Exploring the Details of the SBA Commercial Real Estate Loan
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Expanding your real estate portfolio doesn’t have to feel like you’re on the set of Fight Club. We can not only win, but we can also collaborate and win even further. Who should be in your corner this year?
Well, a good lender that can unlock funding quickly for you is high on that list. However, it’s time to look at a more "silent" partner behind the lenders, if you will. That would be the Small Business Administration (SBA). The news touches on the SBA occasionally, usually about the Paycheck Protection Program (PPP).
We wanted to take time to really explore the details of what’s available from the SBA in terms of commercial real estate assistance, so you can continue to expand your portfolio, build new partnerships, and revitalize your local community.
Why Does the SBA Offer Commercial Real Estate Loan-Friendly Options?
The SBA knows that communities have to have funding in order to grow. A city full of vacant, unused buildings is not making anyone more or providing any jobs. By working on commercial real estate projects, you are doing exactly what the government wants you to do.
The SBA does put some restrictions on its loan programs. The focus has to be on using the space for the benefit of the community, by providing revenue, taxes, and jobs. No SBA commercial real estate loan is designed to support only speculative activity.
Enter the 504 Loan
According to the SBA website, a 504 loan is designed for business growth and job creation. This does include the purchase and construction of buildings. It even includes purchasing land. We recommend looking at the site for full information, including browsing their 504 authorization file library
The terms of a 504 loan are more generous than what you’ll find in purely private CRE loans. The repayment terms are either ten years or 20 years, and the interest rates are set at an increment above five-year and ten-year Treasury notes.
You have to get a 504 loan through Certified Development Companies that are already vetted by the SBA. They have a locator you can check out that will list a genuine CDC. Be wary, as there are some that are impersonating qualified lenders.
This process is a bit involved, unlike what you may experience with non-SBA commercial real estate loans. Documentation is strict with SBA-backed loans.
The 7a Loan Guaranty Program
The 504 program isn’t for everyone. If you need a different program, take a look at the 7(a) loan program, which has multiple types of loans. You can borrow up to $5 million dollars. Most that are involved in complex commercial real estate know that you can definitely spend 5 million dollars if you aren’t careful.
Like the 504 program, this is about real-world impact, not just your exit strategy. You will need to go into great detail to explain how your loan would allow you to impact the local community that you’re most interested in.
Turning to Local Support
Getting into this aspect of commercial real estate development isn’t easy, nor should it be taken lightly. You will connect with business development leaders on the ground and no-profit groups dedicated to the task of making the community a better place.
Your local area understands that ongoing development is both a blessing and a curse. Too much development for a smaller space can drive out the quaint charm of an ara, but not enough development turns it into a ghost town.
Local Tax Incentives
Since SBA commercial real estate loans are focused on building up local communities, it also makes sense to look at local tax incentives and credits.
This will vary by not just state, but the local area itself. Some areas will have more tax incentives than others. For example, New York City has a great program for commercial investors interested in building housing in Urban Development Action Area Project zones.
Downsides to SBA-Backed Loan Programs
We’ve touched on the major benefits of going with a loan backed by the SBA, including lower interest rates and longer loan terms. However, there are some downsides that we need to advise on.
Total Turnaround Timeline
Loans that have the full guarantee of the US government are going to take more time than you think to clear. It’s important to use realistic timelines when planning a larger project. If you need to speed things up, you can look to SBA Express Loans that have a faster approval rate, but they are also smaller than what you can get with the traditional 7(a) Guaranteed loans.
Restrictions Depend on Loan Type
The SBA offers disaster loan funding, which is directly from this government agency (instead of a lender qualified by the SBA). It does require that a natural disaster is deemed such by the federal government. Even if you experience severe weather that causes damage to your property, that doesn’t mean that you’ll be able to tap into disaster funds just to get more money.
Stricter Underwriting
SBA loans are strict, which is something that many in the greater commercial real estate space don’t wish to hear. You have to meet multiple levels of criteria. While there are newer CRE operations that can qualify for SBA loans, it is more common to see established companies able to get this type of loan.
Anyone interested in genuinely getting an SBA loan can to be comfortable with submitting detailed paperwork, including sensitive financial information. It is common for the SGBA to require historical tax returns for not just the business, but personal tax returns for everyone listed on the loan.
The SBA Is in Your Corner
Don’t hesitate to check out what options you have for an SBA commercial real estate. Despite the downsides, these are loans that are guaranteed by the country’s largest business development agency. With the SBA in your corner to help with funding, how can you go wrong?
Building up a community is exhausting, but it’s up to all of us within the greater commercial real estate industry to do our part to make any local area we serve a place where people are excited to live, work, and play.
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