The loan process took four and a half months from beginning to end, but there were some unusual occurrences that likely added four to six weeks to the transaction. Typically, 7a loans take a minimum of 90 days to close; but as with any loan, SBA or otherwise, it’s always prudent to allow up to six months from the start of the process.
Similar to that of other commercial loans, the documentation process involved with an SBA loan can be daunting. In this case, as in all SBA loans, borrowers were required to submit:
- Three years of personal tax returns
- Three years of business tax returns
- Personal financial statement
- Business debt schedule
- Authorization to release financial information
- History of business form
- Statement of personal history
- IRS form 4506-T
In addition, the standard, property-specific financials such as rent rolls and monthly profit-and-loss statements were also required. Hiring an intermediary will expedite the process and help ensure the proper documents are completed in a timely manor.
The underwriting for the SBA 7a process is similar to that of most bank loans. Lenders are focused on the viability of the property being financed and the financial wherewithal of the borrower.
The lender in this case wanted to ensure the subject property was able to positively cash flow on its own merit. The borrower had other sources of income, which, in combination with the income from the property, more than covered all debts (personal and business) at a ratio of greater than 1.25 to 1.0. In general, a borrower with contingent liabilities and limited alternative sources of income will have a tough time financing through the SBA 7a program.
It’s also important to consider the type of lender you work with. Certain lenders have “preferred” status with the SBA, which allows them to fund a deal after approval, foregoing additional steps in the process. Other lenders have to approve the transaction internally and then submit a complete underwriting package to the SBA for its approval. The latter may take longer to close, as the SBA approval depends on the workflow of the SBA office.
As is common with most real estate transactions, a closing officer handles the closing process with disbursement directed through a title company. In this case, there were a number of insurance requirements and assignments coordinated with the borrower’s insurance agent. The borrower also had to coordinate with the state to secure new business licenses, which prolonged the closing.
Overall, the process was successful, though it took longer than anticipated and was not without its ups and downs. The SBA 7a program lived up to its billing as a flexible program that could be creatively structured to allow a first-time buyer to acquire a facility with long-term debt at a reasonable equity level. While SBA lending is not a fit for every deal and every borrower, the self-storage industry will benefit from having an additional capital source available for owners to access.
Noel Cain is a vice president with Chicago-based The BSC Group. He advises clients on debt and equity financing and loan-workout services for all commercial property types. He has significant experience in underwriting and cash-flow modeling as well as due diligence and site analysis. For more information, visit www.thebscgroup.com .