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Release Date: 02.02.10 | Location:
All Metro Atlanta
| Organization:
SCORE Atlanta
Contact Name: Jeff Mesquita | Company: SCORE Atlanta | Phone: 404-331-0121 | Cell: | E-Mail: scoremarketing@joimail.com
SBA’s 504 is for real estate
Equipment financing too Financing commercial real estate continues to be challenging for small-business owners in Georgia. In part it is because values have not stabilized and lenders wonder if the current loan to value ratio will deteriorate a year from now. And even though it is a buyers’ market, purchasers need a wad of cash because lenders are requiring higher down payments --- 20 percent to 50 percent is commonplace. To resolve the dilemma, the US Small Business Administration is tinkering with its 504 program. Briefly, it allows you to purchase a small office building, warehouse, restaurant, or even a more exotic structure such as a skating rink, with as little as 10 percent down. The program is used for new construction, acquisition or rehabilitation provided that the facility will be majority owner-occupied and the company creates or retains enough jobs --- one job for every $65,000 of SBA’s guaranty. The funding has two parts. First, a lending institution such as a bank makes a mortgage for 50 percent of the total cost. The cost usually includes the building, machinery, furnishings, fixtures and equipment. It also includes some transactional cost including fees and legal expense. In addition to the bank's participation, a SBA-licensed certified development company, or CDC, arranges for a subordinated debenture representing up to 40 percent of the cost. Think of it as a second mortgage. SBA guarantees the debenture against default so that it is attractive to investors. For a new company, the debenture is reduced to 35 percent. And for a specialized building, it is reduced further to 30 percent, requiring the borrower to put 20 percent down. The conventional first mortgage lender may opt to go higher than 50 percent of the cost. So in theory there is no loan size limit if the lender willing to take more risk. But in general, the debenture size dictates the overall amount of project funding. Pending legislation will likely increase the debenture size to $5 million from $1.5 million. That could make lenders comfortable with deals that are up to $14 million in cost. Manufacturing facilities will go higher. Most CDC’s are willing to put together deals that cost as little as $200,000. Notably, some 504 loans can be for large expenditures of machinery and equipment without real estate. A low appraisal will not necessarily kill the deal. According to Florida First Capital Finance Corporation’s newsletter, “The recent economic downturn has resulted in more appraisals coming in under the sales price than has been seen historically.” FFCFC is a Tallahassee, Fla.-based CDC. It says that loan analysts will look for mitigating factors to support the strength of the deal when the real estate collateral is inadequate. Furthermore, unlike with SBA's 7(a) program, the agency does not require borrowers to pledge their homes as collateral. Deal strength is usually defined by credit underwriting of the borrower and his or her company. “If the analyst, with SBA concurrence, determines that the relative strength of the factors present to overcome the weaknesses of the factor(s) missing, again no additional collateral and/or contribution is required,” is written in FFCFC’s newsletter. Before the real estate market collapsed there was a secondary market for the conventional first mortgage portion of 504 loans. Originating lenders replenished their coffers to fund more deals. Now that the secondary market is in limbo, SBA has been struggling to reinvigorate it. Accordingly, it unveiled a plan to guaranty up to 80 percent of the first mortgage hoping that investors will return. But the scheme has a few wrinkles that need to be resolved. Most notably, SBA requires that the 20 percent un-guaranteed portion of first mortgage be split 15 percent to be retained by the originating first mortgage lender and five percent be retained by the pooler. Poolers gather groups of 504 loans and sell them into the secondary market. But Chris LaPorte, a broker-dealer and potential pooler with Coastal Securities told me, “It is unfortunate that the five percent retention is a requirement for the pooling process.” Retaining five percent may be a deal-killer for poolers since they are not involved in the origination or underwriting of the loans. “This will certainly be a determining factor as to whether broker-dealers who are not lenders will want to become pool originators.” Meanwhile, some lenders continue to make 504 loans and keep the first mortgage portion in their portfolios. Ask your banker if they make them. You can read more about the 504 program online at tinyurl.com/yjn2g4t. To get a list of CDC’s in Georgia, call SBA’s district office, (404) 331-0100. OTHER INFORMATION:About SCORE:
Since 1964, SCORE “Counselors to America’s Small Business” has helped more than 8 million aspiring entrepreneurs and small business owners through counseling and business workshops. It is a nonprofit resource partner with the U.S. Small Business Administration. More than 11,200 volunteer business counselors in 370 chapters serve their communities through entrepreneur education dedicated to the formation, growth and success of small businesses. The Atlanta chapter has 100 volunteers in conveniently located branch offices. Note to media: Photos of the SCORE counselors quoted and interviews are available upon request. For interviews with SCORE business counselors or SCORE small-business clients, contact SCORE’s chairman, Jeff Mesquita: e-mail, scoremarketing@joimail.com, cell: (770) 713-1702. You may use this article in part or in its entirety and distribute copies with credit to SCORE Atlanta www.scoreatlanta.org. The columnist’s CV is online at: tenonline.org/sref/jc1bio.html |
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