Commercial Loans and Fun Blog

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.

Need an SBA loan? You can apply to dozens of different SBA lenders in just four minutes using C-Loans. And C-Loans is free!

SBA Lenders Have Stopped Making Gas Station Loans

Because of the large number of SBA loans on gas stations that have gone bad, many SBA lenders are no longer making gas station loans. I think the issue may be a directive from the SBA itself - no more gas station loans.

Blackburne & Brown, my hard money shop, is still making gas station loans. You can apply for a gas station loan by clicking here.

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.

Do you need an SBA loan? You can submit your 51% owner-used commercial property loan to scores of different SBA lenders in just four minutes using C-Loans.com. Ad C-Loans is free!

The Government is Anxious to Help These SBA Loans Get Made

As a result of the sub-prime crisis and the resulting credit crunch, banks across the United States have greatly reduced their commercial real estate lending. The Federal government is desperate to pump money back out into the economy. One of the vehicles that they are aggressively using is the SBA loan program. As a commercial mortgage broker, you would be smart to get aggressively involved in SBA deals.

The Small Business Administration (SBA) does not actually make small business loans. Instead, the SBA merely guarantees up to 90% of the principal of certain business loans made by banks and other specialized SBA lenders. Two of the most popular SBA loan programs are the CDC/504 program and the SBA 7(a) program.

Under the SBA 7(a) program, an SBA lender will make a commercial real estate loan that is fully-amortized over 20 or 25 years. Right off the bat, this is a very attractive program because most commercial real estate loans have a loan term of only five to ten years.

The SBA will then guarantee up to 90% of this small business loan for the bank, and the bank will typically be able to sell the loan off in the secondary market at a handsome premium - often five to seven percent of the loan amount. A loan or a bond sells for a premium when it fetches more than the face amount of the debt, usually because the interest rate is higher than the market.

SBA 7(a) loans are written as adjustable mortgage loans tied to prime. The spreads will vary from a low of 1.5% over prime to a maximum of 2.75% over prime. The loan fee depends on the size of the loan and the type of collateral (equipment versus commercial real estate), but the fees usually run between 2 and 3 points.

Small business owners can borrow between $50,000 and $2 million using the SBA 7(a) program.

The really big advantage of the SBA 7(a) program is that the owners of existing small businesses can often get loans up to 90% of the purchase price in order to buy commercial real estate for their businesses. Commercial real estate loans up to 90% loan-to-value are pretty terrific today, especially when you consider that many conventional commercial real estate lenders have cut their loan-to-value ratios down from 80% to just 70% to 75%.

In order to qualify for an SBA 7(a) loan, the business owner must occupy, or intend to occupy, at least 51% of the commercial real estate being purchased. The commercial real estate cannot have a residential component. For example, if the target property consisted of an old home and a large warehouse, it probably could NOT be financed using SBA financing.

SBA 7(a) loans must be fully-collateralized. In other words, the SBA lender is likely to blanket all of the borrower's inventory, receivables and equipment. This makes it difficult for the business to obtain a business line of credit from a bank. In addition, the SBA lender will usually blanket the personal residence of the borrower.

Borrowers can also obtain SBA 7(a) loans for working capital, to purchase equipment or to acquire businesses or franchises. The required downpayments, however, are larger. Start-up borrowers will usually be required to put at least 20% down. More often they will be required to put 30% down.

Do you need an SBA loan right now? You can apply to over 100 SBA lenders for free in just four minutes using C-Loans.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!

These Partially-Guaranteed Construction Loans Are Still Getting Done

As a result of current banking crisis, very few commercial construction loans are getting funded. I have warned commercial mortgage brokers extensively, in this blog and on the main C-Loans website, not to waste precious time trying to place commercial construction loans or residential subdivision construction loans. There is one exception to this rule.

If a commercial property will be 51% owner-used, it is still very possible today to obtain an SBA 504 construction loan. More precisely these loans are known as CDC/504 loans.

Despite the name, these loans are not made by the Small Business Administration. Instead, SBA 504 (CDC/504) loans are made as a conventional first mortgage loans with a piggy-back second mortgage that is recorded concurrently.

The first mortgage is actually made by a conventional lender, typically a bank. The piggy-back second mortgage is also typically the bank or 504 lender for about 45 days, but then the second mortgage is assigned to a Certified Development Corporation and guaranteed by the Small Business Administration.

After the construction period, the underlying conventional construction loan converts to a long term conventional permanent loan. This loan is often fixed for five to ten years and is typically amortized over 25 years. The conventional loan will typically have a term of 10 to 25 years.

The piggy-back second mortgage is always fully-amortized over 20 years and is written at a government-subsidized interest rate about 1.5% lower than the typical conventional commercial first mortgage.

The big advantage of an SBA 504 loan is that the owner only has to contribute 10% of the total cost of the project, including loan fees and other soft costs. The owner can often include some heavy equipment costs in his total project cost, meaning that he gets to buy some heavy equipment at low commercial real estate loan interest rates. In contrast, on a conventional commercial construction loan, the owner usually has to contribute 20% to 35% of the total project cost.

You can apply to 50 SBA 504 lenders using C-Loans.com.