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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   September 2014

Compete With the Big Guys Using SBA 504

Prequalification and government-backed loans help borrowers get in the game

Many real estate brokers, lenders and business owners across the country, particularly in California, are reporting the same thing: The commercial real estate market is heating up, the supply of commercial buildings is decreasing, and many small businesses are getting outbid and losing the opportunity to buy the buildings they want to occupy.

Certainly, it is challenging for cash-strapped small businesses to compete with an all-cash offer, or an investor who’s willing to pay more for a property or can close in a shorter time frame. The owners of smaller businesses have a chance to compete in this competitive market, however, when they understand that preparation — particularly in the form of Small Business Administration (SBA) lending and prequalification — is the key to winning.

SBA advantages

Many mortgage originators are discovering that SBA 504 commercial loans are ideal for small-business owners purchasing a first or second building to grow their business. Cash is tight for these smaller companies and preserving working capital is essential, which is why so many of them opt for SBA 504 loans featuring low downpayments (as little as 10 percent) and fixed-rate, long-term financing.

An SBA 504 loan is a partnership between an SBA Certified Development Company (CDC), a commercial bank, the small-business borrower and the SBA itself. The 504 program reduces the risks for banks to participate through nonprofit CDCs, which are authorized to operate on the SBA’s behalf. The CDC works with the bank, broker and small-business owner to put the loan package together and secure the SBA’s approval. The CDC prepares the loan package, submits the documentation to the SBA and advocates on behalf of the business to answer the SBA’s questions and keep the process moving forward.

Competitive markets

Although many parts of the country are experiencing a buyer’s market, many larger cities — such as San Francisco and Los Angeles — have once again become good places to invest. In fact, money is pouring into California’s commercial real estate market, according to the UCLA Anderson Forecast, recognized as one of the industry’s most accurate, unbiased real estate forecasts.

The commercial real estate market is heating up for a number of reasons: 

  • A stronger economy and broad-based increases in national employment numbers have boosted confidence in the future.
  • Global investment in U.S. real estate is escalating, especially now that the real estate bubble in China has started to deflate.
  • In California, tech companies like Google and Facebook are buying up available real estate to prepare for future growth.
  • A changing e-commerce landscape has time-dependent, delivery-based companies (like Amazon Fresh) searching for properties that are closer to their customers so that they can offer same-day service.
  • Commercial rents are increasing, yet interest rates remain at record-low levels, making commercial real estate investment attractive to a much broader audience. 

Good time to buy

Instead of being put off by these trends indicating a strong commercial purchase market, business owners who are leasing their space should consider purchasing a building now before it’s too late. Building ownership stabilizes costs, makes it easier to maximize efficiency and make long-term investments in the business, and carries significant tax advantages.

Leasing is often the best place to start for a new business, but companies that plan to be around for the long-term should consider purchasing their own real estate. Business owners who have been lucky enough to secure low-rent spaces shouldn’t be surprised to see substantial rent increases when their term is up. Further, in the current low-interest rate environment, businesses that are able to purchase now should take the opportunity seriously before interest rates increase.

Buyers are reporting a number of situations, however, where they are getting pushed out — sometimes unfairly — in multiple-offer situations. It’s foreseeable that sellers will often receive multiple offers in a competitive market, in which case they counter the offers at a price that’s higher than the listed price.

Unfortunately, there are also cases where the seller puts a property up for sale, then after receiving multiple offers, takes it off the market. In extreme cases, a seller may even ask for more money after the borrower made an offer at the initially agreed-upon listing price.

Prepare in advance

The best preparation strategy for mortgage originators is to get their business-owner clients prequalified right away when the latter make the decision to buy rather than lease. Prequalification ensures that the client has provided all of the information necessary to be approved for financing, gives the client an edge over competing buyers and generally assures a speedier approval process once the client finds the ideal building.

To prequalify, clients need to provide their personal and business tax returns, personal financial statements, and an updated profit and loss balance sheet. These prospective buyers also should decide how much money they can spend on a downpayment, which will help determine the maximum loan amount. As noted, SBA 504 loan programs are especially attractive because the downpayment may be as low as 10 percent, in contrast to conventional commercial loans, with downpayments usually ranging from 20 percent to 35 percent.

Throughout the loan process, the broker, borrower, lender and the CDC should be in constant communication to expedite the approval process. Sometimes, prequalification is a very straightforward process. Other times, the information provided by the borrower raises questions that need to be addressed prior to loan approval.

Perhaps the deal is tighter than expected, for instance, or cash flow is worryingly lean. In cases like these, the CDC works with the broker and borrower to anticipate and address any issues that will be raised during the underwriting process. Complicated situations such as these require extra time, and extra days could cause the buyer to lose out on a property, which is why prompt prequalification helps to prevent a good deal of frustration later in the process.

Negotiation leverage

A broker and client may maximize the latter’s leverage to negotiate for the ideal property during prequalification in an SBA 504 lending scenario. Based on the client’s current business rent expense, determine what amount could be borrowed that would result in a monthly mortgage rate equaling the client’s current rent. This will help indicate if the borrower will be able to afford to the maximum prequalification amount available from the lender.

This knowledge is useful when applied to property-purchase negotiations. Borrowers will often go through multiple rounds of offers, and by knowing their predetermined loan-amount limit, they feel more comfortable and have more confidence because they know exactly how high they can afford to go on the deal.

This is also a benefit when an offer is accepted because a prequalification letter to support the offer can be turned around almost immediately. When prequalification is done correctly, the CDC and lender are comfortable with the finances of a deal at the outset and can support the borrower in a competitive situation, because the upfront preparation has already been done.

The commercial real estate market remains a competitive one, especially for small-business owners without endless capital resources. But armed with the flexibility and low downpayments of SBA 504 loans, mortgage originators and their small-business clients will find that advanced preparation, particularly in the form of loan prequalification, makes it easier to compete with the big guys in the property-purchase game.   


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