Last month Linda McMahon, the former World Wrestling Entertainment CEO who ran two Connecticut races as the Republican candidate for senator, was tapped as the head of the Small Business Administration in the Trump administration.
Leaving aside issues such as the government agency’s expansive definition of “small business,” which encompasses 98% of U.S. businesses, and whether the agency should be consolidated with others -- a proposal McMahon supported during her 2012 run for senator -- let’s talk about what the Small Business Administration has to do with real estate.
There are two types of SBA loans that businesses can use for real estate purposes, known as 7(a) and 504. These loans have various benefits and limitations and can be used for multiple property types.
Who are these loans for?
SBA loans are not just for retail businesses seeking to open a storefront. They can be used for many other property types as well.
Take hospitality. The Best Western Orlando Convention Center Hotel at 6301 Westwood Blvd. in Orlando, Florida, is financed by a $4.4 million 504 loan from Atlanta-based Fidelity Bank in 2010, and Malibu Country Inn at 6506 Westward Beach Rd. in Malibu, California, is financed by a $4.5 million 504 loan issued by California-based US Metro Bank in 2015.
And the Cincinnati industrial property at 3765 Round Bottom Rd., occupied by weapons manufacturer Trajectory Technologies, is financed by $4.43 million issues by Cincinnati-based Fifth Third Bank in 2013.
Benefits and limitations
Government-backed loans offer benefits for lenders as well as owners.
Lenders that work with the SBA don’t have to worry as much about whether the business owner will be able to make the payments, since a portion of the loan is guaranteed by the government. This makes it less risky for lenders, which could in turn make it easier for owners to secure loans.
Owners also get favorable terms on SBA loans, such as lower down payments and long repayment terms, which means lower monthly payments.
Prepayment penalties are waived after 10 years under the 504 loan program, which can also be used for refinancing.
Limitations include the eligibility requirements for the business and the size of the loan. 7(a) loans have a maximum loan amount of $5 million. Loan size for 504 loans is linked to job creation or retention. In addition, properties purchased with SBA loans need to be owner-occupied.
Types of loans
The 7(a) loan is a general small business loan whose proceeds can be used for various purposes, including real estate. These loans require down payments of 15% to 25%, and have a repayment term of up to 25 years for real estate.
Commercial real estate loans in the 504 program typically require a down payment of just 10% and have a repayment term of up to 20 years.
As of May 2016, the 504 Loan Program is available to refinance existing debt of up to $5 million (up to $5.5 million for eligible energy-saving or manufacturing projects), with long-term, fixed-rate financing. It can also be used for purposes such as the purchase of land and owner-occupied buildings and the construction or renovation of commercial properties.
Under the 504 program, the first mortgage typically covers half the project cost and the second mortgage covers up to 40% of the cost, according to the SBA. Perhaps most significantly, the borrower needs to provide just 10% of the equity.
Businesses eligible for the refinancing program must be at least two years old, and the debt being refinanced must be a commercial loan that was used to purchase a fixed asset such as owner-occupied real estate, land or equipment and on which the borrower has been current on payments for the previous 12 months.
For business owners setting new goals for a new year and figuring out how to secure funding for commercial real estate deals, perhaps it is time to consider Small Business Administration loans as one more tool in the financing toolbox.
Ely Razin is CEO of CrediFi, a big data platform serving the commercial real estate finance market. He can be reached at ceo@credifi.com.
