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Tuesday, May 31, 2011

SBA 504 Loans

I just completed the closing on a purchase of an industrial property in Waterbury.  My client, a manufacturing company, was tired of paying rent for a bad building and wanted to purchase its own facility.  The combination of low interest rates and a depressed real estate market made for a perfect opportunity.  In order to finance the purchase, my client (with my urging) chose to go with a 504 loan from the U.S. Small Business Administration (SBA).  I have worked on many of these transactions and it is an excellent form of financing.  The SBA 504 loan is specifically designed for the purchase of owner-occupied properties.  It cannot be used for investment properties.  The purchaser must occupy more than half of the property, and the balance of the property can be leased out to another tenant. 

 The 504 program is attractive because the borrower can finance up to 90% of the purchase price.  Most projects are funded on a 50/40/10 basis:  a bank funds 50%, the SBA funds 40% and the borrower must contribute a minimum of 10% of the project cost.  The SBA portion is funded at a fixed rate for 20 years, a deal which is not available from traditional banks. The bank portion is negotiable but since the loan is secured by real estate, most banks will give a 10 year fixed rate. 

 One thing different about the SBA loan is that it does require working with two different lenders.  The borrower must make applications both to a bank and to a lender authorized to handle SBA loans.  In this case we used the Connecticut Community Investment Corporation, an excellent organization located in Hamden.  That means submitting all materials to two different organizations, and obtaining approvals from both as well.  As a result, the loan approval process is a little more time intensive for the borrower, but as long as you work with an experienced SBA lender it isn’t a tremendous burden.  The approval also takes a little longer, because once the bank issues its commitment and sends it to the SBA, the SBA then needs to approve.  That typically requires another week.

 Another benefit of an SBA loan is that the borrower can include additional costs, such as renovation costs, moving costs or even equipment purchases in the loan amount.  Most banks are reluctant to do this without the SBA involvement.  In my deal the loan amount exceeded the purchase price of the property by almost $200,000.  The SBA does not administer construction loans, so in this situation the bank funds all the loan proceeds up front, and then when the construction is completed the SBA funds its portion.  This requires a second closing and some additional costs, but again the benefits of the 504 loan generally outweigh the costs.

 The SBA approval process generally handles environmental issues very well.  The SBA will even close in a situation where remediation is required, as long as there is a sufficient escrow in place to cover the estimated costs.  If a site is subject to the Transfer Act or has any other environmental issues, it is important to have a discussion with the SBA lender (preferably in person so there is no confusion) to determine what the SBA requirements will be. 

 One concern is that SBA loans require more paperwork or take longer to get approved and close.  It is true that the borrower will be required to submit financial statements and other materials to two different lenders, but generally the borrower would just be submitting a second set of copies of the same documents.  And as mentioned above, the additional time period for SBA approval is typically only one week. 




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