All Forum Posts by: Scott Snow

Honestly, both products could work for this deal and the lender will probably decide which is a better fit for them so I would not worry too much on that. USDA  requires a 20% tangible net worth or equity injection into the deal but many of the other aspects are the same as SBA. An SBA lender would most likely want 15-20% down as well for a rural deal. You will need financials that show you can cash flow the project and probably projections if this is an expansion of business along with a business plan. There is no way to do a no money down deal either way. You can do some seller carryback financing for some of the equity but it would have to be on standby for it to count, meaning no payments for the life of the loan. 

Contact some local SBA bankers as most do SBA & USDA anyway. They should be able to talk you through it and answer more questions. 

@Ori Skloot Lots to consider here for sure for SBA loan. I just completed a business & building purchase loan. Some things to figure out:

• What is the building worth vs what are you paying for the business aka goodwill?
  • There could be so much goodwill that the building will not fully collateralize the loan and additional collateral would be needed.
• For the seller note to count as equity for your loan it must be on standby (no payments) for the life of the loan. If not on standby then it is really not equity but more debt. You could possibly refinance it at a later time to get rid of it.
• You mentioned it doesn't cash flow currently, that will make it hard for underwriting to get approved. You need 1.15 DSC-Debt Service or higher for an approval. You will need solid evidence that the repair will get the business on track.
• You will need projections with detail assumptions explaining the reasons profit will increase after repairs.
• You must occupy 51% to be SBA eligible.

Deals like this get done under SBA loans all the time but business acquisition with real estate has more aspects to consider than just a straight real estate purchase. Let me know how I can help as I lend in CA.

I would recommend you consult with your lender on most of this as they will require an environmental report for sure but not always a Phase 1 depending on the loan size, location, building type, etc.. There many types of reports but more often or not the lender wants to order the report from their trusted vendors that provide quality work and make sure it is compliant with SBA if you get an SBA loan. The other reports you have mentioned would be something on your own. Surveys can vary but more often than not they are not required. Many times the title insurance and endorsements a lender wants can drive this as well.

Overall I would consult the lender you are going to work with as they can tell you what they require and then anything else is info you will be requesting on your own.

I have written about this question on another post but that is not the intent of SBA program. SBA loans are for owner-occupied commercial real estate on the 504 loan and the 7a loan is for owner occupied real estate, equipment, and other business related activity debt. SBA funds are not for working capital that gets used to invest in passive real estate house transactions. People probably try to get working capital but you need to show you have a legitimate business that is operating and need operating capital for specific reasons, not diverting into an investment purchase of a house. Startup funds are still fairly difficult to get one way or another under SBA and that use of funds is not eligible.

Not sure why people recommend sba loans for investor properties. They are not eligible unless you occupy 51%.

As far as 15% or 20% down it can be different from bank to bank per the banks criteria although 20% is more common. 

The bank wants the funds seasoned for 30 days as well vs seeing them as borrowed from a line of credit. Many times borrowing on a line of credit for down payment is just more debt and not really equity or down payment. Depends on the type of deal and how the lender handles it. 

There are a lot of misconceptions about sba loans and their programs. The sba programs are created by the government but the the banks are the one responsible for doing the loans and following the hundreds of pages of rules since it is a tax payer back program. The bank still gets to choose when they do the loans or not so one bank may do one type of sba loan for a certain business but not the other. It is not fairly typical to make sba loans to residential real estate investors. Sba loans are for business owners looking to buy real estate for their business to occupy, equipment to buy, and other uses related to a more retail like business. There are many rules related to lending into companies that are making passive income. You can't really get an sba loan for real estate investing purposes as the end product is a passive business practice which SBA doesn't allow just like you can't buy a building with sba without occupying 51% of it.

You can try to get a sba line of credit but without showing you are running an active business vs some rentals you probably won't be approved and especially not at any large bank. Stick to small community banks or credit unions and work on a relationship with them. Put your accounts there and run your money through their bank. Get to know the loan officer. Just like any business relationship you got to put in the time and show them who you are and what you are doing. Pick a lender who lends in real investing and not so much in the sba world would be my advice.

@Jennifer Lee I work in SBA lending but trying to type enough to describe programs is tall task to say the least. For real estate you can do as little as 10% with caveats of property type, industry experience, use of loan proceeds, and strength of the borrow. SBA lending is not as much of a cookie cutter product where you can say this deal is this rate or this much down. We underwrite the business, the owner, and affiliates. You must occupy 51% of the building for existing and 60% if new construction. This program is not intended for investment properties but some leasing of the property can be done. We look at cash flow and collateral. The terms are usually fully amortizing over 25 years for most lenders vs balloon notes that conventional loans have. There are two main products, 7a and 504. 7a is the swiss army knife that can cover most business lending like CRE, equipment, partner buyout, business acquisition, working capital, and other scenarios. The 504 is mostly CRE and heavy equipment. Construction projects are looked at harder as there is more risk involved but the same basic SBA principles are involved. Any 20% or more owner must provide their personal guaranty and many times there are other corp guarantees if affiliates are involved.

If you really want to learn enough about SBA you should talk to an SBA loan officer at your local bank where you can ask the questions you want. SBA has massive amount of info online as well. Hope this covers a little. Any specific questions you have.

Try Jamie Ensley of Conerstone Bank in Georgia. He is a former bank colleague of mine. He should be able to help you out with an SBA loan for that if the property cash flows enough. Just Google him to find his contact info.

Jamie Ensley –Decatur City Executive, Cornerstone Bank

@Matthew Rembish Matthew I work for a bank that does SBA lending and working on a self-storage deal right now but I don't lend on the east coast. Talk to an SBA lender in your market for sure. I'm located in Utah and know Celtic Bank who has reps out on the east coast. I'm also familiar with Live Oak Bank. The advice I gave still applies to those other banks and SBA lending. You can't do a 30 year loan on a 7a product as the max is 25 years nor will they be handing out fixed rates for a self-storage unit deal to a borrower who doesn't have industry experience. You can refinance SBA debt with an SBA loan but that wouldn't make sense to refi an SBA loan with another one usually. The progression is from SBA to conventional once enough equity is there to go conventional.

@Matthew Rembish 

First I would say do you have any experience in the self-storage industry because this is a major question that is reviewed heavily. 

 a. How much would a monthly payment be on a million dollar property with 20% down? Are there any online calculators for that that are accurate? No need for an online calculator, just do a loan payment calculation. Loan at $800k at X rate let say 5.5% for 25 years which is typical 7a term for real estate would be $4,912.70. Payment will be higher if you factor in closing costs

b. How long do you have to wait before refinancing? Are there any additional costs when you do? 7a loans have a 3 year prepay penalty  of 5%,3%,1% for the corresponding 3 years. There might be a small title fee for reconveying the deed but no other fees. You must give notice if you are going to pay it off like most loans.

c. How much, approximately, are closing costs for a million dollar property? The typical closing costs are appraisal, environmental, title, processing/packaging fee, and the SBA guaranty fee. A rough guess would be $35k

Self-storage is really an investment type property that is allowed under SBA lending which is usually for owner occupied loans. The SBA still looks at it as a business and expects a bank to review the various aspects of the request such as management/industry experience, cash flow, location the guarantor's living expenses, and other aspects of the request.