100% LTV commercial real estate financing is possible for successful small businesses.
Commercial real estate loans with no down payment are available for purchase, refinance or construction of a building for your business with nothing down and you can possibly finance all closing costs and even some other business debt and working capital using an SBA loan, but like all commercial lending programs there are caveats.
100 Percent Loans – SBA Only
100% LTV commercial real estate financing is purely an SBA offering from a small percentage of preferred lenders. These are real estate loans for “owner occupied” commercial properties which means that your business must occupy at least 51% of the property. These loans are NOT for investment properties, although there are some industries like self storage that are “investment-like” that are eligible and RV park financing is possible, although both of those industries require at least 10% down.
Major conditions for 100% financing eligibility:
Established businesses only.
Business must have solid, consistent cash flow showing enough income to qualify.
Small business typically has to meet a DSCR (debt service coverage ratio) of 1.15x or better, but there are exceptions.
All business owners must have good credit and good credit scores. Poor past credit must be old, explainable and isolated, but we have helped many clients get an SBA loan after bankruptcy including a Chapter 7).
Typically you must already have a history of ownership of the business seeking financing as new business acquisitions usually require 10% down, although there are a (very) few lenders who will allow you to buy a business with no down payment if you are buying a business just like the one you currently own.
Ideal candidates for 100% commercial real estate financing would be businesses with current lease payments close to what their new proposed mortgage payment would be, but this is definitely not a requirement as many borrowers can certainly qualify for larger loans with significantly more expensive payments as long as their business is profitable enough and the lender can get comfortable with the request.
Tenants Can Help Pay the Loan
Keep in mind that SBA requires a business “owner occupy” at least 51% of a building* and that the cash flow of the business be strong enough to qualify for 100% financing, but the other 49% of the building can be rented out. So…it is possible that you could purchase a building that currently has one or more tenants or you could take on tenants and significantly reduce the amount of your monthly expenses.
* Technically, the SBA allows a borrower to put down just 5% on a business acquisition IF the seller of the business is willing to hold a second mortgage for the other 5% as long as it is on “full standby” for the life of the loan. (Full standby means no payments to be made while you have the SBA loan).
100% Commercial Real Estate Financing
100 percent commercial loans are not a new thing for SBA lenders. For many years, lenders have recognized that the down payment has been one of the biggest impediments to buying small business real estate, and many SBA and some conventional lenders have made no down payment loans available to certain types of businesses (typically dentists, doctors and veterinarians).
This post is about a more recent development where some lenders are allowing 100% financing for ESTABLISHED SBA-eligible businesses that are otherwise solid but do not have (or do not want to part with) the larger down payment that many lenders require.
Generic Buildings Preferred But Not Required
There are more options if the building to be financed is a multi-use or “general purpose” building that almost any type of business could occupy, but we have seen 100% commercial mortgage transactions where non-traditional buildings have been approved, for instance, a dog daycare business with a building and a little bit of acreage, assisted living facilities, residential board and care homes and franchised restaurants.
100% Financing “Plus”
Some lenders also allow for well over 100 percent financing and if your transaction is strong enough you can also roll in renovation costs,closing costs, other business debt and working capital.
In this case, you can purchase the land and construct the building all in one loan and one closing, although we have occassionally seen lenders offer a bridge loan for the land if there is a hard deadline to close on it first AND IF the lender has already issued a commitment for the construction/permanent loan.
Finance First 2 Years of Payments
One unique feature about SBA construction loans is that not only can you roll in all the closing costs and construction interest, but in some cases, lenders will allow you to finance some of the new mortgage payments if you have a business that requires some lease up/ramp up like an assisted living facility or a self storage. In this case, it is actually possible to finance up to the first 2 years of payments for an expanding business constructing a new facility.
SBA Loan With No Down Payment For “Business Expansion”
Another way to acquire a property with no down payment is to leverage equity that exists on the balance sheet or in a property of an existing business. The key is having enough equity on your balance sheet or enough equity in another property that you can leverage in lieu of a down payment. Not many lenders are on board with this option, but it is available for stronger businesses/stronger borrowers and can result in some very good terms.
For this to work, the existing business must be solid and must purchase the new business/building using the same corporate structure with the same borrowers/guarantors.
This technique can also be used for a business expansion with no commercial property. In this case, a lender may require a business valuation to substantiate that there is enough equity in your business to leverage your balance sheet to buy another business and the acquired business must become a part of the existing business, however, non-real estate deals are typically limited to a 10 year term and amortization rather than the usual 25 years.
SBA Loan No Down Payment – Other Options
Borrow the Down Payment
For transactions where it is not possible to get 100% commercial real estate financing (and a down payment is required), or in cases where it makes sense to borrow the down payment in order to get more attractive terms, the SBA allows you to get a loan for the required equity. There are a few ways to do this:
if you have another source of income or a spouse with income then as long as you can prove the ability to repay the borrowed money from that other source then it is allowable. We have helped numerous clients do this as there are many types of businesses that with proper management do not require you to be 100% hands on, so if you have another source of income, a spouse with income or another job or business you can make this happen.
In some cases, the business itself can borrow the money for the down payment. This happens far less frequently, but if your business is solid then it is possible and this may allow you to get excellent terms. As an alternative to true 100% financing, it might be possible that you could put down 10% and the lender might “give you back” roughly the amount of the down payment in working capital. This is possible with businesses with strong enough cash flow and typically results in even better terms for the loan.
Retirement Account Rollover for Down Payment
SBA loans also allow (tax and penalty free) rollovers of certain retirement accounts such as SEP IRA’s or a 401k from a former employer to be used for the down payment.
Gifts and “Investors”
Gift funds are allowed with the SBA programs as well and you can also have “investors” – typically friends or family who would give you part of down payment in exchange for some ownership in the business.
Please contact me at jking (at) green commercial capital (dot) com if you have any questions or if you would like to see if you qualify.
You can also find out more about 100% commercial real estate financing on our website: here.
Depending on what you are borrowing for and which program you are using, you can borrow the down payment for an SBA loan.
You can borrow the down payment for SBA 7a loan if you have another source of income outside of the business that you are borrowing the money for AND if the payment on the borrowed money is something you can comfortably afford.
Your business can borrow the down payment on an SBA 504 loan as long as you can prove that the additional payment on the amount you borrow will not negatively impact your business. This is less common but available to stronger, more established businesses, especially those with significant post closing liquidity.
Re: the down payment for the 7a loan, the Small Business Administration states the following regarding acceptable forms of down payment:
Cash that is borrowed through a personal loan to the business owner with repayment demonstrated to come from a source other than the cash flow of the business (the salary paid to the owner by the business does not qualify).
Typical sources of down payment:
A Home Equity Loan or line of credit
401k from a former employer (these can be used tax and penalty free in certain situations)
A gift – usually from friend or family
An investor – in exchange for some percentage of ownership in the business
The Seller of a business or building can hold a portion of the down payment in the form of a loan*
Probably the most common scenario is to borrow against home equity as the payments are usually affordable and many borrowers have a spouse with income and some have either a “regular” job or another business or other source of income. This is especially common when a business being acquired or started is the type where the business owner does not need to be on site full time. For instance, a self storage business or a hotel or motel.
100% Financing – An Alternative for Existing Businesses
Keep in mind that there is a 100% financing option with the SBA 7a loan for existing businesses undergoing an expansion to new locations or buying real estate for the business. It is not without it’s shortcomings, but it can be a very good solution for some businesses. Click here for more info on 100% loans.
If you have a question about your situation feel free to e-mail me at jking(at)greencommercialcapital(dot)com.
*Seller financed debt must be on “full standby” for as long as you have the SBA loan. Full standby means no payments can be made on the loan. This sounds like it would not be useful, but it is very common as most Sellers are happy to get 95% of the proceeds of the sale at closing.
SBA loan rates for the 2 largest SBA programs – the 7a and the 504 – are quite a bit different from one another because the programs themselves are quite dissimilar.
The programs are similar in that they can be used for the purchase or construction of owner occupied commercial real estate. The 7a can be used for the refinance of commercial real estate as well as other business debts, and the 504 in rare instance of a major expansion can be used for refinancing real estate or equipment, but beyond that there are some major differences and these differences are partially responsible for the difference in rates and terms.
The 7a program can be can be used for a multitude of different business purposes including:
business debt consolidation
business acquisition
financing or refinancing equipment
purchase, refinance or construction of owner occupied commercial property
working capital
inventory
The 504 program is only used to finance commercial real estate (including FF&E) or long-life equipment.
SBA loan rates for commercial real estate transactions can be amortized over 25 years with the 7a program, whereas loans for working capital or business acquisitions can only be 10 years.
SBA 7a loans can also have a “blended maturity” when the loan is used for multiple purposes as when you are purchasing a business with a lot of goodwill and a lot of “long life” equipment. The SBA lender can finance the equipment piece of the loan over the remaining useful life of the equipment and the goodwill over 10 years giving you a blended maturity.
7a rates for commercial real estate loans can be anything from a “Prime plus” variable rate to a full 25 year fixed rate.
Most of the very active 7a lenders prefer to offer an SBA loan rate at a set margin above the Prime Rate and it is typically anything from 1 to 2.75% above Prime. Typically these “active” lenders will have more flexible underwriting criteria than the few lenders who will offer a true fixed rate.
The good news is that Prime is at an all time low of 3.25%, so for now at least, any of these rates can be considered “good.”
A 5 year fixed rate is also gaining in popularity as more lenders are willing to offer it. The loan is fixed for 5 years and then adjusts after that. Most of the active lenders prefer to offer something between 5% and 6% at the moment.
There are other options as well including a 10 year fixed with a 25 year amortization (for commercial real estate transactions), but again this is relatively rare and the rate would be higher than the 5 year.
SBA 504
The 504 program is only for commercial real estate and equipment (no working capital, etc.) although there are lenders who will offer a “companion 7a loan” for stronger transactions if you need working capital.
SBA loan rates for the 504 are actually 2 (really 3) loans because in 504 lending there is a first mortgage, a 2nd mortgage and a bridge loan, although it is not as cumbersome as it sounds.
The rate for the first mortgage is negotiated with the lender and in the case of real estate is very commonly a 5 year fixed rate with a 25 year amortization.
The one constant with 504 rates is the 2nd mortgage which is typically a “below market” 20 year fixed rate. The rate is based on the monthly sale of a debenture (bond) on Wall St. The rate for the second is currently in the 5.20% range.
I thought it might be helpful to make available a basic outline for putting together a small business loan business plan, so here ya go:
Section 1 – Overview of the Business
a)Briefly describe your business and what it does or will do.
b)Who are your customers/potential customers/clients?
c)Who is your competition?
d)What is your competitive advantage for this business?
e)How does your past education/business experience/passion relate to this business?
Section 2 – Business Structure and Management
a)What is the business structure? (i.e. “the business will be operated as an S-Corporation with Fred Flintstone as President and 50% owner and Wilma Flintstone as VP an 50% owner”).
b)Who will manage the day-to-day operations of the business?
c)Will the business employ any managers in addition to the owner?
Section 3 – Information about the Location of the Business
a)Size and site? (i.e. “the business will be located in a 2,500 sf building across the street from the Slate Shopping Center which is located on the main street through “Bedrock”).
b) Information about any neighboring tenants, if any.
c)Access and parking? (i.e. “the building has 12 parking spaces with direct access from HollyRock Blvd”).
d)Surrounding area? (i.e. “the building is located within a stone’s throw of the nearby Rock Home Depot and a new Rockwal-Mart”).
e) Detail hours of operation and number of employees.
Section 4 – Outline of the Advertising & Marketing Strategy
a) Provide a plan to grow and maintain a customer base.
b) Provide a description of any “pre-opening” advertising blitz.
c) Provide a description of any planned or ongoing advertising & marketing strategy (i.e. “we plan to use a combination of website development, social media, traditional advertising, promotional events, community involvement, and Pterodactyl Airlines billboard advertising”).
Section 5 – Revenues and Pricing
a)Revenue assumptions (i.e. “we expect “____” number of customers/sales per day/week with an average average sale of $_.__).
b) Give detailed projections for any “Ramp-up period” and discuss whether or not sales will be seasonal.
c) Provide details on any salaries and whether or not the owner and/or manager will have a salary and if this figure included in the projections.
d) Discuss how were the assumptions calculated? (i.e. “the revenues and expenses are based on comparable businesses: “Rockhead Quarry, Gravel and Tar,” “La Brea Gravel and Tar,” etc.).
e) Provide “industry specific” information (i.e. # of exam rooms (doctor or vet), # of tables (restaurant) or number of “Dino-cranes” (Gravel Pit).
The Creed Act is gaining momentum. Yesterday the Senate Committee on Small Business and Entrepreneurship led by Senators Mary Landrieu and Jim Risch approved legislation that would bring back the 504 refi program.
The vote is a big step in the process that would lead to the return of the program, but the really big news is that the legislation would make the refinance provision a PERMANENT part of the 504 program.
Updated – March 15, 2013:
The SBA has just announced that they support the return of the refinance provision of the 504 program via the CREED ACT. The Creed Act would renew the 90% loan to value “temporary” 504 refinance provision allowing many more businesses to re-structure their current financing and access capital while rates are still very low.
It remains to be seen if the legislation will be passed, but this is a big step in the right direction.
New Bill Gives Hope to Small Businesses
It’s way too early to know if a program that was helping a lot of small business owners refinance their commercial property and equipment loans will be coming back, but a new bill that allegedly has bi-partisan support has been introduced.
The legislation is called the The Commercial Real Estate and Economic Development Act (or CREED Act) and it was put forth by Senators Mary Landrieu and Jeanne Shaheen.
504 Refinance Program Expiration
For those who don’t know, the (temporary) 504 refinance program that was introduced a few years ago died an untimely and premature death this past September just as it was gaining traction with lenders and small businesses.
The program allowed business owners to refinance older, higher rate and usually shorter term debt with lower rate, long term debt, but it also allowed business owners to refinance at up to 90% of the appraised value of their buildings or equipment.
90% Loan to Value with Cash Out
The 90% guideline was a crucial component of the program as many business owners who had been unable to refinance conventionally due to lack of equity now had an option.
This new proposal would extend the program for 5 years and it comes at a time when lenders are getting healthy and many small businesses are starting to rebound from the recession. It could be a huge catalyst for these businesses as having the ability to refinance business debt – both commercial real estate and other debt – could have a dramatic impact on cash flow, further helping their recovery.
Some of the Benefits:
Many businesses have maturing loans (and less equity) then they had before and they cannot meet their current lender’s guidelines for new loans or for an extension. This gives business owners a more flexible option since they can finance all the way up to 90% ltv.
Business owners can access equity in their buildings to get working capital and to pay other eligible business expenses.
Rates are at or near all time lows.
It is a “zero subsidy program” meaning that fees paid by small businesses who get the loans pay for the program. i.e. This program does not cost the taxpayers.
These are low risk loans for lenders making the odds of approval higher than with conventional financing.
Click here for a full rundown of the current refinance provisions as well as the full anticipated guidelines of the new legislation.
When you apply for an SBA loan – or any loan – your odds of approval depend on a lot of factors. Assuming you have most of the right qualifications (the 5 C’s of credit, etc.), a lot of it depends on the lender you are seeking financing from. Specifically, what is their situation and how likely are they to approve your loan?
Well, the answer is: “It Depends”
It depends on the asset you are looking to finance. Is it a multi-use building that could be used for almost any business or is it a circular fondu restaurant that rotates around a giant fish tank.
Hint: “multi-use” is good.
It depends on whether your banker is an experienced SBA lender or if they just dabble in it. A lot of lenders have “discovered” SBA lending in the last few years and ‘aint exactly great at it. (Experienced = Good/Dabbling = Bad).
It depends on how the banks current portfolio of loans is performing. Does the bank have too high a concentration of one particular type of asset. Maybe you are trying to buy a self storage facility but the bank just had 3 self storage facilities default on their loans.
It depends on the banks capital. How much can the bank actually lend? Will your request be too large for them?
It depends on the banks perception of the health of the economy. Does the bank feel the economy is strong enough in your area to support your business or are they running scared and not actually lending?
It depends on the banks future plans. Are they in it for the long haul or are they positioning themselves to sell? (Either scenario could be good or bad).
It depends on how well the bank came through the carnage of the Recession? Are they still licking their wounds, circling their wagons, covering their as…well, you get the point.
It depends on whether the FDIC is the banks Puppetmaster. Is the banker putting on a good face and telling you that they are lending when in reality they are only lending to those who don’t need it because the FDIC is behind the scenes telling them what they can and cannot do?
My point? Odds are pretty good that since you already have a business to run, you might not be up on all this “dependent” stuff and you might need someone to do the dirty work for you. (Or at least someone with first hand knowledge of which bank is doing what).
So how do you know which SBA lender you can “depend” on…well that depends on who is helping you find that lender. Sorry, couldn’t resist just one more “depends.” (Okay, maybe 2).
Sometimes, there’s an easy solution because you have a business that has been thriving and your local community bank is ready,willing and able to help, but more and more that is not the case and you just might need help finding that lender who is right for you…and that is when you might want to enlist the help of an SBA Wingman 🙂
(Blended) Fixed Rates In High 4’s to Low 5’s Now Available
Most people who research the SBA 504 loan program for commercial real estate understand that it is heavily advertised as “fixed rate” financing. This is both true and false, but it is more true now than ever before…at least for a while.
The SBA 504 program consists of a first and second mortgage. The 2nd mortgage is always fixed at a “below market” rate and it is primarily what makes the program so attractive. (See below for current rates as of the date of this post).
7a Rates
The 7a program is the other SBA program that can be used for financing commercial real estate. It is usually a variable rate pegged to Prime amortized over 25 years and it can also be fixed for 5 or more years at a time, but that will be the subject of another post.
The Fake 504 Fixed Rate
Historically, most lenders will offer a first mortgage that is fixed for 5 years (or so) at a time and they (legally) advertise it as a “fixed rate,” but we all know it isn’t and that is why I typically refer to the program as “mostly fixed” (intelligent sounding, I know).
But now there is a new option IF you have a “multi-purpose” or “multi-use” building – a new true/real 25 year fixed rate 504 first mortgage loan. If you are unfamiliar with SBA financing it is only for “51% or more owner occupied business property” – please get in touch if you need clarification on this: jking (at) green commercial capital (dot) com.
It is not available for “single use” properties like hotels or self storage, but any owner occupied building that could house multiple types of businesses should be eligible including medical and dental offices, warehouses, manufacturing facilities, light industrial buildings and even an office building where your business occupies at least 51% of the space.
The rates for the first mortgage are very good at the moment – 5% to 5.5% depending on loan size, length of prepay penalty, etc.
504 2nd Mortgage Rates
The rates for the 20 year fixed rate 2nd mortgage as of today (they change monthly) are as follows:
4.462% for a purchase or acquisition loan
4.665% for a refinance loan
The 10 year fixed rate 504 loan is currently:
3.757%
4.003% for a refinance
The 10 year loan is typically used for equipment financing transactions.
Great Blended Rate
The combination of the 2 fixed rate loans is hard to beat – a 25 year first mortgage in the low to mid 5’s and a second in the mid 4’s – and unless something really dramatic happens to our economy, you shouldn’t need to worry about financing your building ever again.
The temporary SBA 504 refinance program has kind of suddenly become a big success (after a very sloooow start) and it has helped many small business owners refinance their current loans, consolidate debt and reduce their monthly expenses, but time could be running out for business owners to take advantage of this program because it is set to expire September 27th.
This is too bad, because it has provided a rare opportunity for business owners to get long term 90% loan to valuefinancing on their buildings – half of it fixed for 20 years at historically low rates.
Industries that were hit hard by the recession like hospitality and manufacturing have benefited from the program. In fact, SBA loans to refinance hotels were very hard to come by until this program started to take hold with lenders.
504 Refinance Deadline Looms
The program – originally part of the Small Business Jobs Act – was supposed to last 2 fullyears through September of this year, but much to everyone’s chagrin it does not look like it is going to be extended.
The reason for all of the “chagrinning” is that the program in it’s current form didn’t even hit the streets until 14 months after it was supposed to…which means it didn’t do a lot good for 14 of the 18 months it’s been available to date.
The delays in rolling out the program are immaterial at this point, but what is important is that deals are now getting done and the program has sparked a lot of lending and pumped life into some sectors of the commercial real estate market.
Financing of Business Expenses
One of the reasons the program has gained so much traction lately is that the SBA tweaked the program last Fall to allow “cash out” for legit business expenses including such things as business credit card debt, equipment purchases, building renovations, repairs and maintenance, salaries, rent, etc. Unfortunately, the program is set to expire just as word is getting out about all of the great things you can use the program for…and just when lenders are starting to get healthy.
So, if you own a building and you run your business out of itand you think you could benefit from refinancing, then you might want to take a fast (but thorough) look at the 504 refinance program before it dies an untimely death.
For more detailed info on the program guidelines, click here.
A Glimmer of Hope
3 Senators have just introduced a new bill – S.2364 – that would extend the refinance provision for another year. Senators Olympia Snowe, Mary Landrieu, and Jeanne Shaheen have introduced the legislation in the hopes that the program could be extended.
Word on the street is that it is not likely, but it’s a new bill, so you never know…stay tuned.
