Discussing SBA 504 Commercial Real Estate Loans
Finding Creative ways to Keep Business Moving in a Tough Economy
EO: Welcome to another update on the market with Net Lease Commercial Advisory. Again, I’m Eric Odum, Principal at Net Lease Commercial Advisory and today, we have with us Scott Jacobsen who is with – why don’t you introduce yourself…
SJ: NorthStar Bank, Commercial Banking Manager
EO: Scott has been a banker in this area for ….gosh Scott, it’s probably been 22, 23 years now?
SJ: At least…
EO: So, you’ve been around a little bit and he (Scott) presented me the other day with an opportunity I thought was very interesting in the Tampa Commercial Real Estate market in terms of the financing. Of course, there’s been a lot of discussion about illiquidity in the market. We have our feelings about illiquidity. It really has less to do, in my opinion, with the banks and probably more to do with the borrowers. But, we’re going to talk about a program today that can help on some of those illiquidity issues. So let’s talk about it. It’s the Small Business Administration’s 504 Loan Program. Why is this program a program that people should pay attention to, Scott?
SJ: The 504 Program’s been around for a long time, as long as I can remember and there are some key components to it which if you don’t know it, is very attractive — One being the 10% equity requirement for the borrower, where most banks typically will require anywhere from 20 to 30% equity.
EO: That has been going up recently (on traditional commercial loans), right?
SJ: Yes, that’s been going up – banks are requiring more equity (on traditional loans). Everybody knows rates are so low today and the SBA rates are very low as well, and the way the program is set up, the SBA takes 50% of the loan amount and actually fixes in a rate, and that rate is in the low 5’s (percent), and they lock that in for 20 years. So you get a 20 year fixed rate on the SBA’s portion of the loan, which is half of it, and 40% portion of the loan which the bank holds is locked in anywhere from 5 to 10 years.
EO: So you still have a balloon, its just there’s a smaller portion of the amount that’s going to be subject to the balloon. The government portion is a 20 year fixed loan which is pretty attractive. I know dealing with a lot of small business owners when they’re purchasing their property…physicians and lawyers too, their thought is that ‘gosh in 5 years, I don’t know what the interest rate, I want to be a little bit more sure about what my payments are going to be’ and this seems like a really good way to stabilize their payments over that period of time and not worry about the balloon, the adjustment, interest rate, that sort of thing.
EO: Let’s talk a little bit about who you think might be suited for this type of a product.
SJ: It can be and For-Profit business that…we’re going to look at underwriting this credit to typical standards, which would be: a business has to be performing well, even in this tough environment, has to be in business for at least 2 or 3 years, has to have a little equity in their balance sheet, and you know, doctors, professionals, manufacturing distributors, they all qualify. Where this program is really helpful, is if there’s something with the credit that just doesn’t quite get the approval in a traditional manner; the SBA program can push it over the top, because the bank actually at the end of the day, the bank is in at 40% LTV and the SBA is in for 50% so the capital or the equity so that the bank’s first position is very well secured.
EO: So the SBA is essentially taking away some of the risk of the bank which makes it a more attractive deal for the bank to go ahead and make the loan.
SJ: Yes, absolutely.
EO: I think you talked about there was a chiropractor you had worked with…
SJ: Yes, we had a case here just recently….. we had a Chiropractor that owns a half dozen locations, sorry, leases a half dozen locations throughout Tampa Bay and felt like this was a great time to negotiate those leases to purchase and was a little concerned about putting 20 to 30% equity into the traditional financing and thought this SBA program would be a good avenue for him to acquire those offices, lock in a fixed rate for 20 years for half of it and take some of the risk out of the balloon which you mentioned could sometimes give heartburn to clients when they know there’s going to be a balloon after 5 or 10 years.
EO: Great! So let’s talk about in terms of size…can you do this with $10k, can it be $50mil, what are the size requirements?
SJ: Minimum size is $125k and maximum is $10mil. So it’s pretty wide – it covers most transactions.
EO: Most transactions. In Tampa, your typical physician practice was less than $1.5mil. Certainly more than the $125k – it’s going to be right there. I don’t want to make this sound like it’s only for physicians, because of course, you guys have had experience with manufacturing companies and distributors, but it seems to me that the professional practices tend to gravitate toward this more. Maybe that’s because they tend to be more balanced in the Tampa Bay area toward the professional industries.
SJ: Well particularly if you’re a physician or anybody for that matter – if you’re going to be in your building and be there a long term – one of the requirements is that you have to occupy at least 51% of the space so it’s an owner occupied facility that we’re talking about. But if you’re going to be there for a while and if you’re going to pay somebody, you might as well pay yourself.
EO: It’s not a speculative investment then, this is something for owner occupied’s, running their business, has a sound business, has an established business, so that is what this loan program is really all about. Let’s talk about some of the folks that perhaps can’t get this loan, because we talked about who can. Let’s talk about some who can’t.
SJ: The ones that jump out at you: If you’re a not-for-profit corporation, you do not qualify, and if it’s real speculative then you wouldn’t qualify either. Those are really the two big ones, and there are a few other ones: gambling establishments. You know! .….the obvious ones that jump out at you.
EO: Ok, very good. So, how does this compare with the fees to traditional bank financing?
SJ: The fees…… the SBA’s got some programs now that they’re reducing fees to make it more attractive for borrowers. There is a little over a 2% fee on the SBA portion to run it through and so that has to be an embedded cost, so that at the end of the day, if the SBA’s running 20 years on their fixed rate portion at around 5.25% then throw another 2% of closing costs, you’re going to be somewhere in the 7.5% range all in which is still very, very attractive.
EO: Then you throw in the balloon-free government portion, the SBA portion of it and it becomes pretty attractive. So you have the origination fees which are a down side, but then of course you get extended lower rates through the term….. even with the fees included, it’s relatively inexpensive debt.
SJ: Now, you compare that – it you walked into a bank today and asked for a traditional owner occupied mortgage, putting 20 or 30% down, and look at a 5 year balloon, our rates would be somewhere in that 6.5% range fixed for 5 years, and we’re going to charge anywhere from .5pt to 1pt so your cost is somewhere in that 7 to 7.5% range anyway for 5 years, where you can lock in the SBA portion for almost the same time but for 20 years.
EO: Great. Terrific. Well, why don’t we just shift a little bit here and summarize. In terms of why we want to do this or why we at least want to consider this is
- the SBA’s guaranteeing it, so you’re able to be perhaps a little bit more aggressive on underwriting than you guys typically would be.
- It’s only 10% down and the government portion of the debt is for 20 years amortization with no balloon.
So, those are certainly the benefits to it. People that we’re looking for (the folks you want to try to lend to) they’re going to be anybody with a track record, purchasing real estate, between $125k and $10mil. Is there anything else that I’m leaving out here in terms of summarizing this program?
SJ: We haven’t really talked about – but there is the opportunity of throwing some of the equipment into the acquisition purchase and roll that into the loan amount. So, if there’s a capital intensive business or any business for that matter, we can roll that cost into the SBA as well as a significant portion of the fees can be rolled into the SBA loan as well.
EO: Oh, that’s nice.
SJ: So, there’s some great creative ways to make this worth while, and if you’re a business owner that your in a lease and you have the option to buy out that lease, we’ve seen a lot of activity recently as people recognize it’s a good time to be a value shopper for real estate and if you can lock in these rates for long term, it’s a good time to move on it.
EO: Good point. Scott, I’d like to thank you again for taking the time today to talk to us, and hopefully you guys got something out of it. If anybody wants to get in touch with you Scott, how would they reach you on this program?
SJ: Call me at 813-549-5030, or you can email me.
EO: NorthStar Bank is located in the Beer Can building in downtown Tampa. Again, we appreciate you joining us today and hopefully you got something out of it. Feel free to contact Scott if you’d like to have more info on the 504 SBA Lending Program. Thank you again, Scott.
SJ: Thank you, Eric.
