Are banks still doing SBA 504 loans?

Question

In today's COVID-19 environment and banks processing the SBA PPP loans left and right to support the economy, are banks still doing the SBA 504 loans?  I noticed recently that 504 loans are going for 3% or under for 20 to 25 years, which is almost unheard of.  With 90% down for something like self storage or equipment loans, it is pretty much free money after inflation.  Anyone has experience with this recently or any bankers here that are still working with this right now?  What are your thoughts?

Ken Jernigan · Answer

@Zach Quick

The loan has to be at least 2 years old and you have to have been current for the last year (TTM). Seller financing is OK, but SBA's going to want to see a proper promissory note and payment schedule. They're pretty picky about related-party debt, so I hope the seller loan is not from your uncle.

A self-storage would be eligible for up to 90% of appraised value.

SBA fees are roughly: 1) SBA guarantee fee 0.5%, 2) Funding fee: 0.25%, 3) CDC processing fee: 1.5%, Underwriter fee: 0.04% of gross debenture amount. Additionally, the third-party lender owes the SBA a 0.5% lenders fee which can be passed on the the borrower. These can all be capitalized into the loan, provided the property appraises as expected. Note these are calculated on the SBA debenture amount, generally about 35-40% of total project costs, with the exception of the lenders fee which is totaled on the third party loan. The third party lender may charge other fees, such as origination and commitment. SBA fees sometimes change, so I would want to verify current fees with a CDC.

You have to take in other closing costs, like appraisal, environmental, title insurance, attorney. These can also be added to the loan amount.

There are pre-pay penalties, starting at 5% of SBA amount, declining 0.5% each year. I always tell folks, though, if you can get 25-year money at less than 3%, why would you want to re-fi? SBA debentures are assumable, though this is rare. The third party loan is completely separate, save for the conditions of the lender agreement, so prepayment there would be subject to the terms you can get from a lender. Third party loans can be floating or fixed, fully amortizing or balloon. They must, however, carry a minimum 10-year term. You can re-finance a third-party loan and leave the debenture in place, but this is subject to SBA approval, and they generally don't allow cash-outs via third party refi.

I would watch 504 developments as we go into the covid-induced recession. In 2008, SBA used the 504 re-fi much more aggressively to provide companies with balance sheet repair. Use of proceeds was liberalized and fees reduced. In addition, SBA provided liquidity by creating a first lien purchase pool for third party lenders, allowing them to sell their loans upon closing. We may be revisiting that program later this year.

Charles Kao · Answer

@Daniel Lioz Pretty hard to get done and SBA 504s take forever as you have two underwritings and fees are high.  If you can't get the 10 percent down its not worth trying for 15 percent downpayment because fees are so high you are better off going conventional.

Ken Jernigan · Answer

@Daniel Lioz Not sure I follow your structure here. 504 gives you 90% against appraised value if you are an existing business (2 years operation), otherwise for SS it's 85%. But I'll assume your acquisition will come under an existing 2-year old entity. The Green Loan doesn't do 100%, but the standard advance rates. It doesn't make a lot of sense to do only $50K in equipment with it since the chief benefit is to increase the SBA lending limit from $5 million to $16.5 million. Unless you're doing a lot of big projects, this doesn't get you anything. And there is an extra burden of documenting energy savings or production with Green Loans. Same thing with equipment loans--standard advance rates. Term for equipment loans is 10 years or useful life of equipment. I doubt you could get a useful life rep on solar or containers more than 10 years.

If you just did the solar, it's likely it could be rolled into the real estate loan term--25 years.

If you slammed everything up into one 504 loan, total project cost would be $1,150K plus soft costs. Third party lender would do 50% or $575K, SBA 40% or $460K, and you'd come up with cash equity of 10% or $115K. SBA or any lender for that matter will fund based on the lower of cost or appraisal. SBA fees are roughly 2.5% of SBA amount or $11.5K, plus any other costs, such as appraisal, environmental, attorney. You can add these fees to the loan amount, so you can make the adjustments as necessary. None of this includes third party lender fees.

If you want to capitalize on increased value based on appraisal, then your strategy should be a bridge facility to be taken out on stabilization. You could then consider SBA, or maybe CMBS if you have the track record. CMBS lenders don't particularly care what you do with cash out proceeds.

Daniel Lioz · Answer

@Ken Jernigan

So for the sake of easy math, say in a single transaction I want to buy Self Storage for $1m (504 SBA Loan 90% LTV), I will add $50K in Solar Panels (504 Green SBA Loan 100%), purchase $100K in Shipping Containers for additional self-storage capacity (which is 100% financed by the Container seller over 10 years or 504 SBA Equipment Loan 100%), so the estimated assessed value of the facility goes from $1m to may be $2m (because of solar and added storage capacity), what will my numbers look like from loans to out of pocket?  the total cost being ($1m + $50k + $100K with 3 different loans in 1 transaction).

Zach Quick · Answer

@Ken Jernigan I shouldn’t say it was that much of a pain, they knew what they were doing, just a pain like any loan plus 10% pain.

So to refinance an existing storage facility you need to have at least 2 years of payments with existing loan. Interesting, I’m assuming that can be with seller financing too?

What kind of fees does 504 have on a potential refinance? And pre-pay penalties?

Ken Jernigan · Answer

@Zach Quick Yes you can re-fi with a 504, but there are a number of restrictions. You can't re-fi an existing government-backed loan. You have to have had the re-fied loan for at least 2 years and current for the last year. The loan had to be used to acquire 504-eligible assets, Only 20% of loan proceeds can be used for working capital.

All that being said, lenders still say they are doing 504's and rates are super low--sub-3% for 25-year fixed. I'd expect underwriting standards to tighten now and in the near future, though. Your 7(a) experience was likely due to working with a lender who didn't know or like the SBA system. I've been doing SBA loans a long time. If you have more specific questions, you can PM me.

Zach Quick · Answer

Is a refinance a common option for SBA 504? I’ve done/have a 7(a) and it was a pain, but have heard recently of the rates involved on a 504 so been more curious about them.

Greg Dickerson · Answer

Yes but they are busy with the PPC and rescue loans right now depending on where your located. You may need to talk to a few to get it done anytime soon.

Miles McClure · Answer

It is hard right now with PPP. CDC's are helping lots of banks that don't normally do SBA with PPP so they are swamped with that but I have been eyeing this unique opportunity that has presented itself. Pricing on treasury's has somewhat "stabilized" for the moment after the roller coaster ride so maybe it will stay cheap for a while.

Are banks still doing SBA 504 loans?

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