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Wednesday June 9, 2010

Release Date: 06.09.10 | Location: All Metro Atlanta | Organization: SCORE Atlanta

Commercial real estate financing just got more plentiful for owner-occupied buildings. Businesses need 10 percent down

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By: Jerry Chautin, SCORE volunteer, business columnist

SCOREing small-business success

Commercial real estate lending gets a shot in the arm

The U.S. Small Business Administration’s 504 program is for financing real estate and capital equipment. But since the credit crunch, many 504 lenders have tightened their underwriting. Others have ceased making them.

But under the Recovery Act, a new secondary market was created to shift 80 percent of the lenders’ risk to SBA and taxpayers. The tradeoff is that jobs are being created. Furthermore, small-business owners can purchase their own commercial buildings at bargain prices in today’s buyers market.

“We needed additional space,” said Atlanta entrepreneur Russell Rainey, owner of Inner-City Apparel Manufacturing Company. So he applied for and received $1.5 million to buy a building. “I was able to occupy an additional 18,000 square feet of space after I acquired the facility.”

Meanwhile, Tyler Rominger gained ten years experience styling hair at Van Michael Salon in Atlanta. She moved to Savannah and eventually, she and her husband opened their own hair salon. They purchased an old house, renovated and equipped it. The SBA 504 program provided the financing with the help of Small Business Assistance Corporation, a Certified Development Company.

CDCs are licensed by SBA to process and facilitate the agency’s 504 lending program. Their territories are statewide and some include counties in adjacent states. You can find them by downloading the free Georgia Resource Guide from sbaguides.com.

The program is for financing business real estate that is, or will be, mostly occupied by the small-business borrower. Machinery and equipment can also be financed. A requirement is that enough jobs are created or preserved as a result of the loan.

Hotels and motels have topped the list for getting the most 504 dollars. Restaurants, professional offices, gas stations, childcare facilities, stores and most other industries are on the list. The list is online at ffcfc.com/STORY/apr10news2.html

504 financing entails three parts. A banker usually makes a 50 percent conventional first mortgage, SBA guarantees a 40 percent subordinated debenture and the borrower injects 10 percent equity. The subordinated debenture is like a second mortgage and these percentages can vary somewhat.

Because the debentures are SBA-guaranteed against default, they are easily sold to investors in the secondary market. But the conventional first mortgage is considerably more difficult to sell ― especially in the current marketplace.

Before the financial meltdown, there was a cadre of buyers for the conventional portion. But as values began to plunge, the 50 percent loan-to-value became impaired and put the investors at greater risk. A few, including Utah-based Zions Bank continued to buy the conventional loans, albeit more critically underwritten and at less lucrative terms for the sellers.

Given this background, and the Obama Administration’s desire to create jobs, SBA and Congress conjured up a secondary market guarantee scenario for the program’s first mortgage. In their haste, they required poolers that make a market for the guaranteed paper, to retain 5 percent of the risk. The prerequisite eliminated many of the small broker-dealers and may give large Wall Street bankers a monopoly.

But I am not certain because SBA is not willing to tell me who the approved poolers are. “We still don’t have any information on this to share at this time,” says David Hall, a SBA spokesperson. “As soon as it becomes official and available, you will be among the first to know.”

Even if Wall Street got a sweetheart deal, more money will flow to small-business owners and jobs will be created.

But this Recovery Act initiative is temporary. So hurry up and get yours before the 504 secondary market program expires on February 16, 2011. Alternatively, it will end when $3 billion in new pools are created.

To read more about the 504 program go to tinyurl.com/26q2rfa. Mentoring through the process is available for free at SCORE Atlanta, Small Business Development Centers and Women’s Business Centers.