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Business

Mark Mattingly: SBA Lending Program Expanded to Benefit More Buyers

SBA 504 loans are worth consideration by business owners before extending or entering a lease

The federal government recently expanded its Small Business Administration loan program, increasing the total loan size available and covering more and larger businesses. This is great news for the commercial real estate sector, as it offers the most attractive loan terms seen in years, and fills a troubling gap in the commercial lending market, which has yet to rebound from the financial crisis.

Mark Mattingly
Mark Mattingly

Companies that have been forced to lease their facilities because of the high cost of properties, and the prohibitive barriers to financing — in particular the typical requirement for 30 percent to 40 percent down payments — the SBA program offers a means to transition to property ownership rather than tenancy.

This is a short summary of the terms and advantages of the SBA 504 financing program. Business owners who occupy at least 51 percent of their property can qualify for an SBA 504 loan.

The SBA 504 loan program leverages bank financing through a monthly pooling process that provides America’s small businesses the type of access to capital normally available only to large corporations. The bank provides a first mortgage loan typically for 50 percent of the project cost, and the SBA provides a second mortgage typically for 40 percent of the project cost.

The SBA 504 second mortgages are pooled and sold through the private capital markets to institutional investors. Those investors are guaranteed by the SBA. Through this process, the small business is able to obtain a below-market interest rate and up to 90 percent financing for commercial real estate acquisition. The SBA 504 loans are originated through a Certified Development Corporation (CDC) that is licensed by the SBA to originate, close and service the loans. CDCs work hand in hand with the first mortgage lender to assist the small-business owner in access to financing.

The example below shows the rate and term of a recently funded project:

» Bank of America (first), 25-year amortization due in 20 at 4.3 percent fixed interest rate for seven years

» SBA 504 (second), 20 years fully amortized at 5.09 percent fixed for 20 years

That’s a blended interest rate of about 4.7 percent.

In my 30 years as a commercial real estate broker, I have never seen a loan program and interest rates as attractive as this. Combined with depressed asset valuations (prices), this is an exceptional opportunity. Any business owner should seriously consider this before extending or entering into a lease for his or her company.

Our analysis clearly demonstrates that utilizing the SBA 504 program results in occupancy cost lower than current market lease rates. Combined with the tax advantages of real property ownership, including the deductibility of mortgage interest, depreciation expense and traditional asset appreciation, makes this a once-in-a-lifetime opportunity.

You can learn more by contacting us at Pacifica Commercial Realty. We will be happy to introduce you to the lending experts who make this program easily understood and accessible to your company.

— Mark Mattingly is executive vice president of Pacifica Commercial Realty.

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