SBA 504 is a two-party loan program with the ability to fix at least a portion of the debt up to 20 years. However, the program carries a 10-year prepayment penalty. It’s designed for borrowers who: have a long hold period, have a single use of proceeds (real estate or equipment), or want to build a second location.
In general, 7a borrowers are willing to take on interest-rate risk in exchange for proceed-use flexibility and additional leverage. SBA 504 borrowers sacrifice flexibility and have limited use of proceeds, but are able to secure long-term fixed-rate debt.
One additional advantage to the 504 program is it allows for new construction with leverage up to 90 percent with specific limitations. New construction is limited to additional locations by an established owner/operator with the same borrowing structure. Borrowers adding new partners or without prior experience will have difficulty using this program for construction purposes. Primary location(s) will also have to support the additional debt of the new location at or near a 1.25 to one times ratio. The program can certainly be seen as restrictive. But for borrowers who qualify, they can take advantage of near record low interest rates at leverage levels that are rarely seen in other lending programs.
Through the SBA 504 program, a borrower will work with a traditional SBA lender for a portion of the loan and also a Certified Development Corporation (CDC) for the 20-year fixed-rate portion. The traditional lender may offer a floating or fixed rate that will be blended with the 20-year fixed rate CDC portion to come up with a weighted cost of capital.
As recently as the fourth quarter, the rate on the fixed portion of the loan was as low as 4.9 percent. It’s typical that both the traditional and CDC lenders frequently work together so a borrower can expect there to be a working relationship already in place. However, hiring a mortgage intermediary can help keep all parties on track and communicating accordingly.
Refinance With 504 Now Available
Recent changes to the SBA guidelines include the addition of the 504 temporary-refinance program. Previously, this was only available through the 7a program. This program will allow borrowers to use the long-term 504 programs for refinancing debt through Sept. 30, 2012.
Borrowers who want to take advantage of the refinance program should act quickly to identify qualified lenders, as it’s unclear if the program will be extended and it’s not uncommon for a refinance to take up to six months to complete.
It’s important to consider the type of lender you choose. Certain lenders have “preferred” status with the SBA, which allows them to fund a deal after approval. Others 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.
Lastly, it’s important to understand that some borrowers will not qualify for either program. SBA loans are limited to “active” owners. This active role of the owner is an important distinction in the SBA world, as the programs are intended to fund small-business owners actively involved in their enterprise, not investors seeking passive income streams. In addition, borrowers with extensive liquidity (typically greater than the loan amount) and net worth that exceeds $15 million will be deemed too big for the program.
Borrowers who do qualify for either program will have the advantage of adding a capital source to their list in 2012.
Noel Cain is a vice president at Chicago-based The BSC Group, where he provides mortgage brokerage, financial consulting, and loan-workout solutions to self-storage real estate owners nationwide. To reach him, call 847.778.4661; e-mail firstname.lastname@example.org; visit www.thebscgroup.com .