The Best-Kept Secret in
Commercial Real Estate
Financing
What SIORs Need to Know
About the SBA 504 Loan
By Chris Hurn
It’s no secret that commercial credit is hard to come by these
days. More than a few lenders remain reluctant to lend, even to
borrowers with A++ credit scores. Whether they can’t lend or
simply would rather not, it’s not getting any easier for business
owners to get financing from conventional commercial lenders.
It’s clearly a big problem for commercial real estate brokers.
If your clients can’t get funding to purchase the facility you’ve
helped them find, then nobody gets paid.
If your small business clients have had trouble securing
financing for their commercial real estate projects, they may be
looking in the wrong place. While conventional lending is still a
bit “frozen,” loans from SBA lenders are plentiful. Now, I know
that SBA loans have been viewed as “second-class” for a number
of years for multiple reasons, but hear me out on this. There’s a
strong argument for helping your small business clients see the
benefits of SBA financing, and I’ll even dispel some of the common myths surrounding this much-maligned government agency.
SBA Lending on the Rise
In case you haven’t noticed, there’s not much good news being
reported about our economy these days. We mostly hear about
how bad things are, and how it’ll get worse before it gets better. Well, here’s some good news for your small business clients:
SBA lending is not only on the rise, it’s at all-time high levels.
The SBA’s fiscal year 2011 (which ended September 30th)
was a record-breaking one during which the Agency supported
$30.5 billion worth of small business borrowing. The previous
record for SBA lending was $28.5 billion, and it was set back in
2007 — you know, before the “Great Recession/Panic.” The 2011
total is 35 percent more than the total for 2010, which is quite
a jump these days. Armed with these statistics, a good number
of small business lending experts believe conventional lending
is going to continue its slump for a while. In the meantime, it’s
widely held that SBA lenders will fill the gap and be the go-to
sources for the foreseeable future. If this is the case (and I happen
to believe it is), it will pay off big time to be familiar with SBA
financing — especially the SBA 504 loan program.
The Best-Kept Secret
When it comes to commercial property financing for small
business owners, the smartest option available is the SBA 504
loan. This loan program was created specifically for the purpose
of financing fixed assets — commercial real estate and equipment — and it does its job very well. So what makes these loans
so special?
First of all, unlike most commercial bank loans, SBA 504
loans are designed to finance total project costs. Conventional
commercial loans typically finance a percentage of either the
appraised value or the purchase price of the property, whichever
is less. With a 504 loan, the total project cost includes land and
existing structures; hard construction/renovation costs; furniture,
fixtures and equipment; soft costs; and closing costs. The ability
to roll these additional costs into the loan instead of paying them
out-of-pocket is a big deal for most small business owners.
Second, SBA 504 loans have lower equity requirements than
conventional commercial financing. These loans are structured
with a conventional mortgage for 50 percent of the total project cost and a government-guaranteed bond for 40 percent. The
