Commercial Real Estate:

Can advisors utilize SBA lending to purchase commercial real estate?

Yes, commercial property (such as office buildings) can be financed with SBA loans.

What types of SBA loans are used for commercial real estate?

Both the SBA 7(a) and 504 programs can be used for commercial real estate loans. Not all SBA lenders offer the 504 program.

What are the funding amounts for SBA commercial real estate loans?

The maximum loan amount for the SBA 7(a) program is $5 million and the SBA 504 program loans can go up to $20 million.

How long are the terms for SBA commercial real estate loans?

Both the SBA 7(a) and 504 loans can have terms as long as 25 years.

• SBA 7(a) If the real estate is at least 50% of the loan amount then the loan term can go out to 25 years. If the real estate portion is less than 50% the entire loan can extend out from 10 to 17 years.

• SBA 504 With both a lender and a CDC taking part in the 504 loan, there are ultimately two loans, one with the lender and one with the CDC. The 40% CDC portion will have a lower fixed rate with 20-25 year terms. The 50% portion from the lender will typically be a higher rate, could be either a variable or fixed rate, and the terms maybe shorter or with a balloon payment (after 10 years for example).

What are the key requirements the SBA has for commercial real estate loans?

SBA lending for commercial real estate is mostly restricted to scenarios where the owner occupies at least 51% of the project space (up to 49% can be sub-leased to a longterm tenant in most cases) and 60% owner occupancy requirement for new construction deals.

Can I combine my acquisition loan with the seller’s office building purchase I am also doing?

The 7(a) program allows for acquisition and working capital loans to be combined with the commercial property. The big advantage here is that the term of the entire loan (including the acquisition portion) will extend beyond the normal 10 year term.

If the real estate is at least 50% of the loan amount then the loan term can go out to 25 years. If the real estate portion is less than 50% the entire loan can extend out from 10 to 17 years. While there are no pre-payment penalties for standard 7(a) loans, when terms extend to 15 years or more, there is a 5/3/1 prepayment penalty (5% year 1, 3% year 2, 1% year 3).

Is there a down payment required for SBA commercial real estate loans?

The 7(a) program allows for 100% bank financing (for advisors whose practice values high enough) but the 504 program requires at least a 10% down payment.

What kind of commercial real estate uses does the SBA not allow?

SBA have these key loan use restrictions:

• A purpose that does not benefit the small business.
• Investments in real or personal property acquired and held primarily for sale, lease, or investment.
• General refinancing. However, funds can be used to term-out debt obtained in anticipation of the 504 project which would have been eligible for 504 financing otherwise.
• Payments or distributions to Associates of the applicant business.

How does the SBA 504 program work?

The 504 loan program is delivered via a tri-party agreement. A lender provides loan approval for permanent financing on a first lien position at 50% of total project costs. The SBA via a CDC provides permanent financing for up to 40% in a second lien position. The borrower commits a minimum of 10% equity contribution.

With both a lender and a CDC taking part in the 504 loan, there are ultimately two loans, one with the lender and one with the CDC. The 40% CDC portion will have a lower fixed rate with 20-25 year terms. The 50% portion from the lender will typically be a higher rate, could be either a variable or fixed rate, and the terms maybe shorter or with a balloon payment (after 10 years for example).

What are the current interest rates for SBA commercial real estate loans?

When using the SBA 7(a) program, the rates will typically range from 1.75% to 2.75% over the Wall Street prime Rate.

For the SBA 504 program it is a bit more complicated in that there are two loans with two different rates that would need to be combined to get a blended rate.

The interest rate on the 40% CDC portion of the 504 loan is always fixed for the life of the loan. The rate is locked in once the loan is funded.

The interest rate on the 50% SBA lender portion may be fixed or variable, years of term maybe shorter like a 10 year balloon, and rates vary as well and could be as high as 5.75%

To best compare 504 rates to other options look at the blended rate. For example, if the CDC rate is 2.58% for 40% and the lender rate is 5.75% for 50% then the blended rate will be 4.34%.