REFINANCING BUSINESS USER REAL ESTATE WITH SBA LOANS

 

Refinancing Business User Properties with SBA Loans

With the backing of the U.S. Small Business Administration, SBA loans are available to refinance debt on owner-user business properties.  SBA loans offer business owners lower down payment requirements, longer repayment terms, and easier qualifying criteria than conventional bank loans.

In order for a business to be eligible for refinancing a business property with an SBA loan, the lender must be able to document measured improvement in loan terms for the small business.  Usually that means longer repayment terms and a lower monthly payment; however, in the case of refinancing existing debt, it can also mean refinancing a balloon balance which is coming due on the property’s loan.  If a business real estate loan has a balloon feature, whereby the entire loan balance comes due before the loan is fully repaid, SBA considers that loan to have been granted on “unreasonable” terms.  The SBA loan, which is used to refinance a mortgage that has a balloon feature, provides permanent financing with no balloon feature for up to 25 years.

There are two different SBA loan programs which may be used to refinance owner-user business real estate.  The SBA 7(a) loan program accommodates refinancing requests up to $5 million.  The SBA 504 loan program accommodates refinancing requests up to $13 million.  The 504 loan program is traditionally available for purchasing or constructing a business property, and not for refinancing a business property.  Current federal economic stimulus legislation makes the 504 loan program available for refinancing owner-user business real estate available until September 27, 2012.

Following is a description which compares and contrasts the features of both SBA loan programs:

 

SBA 504 LOAN

(Commercial Real Estate & Equipment only)

SBA 7(a) LOAN

(General Purpose)

Loan Size $125,000 to over $13,000,000 $50,000 to $5,000,000
Interest Rate Fixed rate on SBA 504 second lien debenture which is fully amortized through the term of the loan.  Interest rates on 504 loans are set monthly at the time of funding at an increment above the current market rate for five-year and ten-year U.S. treasury issuesA variable interest rate is negotiated with bank on first lien bank loan which is 50% of the total project cost. Variable rate adjusted quarterlyFully amortized through the term of the loan

Interest rates are negotiated between the borrower and the lender subject to SBA maximum of Prime plus 2.75%

Prepayment Penalties Prepayment penalty on SBA debenture is 10%,9%,8%,7%,6%,5%,4%,3%,2%,1% for first 10 years respectively.  Prepayment penalty on bank portion of financing is negotiable. Prepayment penalty is 5%,3%,1% for the first three years respectively.
Eligible Business Size Business net worth not to exceed $15 millionAverage net profit after taxes for 2 consecutive years not to exceed $5 million Business net worth not to exceed $15 millionAverage net profit after taxes for 2 consecutive years not to exceed $5 million
Terms Available and Amortization Periods 20 years fully amortized – real estate loan10 years fully amortized – equipment loan

No balloon payments

25 years – real estate10 years – equipment, business acquisition, working capital

All loans are fully amortized

No balloon payments

Loan Structure(minimum down payment requirement) 50% bank loan40% CDC loan

10% borrower down payment

90% bank loan10% borrower down payment
Loan Purpose Purchase existing buildingLand acquisition and ground up construction (includes soft cost development fees)

Expansion of existing building

Finance building improvements

Purchase equipment

Refinance existing real estate debt

Expand, acquire or start a businessPurchase or construct real estate

Refinance existing business debt

Buy equipment

Provide working capital

Construct leasehold improvements

Purchase inventory

Partner buyout

Loan Program Requirements 51% owner occupancy required for existing building60% owner occupancy required for new construction

Equipment with a minimum 10 year economic life

51% owner occupancy required for existing building60% owner occupancy required for new construction

All assets financed must be used to the direct benefit of the business

Collateral Generally, the project assets being financed are used as collateralPersonal guaranties of the principal owners of 20% or more ownership are required Collateral is the subject assets acquired by loan proceedsMay require pledge of personal assets if equity available

Personal guaranties of the principal owners of 20% or more ownership are required

Loan Fees Fees are financed in the 504 loanFees are negotiated for the 50% bank loan accompanying the 504 loan The bank does not charge a fee.  Instead, the bank collects and remits to SBA a loan guaranty fee.  The fee may be financed in the transaction.

FOR ADDITIONAL INFORMATION, PLEASE CONTACT:

Bruce Hurta

SBA Loan Expert

281/384-2595

bruce.hurta@gmail.com

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About Bruce Hurta

Bruce Hurta has extensive experience in Small Business Lending. He has served in a number of commercial lending and banking capacities in his career including, President of a Houston-area community bank for 6 years, managed Independence Funding Company, a non-bank start-up in 1994, where he developed his SBA lending expertise. Bruce spent 4 years in Finance as a bank examiner for the Texas Banking Department, 7 years in executive management at two community banks, and 14 years as SBA Lender. He is active in the commercial realtor and business brokerage communities, along with various business and industry organizations. Bruce Hurta is Vice President - Business Development in Houston, TX for Fidelity Bank SBA Lending nationwide. Fidelity Bank offers SBA 7(a) loans, SBA 504 loans, and USDA loans for small businesses to purchase or construct new buildings for their small business operations, to acquire a business, to expand a business or to buy out a business partner.
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One Response to REFINANCING BUSINESS USER REAL ESTATE WITH SBA LOANS

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