The Latest Skinny on SBA Loans and SBA Lenders
A buddy of mine in the SBA loan business called me today, and we chatted about a number of very important changes to the SBA loan program. The Federal government is trying to get credit flowing again to the economy, so they have made SBA loans much more attractive.
First of all, until the end of the year or until money runs out, the SBA is now waiving its guarantee fees (points) on 7a loans and on the debenture portion (the second mortgage portion) of 504 loans. You will recall that the 504 loan program involves a conventional first mortgage loan from a bank up to 50% loan-to-value and a piggy-back second mortgage loan from a certified development corporation up to 90% loan-to-value.
The second thing the Federal government has done to make SBA lending more attractive is that the SBA has increased its guarantee of SBA loans from 75% of the loan amount to 90% of the loan amount. This should encourage SBA lenders to start approving more deals.
The third incentive is the SBA has effectively extended the repayment term of its loans. In the past, the real estate portion of an SBA loan had a term of 25 years, but that portion of the loan used to finance the acquisition of machinery or equipment had a term of just 10 years. If the borrower also wanted some working capital, the repayment of this portion of the loan had to be amortized over just 7 years. A weighted-average loan term was used. Now, if more than 50% of the loan is being used to acquire real estate, the entire SBA loan can be amortized over 25 years.
The SBA also announced two weeks ago that 504 loans can now be used for refinances, as opposed to just the purchase, of real estate and/or equipment. The announcement was somewhat unclear, however, and further clarification is expected from the SBA.
In general, the volume of SBA lending is way down. CIT Financial, the largest SBA lender in the country, is back in the market. CIT is now a national bank with one branch in Utah. More importantly, CIT, as a bank, now has access to the discount window at the Fed.
Banco Popular, the second largest SBA lender, has severely trimmed its SBA lending infrastructure. While the bank is still in the market for SBA loans, their SBA loan volume is down by more than half. So is the SBA loan volume of Bank of America and JP Morgan Chase.
Former giants in the SBA lending market - Temecula Valley Bank, UPS Financial, Small Business Loan Source, and Business Lenders - have all closed down their SBA lending divisions.
The secondary market for the conventional portions of 504 loans has completely dried up. These attractive first mortgage loans used to sell for 6 to 15 point premiums because of the implicit guarantee of having the SBA in a second mortgage position. The good news is that the Obama administration has earmarked a sizable amount of money aimed at buying up these 504 first mortgages in hopes of jump-starting this market.
The second mortgage portion of 504 loans are being written at a fixed rate of 5.67% today (3/31/09) for 20 years. The underlying first mortgages are typically written at an interest rate that is 1% to 1.5% higher than the 504 second mortgages. Wait a minute? Higher than the second mortgage? Yes, because unlike the second mortgages, these first mortgages are not credit-enhanced by the SBA.
I learned today that SBA 7a loans have a modest prepayment penalty during the first three years. It's a declining prepayment penalty of 5% in year one, 3% in year two, 1% in year three, and no prepayment penalty thereafter.
The SBA 504 program has a stiffer prepayment penalty. The bank making the underlying first mortgage is not allowed to charge a prepayment penalty. The second mortgage, however, has quite a stiff prepayment penalty - 10% in year 1, 9% in year 2, 8% in year 3, and so on. There is no prepayment penalty on the second mortgage after 10 years.
Gas station loans are still not being guaranteed by the SBA. (Blackburne & Brown is happy to finance gas stations right now.)
While the SBA will still guarantee hotel loans, very few SBA hotel loans are being made by SBA lenders. SBA lenders are worried about declining trends. In other words, they are comparing this year's revenues to last year's revenue - and the trend is usually too negative. The expression - declining trends - is the hot, new buzzword in SBA lending.
If an SBA lender were to finance a hotel today, it would probably be a hotel highly visible from a busy highway. Many more business travelers are driving rather than flying because of the recession. The hotel lucky enough to get SBA financing would probably be a limited service hotel, typically without a restaurant and with far lower nightly rates. It would probably have less than 100 units.
The more expensive full service hotels, typically close to airports, are suffering far worse than the cheaper limited service hotels off of busy highways. These full service hotels would also require large loans, and lenders are loathe to make large hotel loans today.
Finally, if an SBA lender were to finance a hotel today, it would probably be a hotel with interior corridors. Older hotels and motels usually have exterior corridors, and women traveling on business today are likely to avoid such hotels due to security concerns.
The maximum SBA 7a loan is $2 million. Therefore, if a borrower wanted more than $2 million or if he wanted a fixed rate loan, the SBA 504 program would be the right program.
C-Loans recently received a loan that otherwise would have been perfect for the SBA; however, the borrower was a non-profit organization. The SBA will not guarantee loans to non-profit organizations.
Conventional commercial real estate lending is down by more than 80% from early last year. SBA lending is also down by 60% or more. The Federal government's efforts to increase SBA lending is a noble effort. Let's hope it works.
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