SBA Owner-Occupied Office Building Feasibility Study

A professional firm buying a 10,000 square foot building in a county seat does not compete in the office market the headlines describe. CoStar's Office National Report dated October 4, 2026 puts 1 and 2 Star vacancy at 6.2 percent and 3 Star at 12.3 percent against 20.3 percent for 4 and 5 Star buildings, and puts small markets like Lebanon, Kenosha and Hickory at 1.7 to 2.4 percent against gateways near 20. Part of that gap is real and part of it is arithmetic, because CoStar counts owner-occupied buildings as occupied stock and the firm's own space is occupied by definition. The leased share of the same building competes in the multi-tenant market where broker-measured vacancy sits near 20 percent. An SBA office feasibility study from MMCG Invest underwrites those two populations separately, which is the only way the leased share's contribution to debt service survives a credit committee.

The rules are codified at 13 CFR 120.131 and are unchanged under SOP 50 10 8.1.

For the acquisition, renovation or reconstruction of an existing building, the borrower may permanently lease up to 49 percent of the rentable property if it permanently occupies and uses no less than 51 percent. 13 CFR 120.131(b).

For new construction, the borrower must permanently occupy and use no less than 60 percent of the rentable property, may permanently lease up to 20 percent to one or more tenants, and must plan to occupy some of the remaining space within three years and all of it within ten. 13 CFR 120.131(a).

Where an Eligible Passive Company holds the building, the Operating Company or Operating Companies together must meet the same occupancy tests. 13 CFR 120.131. The EPC may use loan proceeds only to acquire, lease, improve or renovate property that it leases to the Operating Company, under a written lease with a remaining term at least equal to the loan term, with the Operating Company as guarantor or co-borrower and every 20 percent owner of either company guaranteeing. 13 CFR 120.111. Loan proceeds may not be used to improve or renovate space that will be leased to third parties; that limit is stated in the SOP and the study applies it to the sources and uses.

Three corrections to pages that rank for these searches. New construction does not require 80 percent occupancy within two years; the rule is 60 percent, then some of the remainder within three years and all within ten. The 51 percent test is "no less than 51 percent," not "more than 51 percent." And SBA 504 cannot finance investment property, because the occupancy rules apply to every 504 real estate loan and passive real estate businesses are ineligible under 13 CFR 120.110(c).

No. 13 CFR 120.160(b) states that SBA may require professional appraisals, a survey or a feasibility study. The study is discretionary at the regulatory level, and pages that describe it as mandatory under SOP 50 10 8.1 for office overstate the rule. Lenders and Certified Development Companies order one when repayment depends on projections rather than history: a start-up firm, in operation one year or less under the SOP's definition; a new business in operation two years or less; new construction; a change of use; or a building whose leased share has to absorb before coverage is reached. Under SOP 50 10 8.1, loans numbered on or after October 1, 2026 that involve the acquisition of a business are underwritten at 1.25x DSCR on historical cash flow under Appendix 15 with projections not relied on, as lender summaries report and as MMCG confirms against the SOP text before citing. A pure owner-occupied office purchase with no business acquisition is outside Appendix 15 and is underwritten on the general 7(a) or 504 cash flow test, where projections and the study behind them are what the lender reads.

The building is split into the share the firm occupies and the share it leases, and each is underwritten against its own population.

The owner-occupied share is underwritten on the Operating Company's cash flow. The firm's EBITDA after owner compensation, plus the rent it currently pays and will stop paying once it owns the building, less the operating cost of the space it occupies, is the cash available for debt service from that share. There is no vacancy on this share, but the firm's revenue, retention and succession are stressed, because a law or accounting practice's cash flow is the collateral's income.

The leased share is underwritten as multi-tenant space. Face rent is taken from the subject's class and market, and CoStar's October 2026 report puts national 1 and 2 Star asking rent at $27.30 per square foot and 3 Star at $32.81. Free rent is spread across the lease term to reach net effective rent; CoStar reports that one month free per year of term is now common, so a five-year lease loses 5 of 60 months, or about 8.3 percent of face rent. Vacancy and credit loss is applied at the multi-tenant rate for the class and market, not at CoStar's blended figure, because the blended figure includes buildings like the subject's own occupied share. Tenant improvement and leasing commission reserves are taken at each rollover, and since CoStar reports that more than 80 percent of sub-10,000 square foot leases in institutional buildings since 2024 have been spec suites on 3 to 7 year terms, the rollover interval is short. A lease rollover map flags any year in which more than a third of leased income expires inside the loan term.

The lender then sees DSCR by year for the combined cash flow, the leased share's break-even occupancy, and the DSCR with the leased share at the market vacancy, at a stressed vacancy and fully vacant. Loans where half or more of repayment comes from third-party rental income are treated as commercial real estate under the interagency guidance, as the OCC's SBA 504 guidance summarizes it, so the study also states the share of repayment that comes from third-party rent.

The figures below are illustrative assumptions chosen to show the arithmetic, not a case study and not market data. Interest rates and the firm's financials are assumed.

Assume an existing 12,000 square foot 2 Star building in a secondary market bought for $2,280,000, which is $190 per square foot against CoStar's 1 and 2 Star national market price of $193.54, plus $420,000 of improvements to the firm's space and closing costs, for a $2,700,000 project. A 504 structure of a $1,350,000 bank first lien at an assumed 7.25 percent over 25 years, a $1,080,000 CDC debenture at an assumed 6.0 percent effective over 25 years, and $270,000 of equity gives annual debt service of about $200,600. The firm occupies 7,200 square feet, 60 percent, and leases 4,800 square feet.

Combined cash available for debt service is $250,506 against $200,600 of debt service, a DSCR of 1.25x. With the leased share at 25 percent vacancy the DSCR falls to about 1.17x. With the leased share fully vacant and still carrying its operating cost, the firm's cash alone covers about 0.76x, which is the number that tells a lender how much of the loan the practice itself can carry. The leased share's break-even occupancy for 1.0x combined coverage is about 46 percent at net effective rent, and for 1.15x it is about 72 percent. A study that had applied a blended 6.2 percent vacancy to the whole building would have shown none of this.

SOP 50 10 8.1 with Technical Updates applies to loans receiving an SBA loan number on or after October 1, 2026 (Information Notice 5000-880695 of August 14, 2026, superseded by Information Notice 5000-882227 of September 25, 2026). The points below are reported from lender and practitioner summaries and are confirmed against SBA's text before a study cites them.

Where the office purchase is part of a business acquisition, an owner buyout or an ESOP transaction, Appendix 15 sets a 1.25x DSCR on the last fiscal year or the average of the last two, with a rent add-back where owner-occupied real estate is acquired, and projections may not be relied on. Business expansions stay at 1.15x. 7(a) Small Loans up to $350,000 carry a 1.10x DSCR on historical information or permitted projections. The 504 borrower contribution is 10 percent as standard, 15 percent for a new business or special purpose property, and 20 percent where both apply. Start-up equity injection for 7(a) is reported unchanged at 10 percent of total project cost.

The study tests equity sufficiency against the injection the structure requires and shows the sources: cash, seller carry where permitted, and the treatment of any existing debt on the business. The credit elsewhere certification remains the lender's, documented in the credit memo under the SOP's paragraphs, and the study supplies the market and cash flow evidence the memo cites.

A signed report with the exhibit workbook: segment placement by class, size and market; the owner-occupied share's cash flow with the rent add-back; the leased share's competitive set, lease comparables, net effective rent, vacancy and reserves; the sources and uses with the occupancy split and the limit on proceeds for third-party space; DSCR by year; break-even occupancy for the leased share; sensitivities; the lease rollover map; and the conditions under which the determination holds. Studies start at $4,900, fixed fee, delivered in 9 to 16 business days with rush from 5.

The method is set out in full in MMCG's feasibility study methodology.

Michal Mohelsky, J.D., FMVA, Practicing Affiliate of the Appraisal Institute, Principal in charge. MMCG Invest, LLC, 27 Maiden Lane, Suite 625, San Francisco, CA 94108. (628) 225-1110. michal@mmcginvest.com.

Sources: 13 CFR 120.110, 120.111, 120.131 and 120.160; SBA Information Notices 5000-880695 and 5000-882227; SBA document page for SOP 50 10 (Version 8.1 with Technical Updates, effective October 1, 2026); CoStar Office National Report, October 4, 2026; Cushman and Wakefield, U.S. National Office MarketBeat, Q1 2026; OCC, Responses to On-Line Questions from SBA 504 Teleseminar. SOP 50 10 8.1 DSCR, equity injection and start-up definitions are reported from lender summaries pending confirmation against SBA's text.