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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   July 2012

The SBA 504 Solution

Get financing and working capital for small businesses

 Even the most-experienced commercial mortgage brokers occasionally find themselves challenged in arranging finances for a tough project. This was the case with a Southern Calif.-based mortgage broker who struggled with financing a hospital project — until he qualified the project for Small Business Administration (SBA) 504 financing.

The project’s troubles began when a prior hospital had gone into bankruptcy, and the property was in suspense for more than two and a half years. It finally was sold to an investor who leased the property to a management group that completely upgraded the facility using its own funds and resources. The hospital was later reopened as a licensed general acute-care hospital.

The investor sought the broker’s assistance because the management group decided to exercise its option to purchase the property and was having trouble finding a lender to advance 80 percent against a special-use facility.

After approaching four different lenders, it became clear that advancing an 80 percent loan-to-value (LTV) ratio was going to be a tough mission. None of the four would commit more than 50 percent LTV, which meant the client would have been forced to inject more funds into the project.

The client didn’t want to commit any extra cash into a fixed asset when it could be used for hospital operations and future growth. That was when the broker considered the SBA 504 loan program because it was designed to keep working capital in the business.

In fact, the SBA 504 loan program partners with lenders to provide as much as 90 percent financing on owner-user commercial real estate. The financing is delivered through a network of SBA-designated entities known as certified development companies (CDCs).

The broker contacted a local CDC and was able to prequalify the hospital management group for SBA 504 financing. With this prequalification in hand, he revisited lenders to find the best loan structure and pricing. The final deal had a blended term of 22.5 years and a blended rate of 6.4 percent. The project also met the downpayment requirement — 20 percent — for a special-purpose facility and a new business. In addition, because the appraisal reflected the value of the improvements that the client had already put into the hospital, the required injection was fulfilled without more out-of-pocket cash.

As with this case, commercial mortgage brokers should learn how to identify potential candidates for SBA 504 financing. These are a few basic requirements that a business must meet:

  • It must be asking to finance fixed assets, such as an existing building or long-term equipment; 
  • It must be for-profit and located within the United States;
  • The business, including any affiliated entities, must have a tangible net worth of less than $15 million and after-tax profits, averaged over two years, of less than $5 million; and
  • It must occupy at least 51 percent of the property for existing buildings and 60 percent for ground-up construction (and the equipment must be used for business operations).

Once you have identified a potential candidate, contact an SBA-designated CDC in your area either through the SBA district offices or the National Association of Development Companies.

With these points in mind, commercial mortgage brokers can position their deals for financing that keeps working capital in business — a quality that many of today’s businesses are keen to have in view of tight liquidity. 


 


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