Jeff Rauth

The SBA 504 refinance program was signed into law in September 2010 and has been, for the most part, a complete failure. One year after it was announced, there’s been approximately 60 loans funded nationally… At approximately $50 million in total debt issued. A drop in the bucket compared to the $15 billion initially allocated to the program.

Prior to it rolling out, most industry insiders considered this to be virtually the holy grail of owner user commercial real estate financing. It was going to “save” the small business lending industry and save thousands of loans for borrowers that could not qualify for conventional loans (Largely due to declining property values) .

Low long term fixed rates, with 20 to 25 year amortization schedules and of course at tantalizingly high leverage at 90% made all of us drool.

What happened?

How could it go from being the biggest no brainer in decades to being utterly dormant? (For example there has been 3, that’s right 3, SBA 504 loan refinances completed in the entire state of Arizona as of September 1, 2011 since it was rolled out a year ago. The answer is that there has been utter confusion and several technical restrictions (otherwise known as “gottcha’s”) that have eliminated virtually 99% of all loan requests. Here a few of the most prominent issues that we’ve seen:

1. Major delay/ lag from the SBA from when the program was signed into law and when the “small print” was actually rolled out and they began accepting loan submissions; which was in February 2011. So the program which has a two year time limited wasted 6 months as it just sat in limbo. No one had any real idea what was going on and we all just waited for the program to be rolled out. It’s very hard not to speculate why this happened. Was it just bureaucracy at its worse or was there real concern that the SBA would be overrun with deals?

2. This next restriction was perhaps the biggest blow/let down of the 504 program. It was that the borrowers existing loan had to be ballooning before 12/31/2012 to qualify. This alone eliminated probably 90% of all the loan requests in the nation. It was later switched to just requiring you to have a balloon, than was eliminated completely.

3. The lineage of the existing loan has to be eligible under the traditional SBA 504 rules. Existing debt had to have been used to finance hard assets such as real estate and equipment. Meaning if part (More than 15%) of your existing debt was ever used to finance working capital, for example and even if that loan has been refinanced 3 times since, then that portion of the debt was ineligible and killed your entire SBA 504 refinance. This rule is still in effect and is still killing transactions.

4. The appraisal had to be ordered before the loan was approved. And delivered when the loan was submitted to the SBA. This was a major turn off for many borrowers as they didn’t want to risk the cost of the appraisal, before they had any real indication that there loan would be approved. This rule has since been removed and you can wait until after the approval has been delivered.

5. You cannot refinance an existing government loan with the SBA 504 loan. So if you have a variable rate SBA 7a loan, you cannot refinance that debt with the 504.

We do SBA loans and appreciate what the SBA has done historically to help small business. This is not meant to be just a slam on the agency. But it really has been a shame on how much anticipation the program had, coupled with how many small businesses the program could have helped. All in all, it has wasted tens of thousands of hours as borrowers submitted loan request that where declined. They could have used that time in trying to improve their business. Seems like such a waste. Hopefully more of the kinks will be worked out before the program expires.

We have seen steady increases in originations in virtually all fronts of commercial lending in the last year. Is all of this momentum and good news about to disappear due to the struggling national and global economy? For example, SBA loans are up and are about to run out of its allocated capital before their fiscal year end (September 30^th 2011), and conventional investment property loans are up over 107% in 2^nd quarter 2011 from the same period a year ago (according to the Mortgage Bankers Association).

In addition, as far as our perspective from doing transactions on the “street,” we’ve not only seen an increase in the number of banks competing on individual loan requests, but also by loosening underwriting standards and by improving loan products (such as our 25 year fixed loan), lowering commercial interest rates, etc all designed to win loans from other banks.

No one knows of course, whether we are about to enter another prolonged stall in national commercial real estate lending/small business lending or not. But the commercial mortgage secondary market holds a lot of the answers to this question. The secondary market provides much of the overall liquidity of the market. Currently the demand for government guaranteed loans such as the SBA 7a loans remain incredible high, with premiums (paid to banks that sell their loans) at some of the highest levels ever seen. This is great news and it gives a lot of confidence that we might just roll through this latest batch of bad news.

However, CMBS loans, which are directly tied to the secondary market, have seen several setbacks this year. For example, there’s been lower than expected fundings, soft demand and investors have demanded higher margins (higher rates of return) to spur their desire to buy this debt. This slowdown in demand translates into low originations. Also troubling is that the default rates with these types of loans continue to increase.

One of the big issues in this sector, and it’s been the same issue since 2007 is that CMBS loans offered higher loan to value financing than traditional commercial loans offered. The problem has been exasperated as property values have declined over the last 4 years. For example, take a $10 million shopping center that received 80% financing in 2006. Now the property is worth $8 million and the max loan to value one can find is usually around 65%...

The CMBS market creates problems for the whole market, even for those banks and borrowers that aren’t involved in it. Bottom line, it reduces the overall liquidity and confidence in the market which in turn slows everything down.

The brightest spot remains Government Guaranteed lending such as SBA loans. Also, at the end of the day, banks can only hold out for so long before they lend. Most community banks do need to lend in order to win deposits with small business borrowers. And getting more deposits is still how small banks grow. Also on a positive side, do we really need the CMBS market? We have survived the last 4 years without it. Maybe it’s not as critical as was once thought. One thing is certain, 2011 and 2012 will remain tedious and slightly painful for all involved.

Medical financing continues to enjoy the best loan options in the business. Lenders continue to "salivate" over doctors, dentist, and veterinarians. For example, 120% financing on purchases and up to 90% on construction transactions still exist.

A lot of doctors are surprised to hear this, especially in regards to construction financing, as most banks are currently no longer considering construction loans. However, there still are a handful of national, non-depository banks and lenders that continue to lend on ground up construction.

One of the interesting things about both purchase or construction financing for medical practitioners is the ability to roll in other non real estate components into the loan. For example, say you where considering purchasing an office condo, which only currently had the outer shell complete. The cost to build out of the space can still be included. In addition, the cost of medical equipment can be rolled into and often amortized over a 25 year schedule, unlike most equipment lenders that normally only offer 5 - 7 year schedules. Also, lines of credit/working capital can be included, and beyond the value of the real estate.

We recently closed a physician loan in Georgia, on a ground up construction project which is a very good example of this. He purchased the land for $300,000 and the cost for construction was $500,000. For most non medical borrowers they would only be able to have the 80% of the $800,000 financed. However with this doctor, he added $150,000 of equipment and a $90,000 line of credit. He received 90% financing of the total of $1,040,000. This is 130% loan-to-value financing off of the value of the real estate, which is pretty aggressive. Rate was 6% and was on a 25 year amortization schedule.

Medical practitioners should take some time or work with a seasoned third party provider to produce options beyond what the local banks provide. There can be huge differences, such as higher leverage, longer fixed rates (up to 10 years) and amortization schedules up to 30 years. As a comparison, most local banks only offer 20 year amortization schedules with 5 year fixed rates, and they expect side business, like your checking, saving, etc., if you work with them.

Jeff Rauth is President of Commercial Finance Advisors, Inc. They close commercial mortgages throughout the US from $400,000 plus. 248 885-8797. medical financing, physician loan, commercial mortgage rates.

Medical financing continues to enjoy the best loan options in the business. Lenders continue to "salivate" over doctors, dentist, and veterinarians loans. For example, 120% financing on purchases and up to 90% on construction transactions still exists.

A lot of doctors are surprised to hear this, especially in regards to construction financing, as most banks are currently no longer considering construction loans. However, there still are a handful of national, non depository banks and lenders that continue to lend on ground up construction.

One of the interesting things about both purchase or construction financing for medical practitioners is the ability to roll in other non real estate components into the loan. For example, say you where considering purchasing an office condo, which only currently had the outer shell complete. The cost to build out of the space can still be included. In addition, the cost of medical equipment can be rolled into and often amortized over a 25 year schedule, unlike most equipment lenders that normally only offer 5 - 7 year schedules. Also lines of credit/working capital can be included, and beyond the value of the real estate.

We recently closed a physician loan in Georgia, on a ground up construction project which is a very good example of this. He purchased the land for $300,000 and the cost for construction was $500,000. For most non medical borrowers they would only be able to have the 80% of the $800,000 financed. However with this doctor, he added $150,000 of equipment and a $90,000 line of credit. He received 90% financing of the total of $1,040,000. This is 130% loan to value financing off of the value of the real estate, which is pretty aggressive. Rate was 6% and was on a 25 year amortization schedule.

Medical practitioners should take some time or work with a seasoned third party provider to produce options beyond what the local banks provide. There can be huge differences, again like higher leverage, longer fixed rates (up to 10 years) and amortization schedules up to 30 years. As a comparison, most local banks only offer 20 year amortization schedules with 5 year fixed rates, and they expect side business, like your checking, saving, etc if you work with them.

Jeff Rauth is President of Commercial Finance Advisors, Inc. They close commercial mortgages throughout the US from $400,000 plus. 248 885-8797. Check out their current commercial mortgage rates here.

We are going to break down the current SBA loan rates, into two categories, 1. on SBA 7a loans and 2. on SBA 504 loans. Both are very different so we will describe what the current rates are separately, and give a brief description of the programs themselves.

SBA Loan Rates on 7a Loans

The vast majority of banks tie their 7a loans to Prime Rate, which is currently at 3.25%. The banks margin is normally 2.75%, so the Effective Rate for the borrower is currently at 6%. It is very uncommon in this market for a bank to offer an effective rate less than 6%. Most banks are reluctant to lend, so if they do they are currently maxing out their margin.

Also, the SBA 7a loan, is used for the purchase or refinance of commercial real estate, business goodwill, equipment, debt consolidation (limited) and working capital. The loan is almost always amortized over 25 years and the rate floats with Prime, adjusting quarterly. Prepayment penalty is 5% year one, 3% year 2, 1% year 3, gone thereafter. Loan amounts can go up to $5,000,000.

SBA Loan Rates on 504 Loans

The SBA 504 loan, has two different loans and therefore 2 different rates. The first lien position loan is a conventional bank loan, so its terms and rates vary from one lender to the next. By the most common loan would be a 5 year fixed on either a 20 or 25 year amortization schedule. For example, our 504 loans are tied to the LIBOR 5 Year Swap, which is currently at 2.15%. The margin depends on the financial strength of the borrower as well as the loan size, but the Effective Rate is currently between 5.8% and 6.2%, on a 25 year amortization schedule. Theses loan also come in a 1, 3 or 10 year fixed rates, on a 15, 20 or 25 year amortization schedules.

The second lien loan is the SBA loan also referred to as the CDC loan, it???s a 20 year fixed loan on a 20 year amortization schedule. The current debenture rate is 5.79%.

Go here to see the most updated commercial loan rates, including the 504 debenture rates, conventional commercial mortgage and SBA 7a loan rates.

Jeff Rauth is President of Commercial Finance Advisors, Inc. They do commercial mortgages nationwide from $500,000 to $10,000,000. To get more information go here: commercial loan rates, Current SBA Loan Rates, or commercial mortgage.