SBA Programs Can Save Transactions… Really!

With credit sources hard to access, it seems that more businesses would turn to the Small Business Administration (SBA) and its loan programs for building acquisitions. In spite of today’s sub five-percent, 20-year, fixed loan rates however, the program battles some misperceptions and does little to promote its loans. In a typical SBA 504-loan, a bank provides the first mortgage at 50 percent loan-to-value.

A certified development company (CDC) – arranged through the SBA – provides the second mortgage of 40 percent and the borrower puts down 10 percent. This program facilitates billions of dollars in commercial real estate transactions annually.

Christopher L. Crawford, president and chief executive officer of the National Association of Development Companies (NADCO), one of the industry’s primary trade associations, admits the SBA processing and the CDC industry overall have had their issues.

“There were once 70 autonomous SBA field offices; but we advocated for – and have achieved – central processing and criteria consistency to process and accept or reject loan applications,” said Crawford. Loan authorization approval is now down to two to three days.

There remain some document requirements and restrictions on SBA lenders that banks don’t necessarily face, but Crawford suggests that the hurdles are worth the benefit. The SBA requires more money down if the business is less than two years old or the real estate is a special use.

“They require fingerprinting and there are more restrictions on to whom they can loan money,” Crawford said. “But, you can’t find a bank that will loan at a 20-year fixed rate on commercial real estate with only 10 percent down,” he added.

Brokers’ Experiences

Jack Faris, SIOR, senior vice president with Voit Real Estate, has worked with buyers to complete as many as 100 SBA loans over the last 10 years. “The SBA loan process just isn’t as tedious anymore,” he said. He cited a 45-60 day “start-to-finish” timeline as typical – “just like a conventional bank loan program.”

Recently Faris worked with Fireblast 451, Inc., a manufacturer of mobile firefighter training systems. His client acquired a building, and the company significantly expanded and upgraded its facility, making them much more efficient.

“The deal wouldn’t have happened without the SBA-504 loan program; the company just didn’t have the money to put down 25 percent of the purchase and renovation costs,” Faris said. Michael and Mark Nelson, brothers in industrial firm, Nelson Hill in the Chicago market, pull no punches about the effectiveness of SBA loans. “From our point of view, it saved our lives,” Michael said. “People wouldn’t have done the deal without the SBA. It made such good sense for our buyers.”

Nelson cautioned that not every situation is a slam dunk, acknowledging additional SBA stipulations, such as requiring a good credit record. “They can’t just take anyone,” he added; yet it sure beat the alternative for Nelson and a handful of their clients. The Nelsons closed five SBA-504 transactions in 2010 in Chicago. Beyond providing capital for the acquisitions, most of the transactions involved securing money for substantial modernizing and upgrading facilities.

In a transaction that may not have been completed without SBA, food company, Daily Meat, which previously leased space, purchased a 25,000 square foot warehouse building in Chicago and converted it to a freezer/cooler building, a project that Nelson said “wasn’t cheap.” In another, Martinez Seafood and Produce relocated to a new facility after completing a full gut rehab.

Crawford suggests that commercial brokers take a hard look at SBA-504s. “We are the best credit guy standing,” he said. Faris agreed encouraging brokers to work with an experienced lender/CDC – ones that know the landscape and can be an asset in sourcing capital. Nelson believes there are brighter days ahead for the program, including awareness of it. “More people are talking about SBA,” he said. “Word is getting out, but we give it a push.”

Knowledge Resources for SBA Programs

  • Visit and for a list of CDCs and program information
  • Meet with a local CDC to understand their mechanics and process for SBA-504 loans
  • Most SBA offices conduct webinars on loan basics; contact your district office for details
  • Work through your local REALTOR® association to arrange an educational program conducted by the SBA or a CDC.

The Basics of SBA Lending and Standard Loan Requirements

  • Working with SBA nationwide are 250 CDCs. In fiscal 2010, almost 6,800 SBA-504 loans valued in excess of $3.8 billion were approved, according to NADCO. Standard loans require:
  • Current financials, dated within 120 days of application, on the operating company with a listing of accounts receivables and payables
  • Two years of projected income and expenses for new businesses
  • Personal history statement on all owners of 20% or more of both the operating company and realty company set up to take title to the property
  • Personal financial statement with tax returns on all owners of 20% or more of both the operating company and realty company set up to take title to the property
  • Credit report on operating company and guarantors
  • Appraisal and environmental reports (may be a condition of loan closing)
  • Typically – owners put down 10 percent; some situations require 15 percent (i.e. new businesses or special use—gas stations or bowling alleys).

* Note that the SBA 7(a) program differs from SBA’s 504 program featured in this edition.


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