SBA and Commercial Finance and Investment News

Welcome!

Centennial Lending, whom I represent as senior Business Development Officer, is a credit union service organization owned by 13 credit unions in Colorado and Wyoming.  We lend in Colorado, Wyoming and Nebraska and finance” small” projects from as little as $100,000 up to $5 MM.  We like small retail centers, freestanding retail, office, industrial and retail condominiums, neighborhood centers, office buildings, industrial buildings and of course apartments from 5 to 100 units.   We also finance 1-4 unit rental housing.  We offer a 5+5 fixed rate and a 10 year fixed rate permanent loan, with no prepay penalty.  And construction financing for qualified projects. We also are experts on the SBA 504 and have financing up to 90% LTV for owner-user buildings.

Please click here to download our most recent rate sheet for commercial and multifamily construction and permanent financing:

Rate and Program Summary Centennial Lending Commercial Mortgages January 2012

And here are some of our recent closings

Success Stories by Centennial Lending

Contact Tim Thomas for more information, tim.thomas@centennial-lending.com, 303-746-9169

Yes, I write TWO blogs:  this one at www.sbafinancenews.com and www.coloradoloaninfo.com.

Have you ever wondered why the prepayment penalties are so high when you take out an SBA 504 loan?  The 504, as you know, consists of two loans:  a first mortgage, funded by a credit union or a bank, typically, at about 50% LTV, and a second mortgage, typically 20 years fixed rate, that is funded by a Certified Development Company, or CDC, for the “junior” 40% of the debt.

The 504 program is great because it enables you to get 90% financing in most cases – lower in some – with a combination first and second mortgage loan on your commercial building, or commercial condo, provided you have 2 years in operation, are “for profit,” and have a net worth for the business of under $15 MM and net profit of $5MM or less per year over the last two yours.  In other words, you need to BE a “small business.”

You can refinance your current loan(s) and/or buy a new building or commercial condo.

The SECOND trust deed loan is funded with a debenture, which is a form of a bond.  Bond investors need to know their yield is in place for a period of time, so in order to sell the debentures, the SECOND loan, which is actually the SBA 504 guaranteed loan, has a hefty prepayment penalty for the first half of the loan.  We’ll talk about this in more detail in future installments.

IF YOU BORROW from a bank or a credit company, chances are you will also have a large prepay penalty on the FIRST mortgage part of the 504.  Those penalties are (name your poison):

• The most popular: 5% the first year, 4% the second, 3% the third, 2% the forth, 1% the fifth
• Or you can have 5% flat for 5 years
• 7/6/5/4/3/2/1
• 5% for 6 years then 4/3/2/1
• Here’s one, I call it the rocket prepay: 10/9/8/7/6/5/4/3/2/1
• Or for the truly desperate, 10% a year flat for TEN YEARS

These penalties exist because your lender (the bank, let us say, ) either (a) wants to SELL your loan on Wall Street for a huge premium, or (b) just likes a large prepay penalty.

Now for the good news in this story: Credit unions.   Centennial Lending originates loans for our credit union owners.  We offer great fixed rate 504 first mortgage loans WITH A ZERO prepay penalty.  ZERO, ZED. NADA.  You can pay off our loan any time without any penalty.  You can pay DOWN our loan and reduce your principal ANY TIME without penalty.  We think paying down debt is a good investment for your company, particularly with alternative investments yielding so little.  So we do not charge any prepay penalty.  Instead, our credit union partners just keep your loan in portfolio instead of selling them to an investment bank.  We recycle your money and lend it out again as you prepay.  We think it’s good business.

Contact Tim Thomas at 303-746-9169 (tim.thomas@centennial-lending.com) for all the details.

Intersted in financing?  Click on the links below for 2012 rates and programs

Rate and Program Summary Centennial Lending Commercial Mortgages January 2012 - Rates for 504 and commercial real estate loans

Success Stories by Centennial Lending - Click for somne examoples of recent closings

First, the bad news:  the economy is still, to be generous, sluggish.  My compadre Lou Barnes writes,

” One of these monthly payroll reports will signal a turn in the economy to self-sustaining growth, and splatter the bond and mortgage markets all over the windshield.”

Not today.  Economic reports weaker than expected included the New York Fed Empire State Manufacturing Index, August Industrial Production, August Capacity Utilization, the September Philadelphia Fed Business Index, and the University of Michigan Consumer Sentiment Index.  The August Consumer Price Index (CPI), a measure of inflation, was up 0.3% on expectations that it would be up 0.2%.  Year over year, though, CPI is up just 1.1%.  Excluding food and energy, core CPI is up just 0.9%.

The Dow Jones Industrial Average is currently at 10,589, up slightly over 100 points on the week.  Crude oil futures are currently trading at $73.35 per barrel, down over $3 per barrel on the week.  The Dollar weakened versus the Euro and strengthened versus the Yen on the week.

Depressed?  Don’t be.  We are all waiting for SB 5297 to add volume for the SBA world, and JOBS JOBS JOBS.  And FINALLY it looks like the House will listen and the Senate version may pass.  Here’s the latest per my colleague Jordan Blanchard at CDC Small Business Finance in Pasadena:

the following bill (HR 5297) is expected to be on the President’s desk.  It will dramatically increase 7A production and double 504 production across the country.

SBA 7A Provisions

• Increase to maximum SBA 7a loan amount to $5,000,000
• 90% guarantee through December 31, 2010
• Fee waiver for the rest of 2010 (subject to available funding)

SBA 504 Provisions

• 504 Debenture increase to $5,000,000 for most applications and $5,500,000 for

`manufacturers

•  Two year window for refinancing debt (details provided below)
• 504 Debenture increase to $5,000,000 for most applications and $5,500,000 for program from the date of the first pool issuance – first pool issuance expected to be September, 2010
• Fee waiver for the rest of 2010 (subject to available funding)

First Mortgage Pool Program Update

• The extension to the FMP program was critical as FMP program which allows us to sell the FIRST lien portion of the 504 at prices around 105.
• That program was set to end in February, 2011. The new sunset date is slated to

be September, 2012, or $3B in allocation – whichever comes first.

• Increased 504 activity by community banks due to capital, liquidity and regulatory relief.
• Community banks can now compete against larger banks by offering lower rates and longer fixed periods while achieving an above market yield.
• ncreased 504 volume by non-bank lenders who can sell 85% of each loan.
• A significant increase in wholesale liquidity for special purpose properties such as hotels, gas stations, car washes, and restaurants.
• A new industry of Pool Originators who are the first participantsin the new era of ‘skin-in-the-game’ securitizations.
•  Interest in the SBA 504 wholesale first mortgage market (post FMP) by the nation’s largest banks including Bank of America Merrill Lynch.
• Significant increase in volume for CDC’s from both bank and non-bank lenders.
• A new era for those CDC’s that choose to become a secondary market resource for their first mortgage partners.

When they waived the guarantee fees on the 7A and 504, and raised the guarantee percentages, we all knew it had to end.  We took it “cum grano solis,” with a grain of salt.  Well, the ARRA runs out February 28.  And the fees are back yet again.  Here is what to prepare your borrowers for.

7A Loans between $150,001 and $700,000 3.00% of the guaranteed amount so 2.25 points on the TOTAL loan (See, if you want the math, $700,000 times 75% guarantee times 3 percent is $15,750 which is 2.25 points on the $700,000.)

7A Loans greater than $700,000 3.50% of the guaranteed amount which is 2.626 points on the total loan

(OK class so here:  $1 million loan, times 75% is $750,000, times 3.5% is $26,250.  Got it? And magically $26,250 is 2.625 points on the $1 million loan.)

AHA!  But here’s a wrinkle.  There’s an EXTRA charge if your GUARANTEE amount is over $1 million.  Let me work an example for you.  $1.9 million is the loan amount.  $1.9 million times 75% guarantee is $1,425,000, correct?  Now, $1,425,000 is $425,000 MORE than the $1 million the SBA is really wanting.  SO, on the EXTRA $425,000, charge 25 basis points.  So the EXTRA is $425,000 x .0025 = $1,062.50.  Bottom line:  Borrower pays 3.5 points x $1, 425,000 which is $49,875, plus the Override, or of $1,062.50, so the TOTAL fee to the SBA is $50,937.50.  . 

Guarantee fees can typically be added to the loan and financed.   As long as LTV is under 90 including said fees. Or 80 for special purpose properties. 

The Guarantee Fee on a 504 loan is ½ of 1% on the SENIOR (bank funded) loan. So:  $4 million deal, of which $2 million is the BANK loan, $400,000, is the Equity Injection and $1.6 Million is the DEBENTURE.  What is the fee to guarantee?  Half a point NOT on the guaranteed loan, oh no, that would be too logical.  It’s on the BANK loan, so $2 million x .005 = $10,000

$3,240,000 SBA 504 Benefits Local Company

CITY OF INDUSTRY, CA.,   TUESDAY, DECEMBER 15, 2009:  Gaytan Foods in the City of Industry, California now owns its own 64,000 square foot building thanks to SBA 504 financing from Horizon West Partners, LLC of Salt Lake City.   Jason Charles of Horizon West (www.horizon-west.com) provided  a $1.8 million first mortgage and a $1,440,000 second trust deed bridge loan to close the transaction. 

Under the 504 program, a bank funds the first mortgage loan and a short term second mortgage loan, called a bridge.  Then, an SBA approved Certified Development Company, (called a CDC in the trade) provides a long term (20 year) fixed rate loan.  The fixed rate loan pays off the bridge.

Phil Mulder of CDC Small Business Finance of Los Angeles provided the debenture, set to fund December 16.   In this case,  CDC  Small Business Finance funds the 20 year loan after issuing a debenture that is fully guaranteed by the US government.  For this reason,  the second trust deed has a lower interest rate than the first.  The deal structure  was as follows:

Purchase Price                  $3,600,000

First Mortgage                  $1,800,000 25 years fully amortized, adjusting every 5 years, 5.98% initial rate.

The loan adjusts every 5 years at 3.50% over the 5 year swap index as published by the Wall Street Journal.  It has no balloon payment

Debenture by CDC          $1,440,000 20 Years fixed rate for the full term at 5.460% with no balloon payment.

Down Payment                 $360,000 by Gaytan Group LLC

Gaytan Foods  is a family owned snack food producer in the City of Industry.    The company was

founded in 1935 and  has a very unique market niche, manufacturing pork rinds, pickled pork products

(ever wondered who makes pickled pigs’ feet?) 

 “My father, Rudolph, was actually born in a house that at one time was part of our

factory,” reports executive  Ryan Gaytan, who credits family involvement with the Cany’s growing

market share and  innovation.  “We have a unique product mix and affordable price point,” he says,

“and though 2009 was the hardest in history for some of our suppliers, we were up 13% and our

(affordable) end of the snack food market grew 20%.”  Gaytan looks for another 7% sales gain in 2010

and the SBA 504 loan will also help with profits both before and after tax.   “We now own our building,

we can write off the  depreciation and save over $1,000 a month in cash flow to boot, thanks to the 504

structure and these great interest rates,” said Ryan.

The transacton was originated by Mission Oaks National Bank of Bonsall, California, and funded by the

Salt Lake City office Horizon West Partners, LLC,  (www.horizon-west.com), a nationwide wholesale SBA

 loan production office for  United Midwest Savings Bank of Columbus, Ohio.

For more information on SBA 504 financing, contact Jason Charles at Horizon West, (801) 214-6151, or

email him at  jason@horizon-west.com

OK, we will give you the answers on Monday the 7th.  To ponder over the weekend, here are the questions on 7A, 504, and the Horizon West USDA program. 

____Pricing at Horizon West  is different for special purpose and multipurpose on the 504

___ Your premium on the 504 is based on the amount of the FIRST mortgage

__   First mortgage on a 504 is usually 50 percent loan to value/loan to cost

__You CAN prepay up to 20% of the first case by case on a 504 with no penalty

___The 504 second is called the debenture portion

___Debentures have a 10 year long prepay based on the interest rate

___You cannot charge an ORIGINATION fee on a 7A

___You CAN charge a CONSULTING fee on a 7A

___7A loans can be used for refinances

___You CAN earn up to 2 points PREMIUM on a 7A origination

___504 and 7A loans have NO BALLOON PAYMENTS

___10% is the typical minimum cash injection

___You can offer CONSTRUCTION financing with 7A or 504 loans on multipurpose property

___You can offer CONSTRUCTION with 7A or 504 on SPECIAL purpose properties like car washes

___USDA loans are for properties in rural areas of 50,000 or less

___USDA’s guarantee fee is 2% on the 70 or 80 pct guaranteed amount

___USDA loans CAN be used for INVESTOR properties

___USDA loans require a case for JOB CREATION or RETENTION

___Horizon West will consider hotel-motel financing under the 7A program

___Assisted living, funeral home, day care and ESTABLISHED restaurant financing is available under 504   and 7A

___Office, industrial and retail condominium and med office financing can be a good business focus

The SBA will now – finally — as of regulations published October 28 — guarantee 80 percent of 504 first mortgages that are pooled and sold on the secondary market.

The 504 relies upon banks and other lenders to make a first mortgage for 50 percent of a project’s cost. This loan is combined with a second mortgage provided by your local CDC – for example, www.coloradolendingsource.org.  The secondary market for 504 first mortgages evaporated when the credit crisis hit and there have been few players.  Now, in addition to Zions, and Wells, there are regional and national banks getting back in.  Chase, for example, is expanding and may be hiring as many as 325 to expand its SBA and commercial platform.  And new wholesalers like Horizon West www.horizon-west.com  are bringing the 504 PREMIUM back – so banks and mortgage bankers and brokers can originate these loans at a real profit.

“We are positioned to bring the 504 program to community banks and originators across the country,” says Keldon Moldre, President of Horizon West.  The Company has a nationwide wholesale platform for community banks and commercial mortgage bankers and is sponsored by Midwest Business Capital among other lenders.   “And poolers will be able to enjoy loan production through the Horizon West network on a scale that fits their need for product to fill these new pools.” 

To quote SBA Director Karen Mills, (www.sba.gov),  “This new program will stimulate activity in the secondary market, ensuring lenders have a place to sell first mortgage loans on their books and in turn have liquidity to make more loans to small businesses,”

Lenders will retain at least 15 percent of each loan and pool originators will take a 5 percent stake. First mortgages associated with a 504 loans must have been disbursed on or after Feb. 17, 2009, to be included in an SBA-guaranteed pool, so the new liquidity is RETROACTIVE. 

Debentures, which are the SBA-guaranteed second mortgage portion of 504 loans, totaled $3.8 billion in fiscal 2009, a drop of 28% from 2008.  Look for the numbers – and YOUR production – to improve dramatically.

It’s a bit less exciting than the Denver Broncos’ 4 – 0 surprise record.  And no surprise to any of us who originate and process SBA.  But the cumulative effect of credit concerns, credit officer conservatism, and the economic stimulus and personel cutbacks and collapse after collapse and consolidation in our well loved SBA industry had this scorecard for the Governments fiscal:  The  Small Business Administration guaranteed 44,221 loans for the FY ended September 30 2009 . That’s 36% DOWN  versus 2008. Total dollar volume also fell— Volume in Fy 2009 totaled $9.3 billion, a 27% drop.  Goodbye CIT, goodbye Bank of the West, Citi, Wachovia, regionals.  Thanks, Wells, at least YOU were there.  And so are about a hundred or som community banks, some ably represented by good quality consultants like Commercial Partners of Illinois.  www.commercialpartners.com.  Now there’s a plug!  Stay tuned.

Those in the know know that SBA + BDO + BANKING = NOT NOW. At least that’s the sentiment out there. But community banks are waking up and smelling the profits. Their priorities: Control risk, add revenue, grow the client base, avoid compliance problems. Government guaranteed lending does all of those things. Shifts rsk, generates NII, generates a great ROI, doesn’t grow the portfolio and — done well — it poses little compliance risk.

On the job front: Expect growth in our sector as TALF rolls out and the Fed buys SBA backed bonds to move the senior 504 pieces. The cavalry is here! Viva Geitner.
Overall, Reuters reports today that:
“Seventy percent of bank executive respondents expect the job market to remain the same or worsen next year, and improvements in the real estate market and consumer confidence topped the list of triggers for a full recovery.

Though a turnaround in financial services is expected to be slow, 78 percent of the financial heads forecast improvement in 2010 as revenues and profitability improve.

And the worst seems to be over with job cuts, as two-thirds of respondents said they had completed their head count reductions and only 15 percent contemplated further action.”

So it ain;t that bad. There IS a light at the end of the tunnel.