax status (current or delinquent)
Insurance Requirements
SBA lenders require specific insurance coverage for real estate collateral:
- Property insurance covering the replacement value of improvements
- General liability insurance
- Flood insurance (if in a FEMA-designated flood zone)
- Additional coverage may be required based on the property type and location
Strategic Decision: Include Real Estate in the Deal or Lease Separately?
When the seller owns the real estate, you have a strategic choice: buy the real estate as part of the acquisition or lease it from the seller (or a third party). Each approach has pros and cons.
Buying the Real Estate
Advantages:
- You build equity in the property as you pay down the mortgage
- You control the property — no risk of lease non-renewal or unfavorable terms
- Real estate often appreciates over time, adding to your net worth
- You may qualify for longer SBA loan terms (up to 25 years for real estate)
- Rent payments go to yourself (through the business) rather than a landlord
Disadvantages:
- Higher total purchase price means a larger loan and more cash required at closing
- You’re responsible for all property maintenance, repairs, and capital improvements
- Property ownership ties up capital that could be used for business growth
- Environmental and structural risks transfer to you
- Less flexibility to relocate if the business needs change
Leasing from the Seller
Advantages:
- Lower acquisition cost and smaller loan
- Less cash required at closing
- Property maintenance responsibility stays with the landlord (depending on lease type)
- More flexibility to relocate in the future
Disadvantages:
- You’re dependent on the seller-landlord for lease renewal and terms
- Rent payments build the seller’s equity, not yours
- Potential conflicts of interest between you (as tenant) and the seller (as landlord)
- SBA lenders may view the arrangement with scrutiny if terms aren’t at market rate
Key consideration: If you lease from the seller, the SBA requires that the lease be at fair market value and at arm’s length terms. Below-market rent can raise red flags with lenders and the SBA.
The SBA 504 Option for Real Estate
If you’re acquiring a business that includes significant real estate, the SBA 504 loan program may offer advantages over a standard SBA 7(a) loan:
How the 504 Program Works
The SBA 504 program is specifically designed for major fixed-asset purchases, including real estate. The typical structure:
- 50%: Conventional bank loan (first lien position)
- 40%: SBA 504 debenture through a Certified Development Company (CDC) (second lien position)
- 10%: Borrower’s equity injection
Advantages of SBA 504 for Real Estate
- Lower down payment: Only 10% equity injection required (compared to 20%–30% for conventional commercial mortgages)
- Fixed interest rates: The CDC portion carries a fixed rate for the full term, protecting you from interest rate increases
- Longer terms: Up to 20 years for real estate (25 years in some cases)
- Lower monthly payments: The combination of low rates and long terms results in lower debt service
- No balloon payments: The loan is fully amortizing — no surprises at the end of the term
504 vs. 7(a) for Acquisitions with Real Estate
In some acquisitions, a combination approach works best: an SBA 7(a) loan for the business acquisition and an SBA 504 loan for the real estate component. This can optimize your financing by leveraging the strengths of each program. However, this structure adds complexity and may not be available from all lenders.
GoSBA’s team can help you evaluate whether a 7(a), 504, or combination structure is optimal for your specific deal.
Real Estate Due Diligence Checklist
Use this checklist to ensure you’ve covered all the bases:
For Leased Properties
- ☐ Full lease review by your attorney
- ☐ Assignment rights confirmed
- ☐ Remaining term plus renewals ≥ loan term
- ☐ Rent escalation schedule documented
- ☐ NNN/CAM obligations quantified
- ☐ Personal guarantee terms understood
- ☐ Landlord contacted regarding assignment consent
- ☐ Permitted use verified for your operations
- ☐ Signage rights confirmed
For Owned Properties
- ☐ Phase I Environmental Site Assessment completed
- ☐ Phase II ESA completed (if required by Phase I findings)
- ☐ Commercial property inspection completed
- ☐ Appraisal ordered by lender
- ☐ Title search and title insurance arranged
- ☐ Zoning and land use verified
- ☐ Survey reviewed (if available)
- ☐ Property insurance quotes obtained
- ☐ Flood zone status confirmed
- ☐ Property tax status verified (current, no delinquencies)
- ☐ Utility costs reviewed (12-month history)
- ☐ Capital expenditure needs identified and budgeted
How GoSBA Navigates Real Estate Complexity in SBA Deals
Real estate adds layers of complexity to any SBA acquisition. At GoSBA, we handle these complexities every day:
- 50+ lender network: Different lenders have different appetites for deals involving real estate. Some specialize in 504 loans; others prefer to keep everything under a 7(a). We match your deal with the right lender.
- $320M+ funded in 2025: We’ve navigated real estate DD issues across hundreds of transactions — environmental concerns, lease negotiations, appraisal disputes, and more.
- Free business plan and financial projections (a $2,500–$5,000 value): Our financial projections incorporate real estate costs — whether you’re buying or leasing — to ensure your deal cash-flows properly from Day 1.
- Completely free service: Our loan brokerage services cost you nothing. We’re compensated by lenders, so you get expert real estate guidance without adding to your closing costs.
- SBA program expertise: We help you evaluate 7(a) vs. 504 vs. combination structures to optimize your financing for deals that include real estate.
Don’t Let Real Estate Issues Derail Your Acquisition
Real estate due diligence isn’t glamorous, but it’s essential. A contaminated property, an unassignable lease, or an inadequate lease term can kill an otherwise perfect deal. By addressing real estate issues early and thoroughly, you protect your investment and keep your closing on track.
Acquiring a business that involves real estate? Contact GoSBA today for a free consultation. We’ll help you navigate the real estate complexities, secure the right SBA financing, and close your deal with confidence — all at no cost to you.
