Commercial Loans and Fun Blog

New Loan Poolers Will Help Jump Start Secondary Market for 504 Loans

The U.S. Small Business Administration (SBA) announced the first nine loan pool originators authorized by the agency to assemble and sell pools of 504 program first mortgage loans, a major step to jump starting a secondary market that should make fixed-asset financing more widely available for small businesses. The new program was approved under the American Recovery and Reinvestment Act.

Prior to the recent disruption in the credit market, a private secondary market for these loans existed, but it has not revived as the economy has started to rebound. The SBA expects this new program to breathe life into that secondary market and improve access to credit for small businesses by providing a resource that can help boost liquidity to small business lenders.

"With the resources provided in the Recovery Act, we have engineered a turnaround in its SBA lending, putting nearly $30 billion in the hands of small businesses across the country," said SBA Administrator Karen Mills. "This added support to re-launch the 504 first mortgage secondary market builds on that success and will help leverage even more capital for small businesses to support their growth and create new jobs."

Under the program, the SBA will provide a government guarantee on pools of portions of eligible 504 first mortgage loans assembled by approved pool originators to be sold to third-party investors. Lenders will retain at least 15% of each individual loan, pool originators will assume 5% of the risk, and the SBA will guarantee the remaining 80%.

Typically, a 504 project includes three elements: a loan (or first mortgage) secured with a senior lien from a private-sector lender covering up to 50% of the project cost, a second mortgage secured with a junior lien from a Certified Development Company (backed by a 100% SBA-guaranteed debenture) covering up to 40% of the cost, and a contribution of at least 10% equity from the small business borrower.

Under the new program, portions of the senior liens are pooled by pool originators and sold to investors in the secondary market. To be eligible to be included in a pool, the first mortgage must be associated with a 504 loan disbursed on or after February 17, 2009. The program will be in place until February 16, 2011 or until $3 billion in new pools are created, whichever occurs first.

The pool originators approved so far are

• Bank of America, N. A. of New York, New York;
• Cantor Fitzgerald & Co. of New York, New York;
• Citizens Bank of Elizabethton, Tennessee;
• Coastal Securities, Inc. of Houston, Texas;
• Community South Bank of Knoxville, Tennessee;
• Fidelity Bank of Covington, Georgia;
• Meadows Bank of Las Vegas, Nevada;
• Morgan Stanley Bank, N.A. of Salt Lake City, Utah; and
• Voyager Bank of Eden Prairie, Minnesota.

Need an SBA loan right now?  Please call George Blackburne III at 574-360-2486 or email him at george@blackburne.com.

The Wise Commercial Mortgage Broker Will Aggressively Solicit These Loans

Many banks today are terrified of making conventional commercial real estate loans. They are afraid of losing money. Using the SBA 504 loan program, however, a bank is largely insulated from loan losses. As a result, many banks are still quite anxious to make these commercial loans. If you're a commercial mortgage broker, why not try to swim downstream? You should originate the kinds of loans that the banks want to see during this credit crisis.

Under the SBA 504 loan program, a borrower can finance up to 90% of the purchase of a piece of commercial real estate. He can sometimes also finance up to 90% of associated heavy equipment he might need for his factory.

These loans are typically made by banks, with the assistance of a local Community Development Corporation. A conventional commercial first mortgage of 50% loan-to-value is made by the bank, and a piggy-back second mortgage up to 90% loan-to-value is recorded concurrently.

For example, let's suppose a widget manufacturer wished to expand its business by buying an industrial building for $1 million. The bank would make a $500,000 conventional commercial first mortgage at market rates, typically amortized over 25 years, due in ten to twenty-five years, and with a fixed rate for at least the first five years. The bank would record concurrently a $400,000 second mortgage that would eventually be sold to a local Certified Development Corporation and guaranteed by the SBA.

The buyer would therefore get $900,000 in financing on this building. He would only have to put $100,000 down. In contrast, if he applied to a conventional commercial mortgage lender, he normally would only be able to finance $700,000 to $750,000. He would have to put down a whopping $250,000 to $300,000.

But wait! It's gets better. The second mortgage is fully-amortized over 20 years. There is no balloon payment. In addition, because the second mortgage loan is guaranteed by the SBA, the interest rate is typically 1.5% lower than the underlying conventional first mortgage. The borrower gets a blended rate, between the market interest rate on the $500,000 first mortgage and the lower, subsidized interest rate on the $400,000 second mortgage, that is around 1% lower than conventional first mortgage rates.

But that's not all! Both loans are also assumable. The loan fees are also low - typically 1.5 points on the first mortgage and 1 point on the second mortgage. The SBA 504 loan program is a great deal. Plus banks actually want to make these loans.

There are some limitations. First of all, the property must be at least 51% owner-used. Usually the borrower's credit score must be at least 600 - but even this is good compared to banks today, who normally require a credit score of at least 650 on conventional commercial real estate loans.

Finally, after adding back depreciation and existing rent payments, the borrower's net income from his business, according to his tax returns, must substantiate enough income to make the proposed new mortgage payment. The coverage ratio only needs to be 1.0. In contrast, conventional commercial real estate lenders require a 1.25 debt service coverage ratio.

So if you are a commercial mortgage broker, be sure to get involved with the SBA 504 program. You can apply to scores of SBA lenders using C-Loans.com. And C-Loans is free!