Discover the “Forgotten” SBA Program deserve another Look
Much has been written on these pages within the past two years a few little understood and even less used commercial land loan program called the 504. As our lending firm was the primary and remains the sole nationwide commercial lender to exclusively specialise in only this loan product, I’d wish to succinctly put to rest a number of the more common misconceptions about this terrific loan product. instead of waste anymore ink, let’s get right to issue at hand . . .
Who Uses It?
The 504 loan is for commercial property owner-users. it’s not an investment land loan product intrinsically . Borrowers of 504 loans must occupy a minimum of an easy majority (or no but 51%) of the commercial property within subsequent year so as to qualify. Two operating companies can close to make an Eligible Passive Concern (EPC) (otherwise referred to as a true Estate company , typically as an LLC or LP), however, to require title to the commercial property. In other words, a 504 loan doesn’t need to be only one small business owner purchasing his commercial property. It might be a physician and an accountant each utilizing 3,000 square feet during a 10,000 square feet office block (at 6,000 total square feet in their LLC, they might occupy 60% and be eligible) for instance . Additionally, a minimum of 51% of the entire ownership of the Operating company(ies) and EPC must be comprised of U.S. citizens or resident legal aliens (those considered to be Legal Permanent Residents) to qualify.
There are not any revenue restrictions or ceilings for 504 loans, but there are three financial eligibility standards unique to them: operating company(ies’) tangible business net worth cannot exceed $7 million; operating company(ies’) net cannot average quite $2.5 million during the previous two calendar years; and therefore the guarantors/principals’ personal, non-retirement, unencumbered quick assets cannot exceed the proposed project size. These three criteria usually don’t disqualify the standard , privately-held small to mid-sized business owner; only absolutely the largest ones get tripped-up on these. Last financial year (October 1, 2004 to September 30, 2005), nearly 8,000 business owners used 504 loans for over $11 billion in total project costs representing a recent five-year rate of growth within the program of twenty-two year-over-year.
Why Use It?
These loans are structured with a standard mortgage (or first trust-deed) for 50 percent of the entire project costs (inclusive of: land and existing building; hard construction/renovation costs; furniture, fixtures and equipment [FF&E]; soft costs; and shutting costs) combined with a government-guaranteed bond for 40 percent. The remaining 10 percent is that the borrowers’ equity and is typically a 3rd to half the maximum amount as traditional lenders require. This lower equity requirement lowers the danger for little business owners as against lowering a lender’s risk profile with more capital injected into the project like with ordinary commercial lending. It also allows the tiny business owner to raised utilize their hard-earned capital, while still getting all of the wealth-creating benefits commercial property ownership provides.
Unlike most full service bank deals, these loans are meant to finance total project costs as against a percentage of the appraised value or price , whichever is a smaller amount . the primary mortgage (or trust-deed) is usually a totally amortizing, 25-year term at market rates, while the mortgage (or trust-deed) may be a 20-year term, but with the rate of interest fixed for the whole time at below-market rates. The mortgage (trust-deed) on 504 loans is guaranteed by the U.S. Small Business Administration (SBA) and is, contrary to popular belief about SBA loan programs, the most cost effective money available for typical small business owners. for many of the past two years, the SBA bond rate hovered near six percent fixed for 20 years, which is a fantastic deal for any small to mid-sized business owner and really tough to beat. Not only do these loans provide better income for borrowers (by borrowing at better rates and terms), but they also provide the very best cash-on-cash return available within the commercial-mortgage industry which may be a financial metric employed by most successful land investors. Furthermore, these loans are assumable should borrowers plan to sell their property within the future, but a far better strategy for many small business owners would be to sell their operating company while keeping their EPC and cashing rent checks long into their retirement.
Why you’ll Not Know Much about These Loans?
Many bankers and brokers do not like to supply 504’s because they fundamentally are smaller loan amounts for the bank (typically only 50% first mortgages or trust-deeds versus the common 80%), which suggests a banker has got to work that much harder to usher in more assets and therefore the smaller loan amounts also hit the standard business loan officer right within the pocketbook. they might rather discuss the SBA’s more notorious 7(a) loan program, which features a well-established, if not egregiously well-paying secondary market (due to Prime-based, floating rate pricing) already in situ , when the difficulty of low down-payment commercial loans comes up. once you couple those two reasons with the very fact that these 504 loans take more effort and skill only on the a part of the lender, it’s no wonder this loan product has only recently began to erupt within the marketplace.
So what are Some Common questions on These Loans?
Isn’t There plenty of Paperwork Involved?
This was certainly the case years ago, but it’s no more. With the arrival of more and more specialty lenders and therefore the recent specialise in streamlining the SBA application process, 504 loans are not any more involved than most ordinary commercial loans. While the documentation is restricted and detailed, most small business owners are ably organized and ready when the choice is to pay two to 3 points higher in interest rates with no documentation or stated income commercial loans.
Aren’t There Extra Fees Involved?
When all closing costs are considered, 504 loans usually average about 25 to 50 basis points more in total loan fees on a mean sized transaction. With stronger borrowers (i.e. better debt service coverage ratios [DSCR], higher personal liquidity, and/or better personal credit scores), these fees can usually be negotiated lower. Most small business owners utilizing 504 loans are willing to pay slightly higher fees, however, so as to receive longer-term, below-market fixed interest rates on nearly half their deal, while receiving the very best cash-on-cash return from their property. this is often precisely the reason my business partner and that i chose a 504 loan when many alternatives were available to us. That’s right – we even have a 504 loan and are within the shoes of 504 loan borrowers, so I even have first-hand experience of using the loan product that we provide .
Don’t These Loans Take 3 or 4 Months to Close?
This is another old relic of the past regarding these SBA loans. Our quickest 504 loan so far took only 35 days from the primary call to the closing table, and therefore the commercial appraiser ate-up most of these days while we waited. We’ve done countless others in much but the standard 60 day commercial land contract. If a lender claims they have nearly four months to fund a 504 loan, then perhaps you ought to look elsewhere. Twenty-four to forty-eight hour pre-approvals and 4 or five-day commitments are getting the norm with most specialized SBA lenders.
Aren’t These Loans for Start-ups or Low DSCR Borrowers?
Plenty of 504 loans are approved with start-up borrowers and/or borrowers that do not have DSCR’s greater than 1.25 times. While it’s true that the majority 504 loans are for more credit-worthy (usually bankable) borrowers, this is often not a necessary condition. Frequently, 504 loan borrowers with many experience during a given industry, but no actual ownership experience, will have a neater time securing a 504 loan than a standard loan . Projections-based deals and franchised deals are often great candidates for 504 loans when the project involves commercial property. There are other SBA loan programs which will be a far better fit pure start-ups, as 504 loans don’t leave the financing of capital , but those other SBA loans can often be utilized in conjunction with SBA 504 loans.
Doesn’t a Borrower need to Pledge their House as Collateral?
Only some lenders require this for 504 loans, and it’s increasingly rare. Other SBA loans, on the opposite hand, must be “fully collateralized” so as to take care of their government-guarantee which is where this generalization comes from. Most 504 loans only secure the commercial property and/or equipment that are financed as a part of the 504 loan project.
What if a Borrower features a “Checkered Past”?
Misdemeanors and/or felonies aren’t in and of themselves, reasons to disqualify someone from getting a 504 loan. there’s another process that always lengthens the time to closing, but the SBA usually approves borrowers with misdemeanors or borrowers with felonies that occurred within the distant past. Defaulting on previous government-guaranteed financing, however, will preclude someone from securing a 504 loan or the other SBA loan. Personal bankruptcies that occurred quite seven years ago usually won’t prevent a 504 authorization , assuming the present-day underwriting variables look promising, but more current bankruptcies are examined subjectively and regularly won’t be approved.
How does one determine who to involve a 504 Loan?
If you visit a lender’s website to try to to some due diligence on them, confirm they a minimum of list and/or mention 504 loans, as a way by which you would possibly gauge their competency with these loans. Any lender can say they are doing 504 loans, but it’s much better to figure with people who can demonstrate their past experiences with the merchandise , also as detail their commitment thereto on a go-forward basis. Like most things delivered better by specialists, it’s not usually an issue of if a daily lender can provide a 504 loan; it is an issue of how well they will provide it. Choose wisely.
Christopher Hurn is President of Mercantile Commercial Capital (MCC), the nation’s leading 90-percent loan-to-cost business loan provider. He was recently named 2006 Banker of the Year by his industry’s only trade association, the Marketing Guru of the Year by Coleman Publishing, and therefore the SBA’s Financial Services Champion of the Year for Florida and for the twelve-state Southeast region.