I Had a Long Conversation With a Veteran SBA Originator
I have a buddy who has been originating SBA loans exclusively for over a decade. Yesterday we spoke about SBA lending for almost 40 minutes. Here are some of the highlights:
SBA lenders rely on selling the insured portion of their SBA 7a loans to bond investors in order to get their principal back with which to make new loans. During the nadir (lowest point) of the financial crisis last year, these bond buyers completely disappeared.
As a result, the huge finance company for which my buddy worked completely stopped making SBA loans for three months. Many other SBA lenders dropped out of the market as well. The only SBA lenders left in the market at the time were a few banks who had the luxury of holding newly-originated SBA loans in inventory.
Recently, however, my buddy's huge finance company converted to a bank and received over $2 billion in TARP money. As a result, his company is now aggressively back in the market to make both 7a and 504 SBA loans.
The SBA will not insure loans on apartment buildings and self-storage properties. These properties earn their cash flow from relatively long-term rentals. As a result, they do not create a lot of jobs and are therefore not eligible to be insured.
Hotel and motels, as my buddy pointed out, are suffering greatly as a result of the financial crisis. Few SBA lenders will make loans on hotels and motels right now.
My buddy's company will not consider gas stations as well right now. His company made a lot of bad gas station loans and lost tens of millions of dollars. Apparently few other SBA lenders will consider gas station loans right now because my own hard money shop, Blackburne & Brown, is seeing a ton of gas station deals.
To my surprise, my buddy told me that the SBA will make loans on mixed use properties. A mixed used property is one where there is both commercial space and residential income space (apartments). Being from New Jersey, he sees a lot of mixed use properties in downtown areas where there is an apartment upstairs and a commercial unit (storefront) downstairs. The only restriction is that the owner-used commercial space must be larger than the apartment space; however, since most of these properties have basements used by the owner of the commercial space, this condition is usually satisfied.
He also surprised me by saying that an SBA loan borrower does not have to have good credit. If the borrower's credit problems were a result of some situation that has subsequently been resolved (divorce, medical problem, etc.), the borrower will still qualify for an SBA loan. He just can't have a lot of delinquencies at the time of the application.
The biggest issue is that the borrower must be able to demonstrate from his tax returns that he has the ability to make the proposed payments. Of course he gets to add back any depreciation and interest payments on any loans that will be paid off from the proceeds of the SBA loan.
My buddy's company has plans to make between $400 million and $600 million in SBA loans this year; however, there has been a fundamental shift in the type of deals they will make. No longer will they make loans where the underlying commercial real estate constitutes less than 50% of the size of the loan.
Prior to the financial crisis, SBA lenders were regularly making SBA loans with no commercial real estate as collateral at all. They would often finance the purchases of franchises and professional practices, for example. His own company will no longer make SBA loans without some commercial real estate as collateral.
I was surprised at the leverage that SBA lenders can achieve. Using the SBA 7a loan program, SBA lenders can finance not only the purchase of commercial real estate, but also furniture and equipment to use in the property. They can often finance up to 150% of the value of the commercial real estate!
Did you know that if an SBA loan goes delinquent for four months that the SBA lender can present the loan to the SBA, and the SBA will immediately return 75% of the SBA lender's original principal? The SBA lender is still responsible for foreclosing on the collateral and selling the property. Whatever the SBA lender recovers, it must give 75% back to the SBA; but it still gets to keep the remaining 25%.
Let's suppose a SBA lender makes a $1,000,000 loan. When the loan goes delinquent by four months, the SBA lender presents the loan to the SBA, and the SBA immediately gives the lender $750,000 (75%). If the property is later sold at foreclosure for a net sales price of $800,000; the SBA lender gives $600,000 to the SBA (75%) and keeps $200,000. The SBA lender therefore recovered $750,000 plus $200,000 on a $1 million loan, for a loss of only $50,000. This is a good deal.
Based on my buddy's comments, it appears that SBA lenders are likely to loosen up and make some loans this year.
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