SBA and Commercial Finance and Investment News

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.

About twenty community bankers and several  credit union executives took part on our webinar on “Five Ways to Ramp Up Fee Income” held Friday November 12.   Did you miss the panel?  If so you can listen in by clicking  on the link to the right of this page.   For your convenience here are the panelists all of whom can be resources to your financial institution as you explore new income opportunities that are low risk:

Wealth Management:  Gail Frances,  Joseph Janiczek and Company, email gfrances@janiczek.com,   Telephone 303-721-7000.

 SBA/USDA Wholesale:  Jason Charles, email  Jason@horizon-west.com, telephone 801-214-6151

 Working Capital Lines:  Dan Drechsel, email dandrechsel@ftrans.net, telephone 678-268-3316

Residential Origination:  Brian Sample (bsample@megastarfinancial.com), phone (303) 429-7310

Multifamily Origination:  Keith Nisenson, email keith.nisenson@apartmentbank.com, telephone 815-893-0866 }

SBA-USDA Secondary Market Pools and Guaranteed Loans,  Bank Qualified Bonds, Trust bonds,  Agency Securities:  Tim Thomas, email tim@isaakbond.com  telephone 303-623-7500 }

Accounting and Advisory:  Charles Garrison, CPA, Fortner, Bayens, Levkulich & Garrison, P.C   303·296·6033  garrisonc@fbl-cpa.com

Board Level Bank Advisory:  Larry Martin, Director, Bank Strategies LLC.  303-618-0056 larry@bankstrategiesllc.com

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.

$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

Capmark, once GMAC, was one of the lead players in CRE finance — especially the big glam deals — in this Country.  It looks like, as the WSJ reports, they are headed for bankruptcy as early as Monday.  So sad for a long established and well respected shop that did almost $10 B in volume in its heyday.  There may be a servicing sale to Warren Buffet and partners, but Capmark-GMAC as we know it is done.

Capmark had a $1.6 billion second-quarter loss and warned it might be forced to seek Chapter 11 bankruptcy protection. KKR has already written down its investment in Capmark to zero.

On the more uplifting SBA side,  despite the pronouncements from the White House, remember CONGRESS has to raise the 7A limits — wow, what a lift that will be — $2MM to $5 MM   Let’s hear it for Sen. Olympia Snowe, whose bill does just that! 

NAGGL is in Phoenix this week — watch the news!  Small business is of course not covered like Balloon Boy, or Balloon Parents, or Balloon Household Living Conditions, or Balloon Dad Goes to Prison —  or flu vaccine shortages, but there is a little press for us and more than a little good news.

AND remember htere’s a new national wholesale player looking for a few, good correspondents:  www.horizon-west.com.  Contact tim@horizon-west.com.  Got gas?  Contact Dominick  dominick@cpcommerciallending.com.

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Fitch Ratings, following Moody’s lead,  insists  the next big round of bad news for banks will come from commercial real estate loans. “Virtually all major property types [multifamily, office, retail and industrial] are suffering from rising vacancies and declining rents,” a recent Fitch report warned.   OK  so all the Chicken Littles have said the sky is falling.  And it is.  Who is going to lend IN to a market where cashflows and values continue to plummet and we cannot see bottom and examiners and the rating agencies are on high alert and reserves have to be added continually?  If I were a credit guy, count me out. Sorry, but 55 is the new 65.  No wonder Johnson Capital has gone to a flat desk fee in its Denver office.  It’s the only way to survive the continually increasingl;y justified credit meltdown even among life companies.

Once upon a time, a successful small balance commercial mortgage broker became more
successful despite the worst recession in 50 years. He realized that the only liquidity in the CRE
market, for a while, was in the SBA sponsored loan production area because SBA secondary
would come back first – it was one of the government’s key areas of economic stimulus. And with reduced fees and higher guarantees, that expansion was well underway!
.He further understood that he needed a good strong 7(A) program for refinances, and some
purchases, and a competitive 504 program for purchases. Some lenders paid up to 1.5
points back on 7(A) loans and up to 2 points on 504 loans, and those lenders were his main investors.
The Bank that paid that premium was tough on credit and cash flow – so some loans did not fly – but they could tell him up front, and all he needed to get was three years tax returns, current P&LS, operating company P&L
and balance and returns, and they would do the work and screen. And our Broker studied their
policies, and what industries they liked and did not like, and how they came up with global cash
flow. So the surprises got fewer and fewer.
Besides, the Bank was a preferred, basically delegated, lender. PLP. The files were not
delayed by the SBA. Yes the 504’s took longer, but the 7A’s flew. And on the 504’s, And the Bank he chose
made the bridge loan – no fee to them – so there was no waiting for the 504 debentures to
sell. Purchases closed on time.
He was also afraid of PROCESSING SBA loans – so he hired a top notch outside packager with
17 years experience. See http://www.sbaonesource.com. The borrower paid the fee once they had accepted the pricing. It was great. No overhead, vast expertise, and top quality files with all he
forms filled out just the way their SBA banker– or any other lender – or auditor – or the SBA –
would want.
Now all our Broker needed was business. So he devised a spreadsheet, that gave a potential buyer two or three alternatives (contact timothyethomas@gmail.com for a copy of the magic spreadsheet) and plugged
in the rates. He hired a commissioned LO to pull up listings on CoStar and Loop Net of owner
user properties and office condos for sale. He targeted the industries the Bank wanted to
see. And he pulled the listing, plugged in the numbers, sent that fantastic spreadsheet to the
commercial realtor who had the listing. And he did TEN of these a day. And he followed up by
phone. And each day ONE of them called back. And each week THREE of them had customers
wanting to be pre-qualified. And of those three, one closed, So he had 52 closings, average loan
a paltry $500,000, that’s $26 million in volume, average fee 1.5 points, salesman made
$195,000, and our Broker made $195,000, plus a hundred percent, less overhead, on his own
production. So he expanded, and narrowed his focus while widening his base. After all, there
were a million properties listed in the right size range and SOMEONE had to finance them.
Over time, his business grew by referral, too, and some select calls to businesses in those key
industries that everybody liked.
And life was good again.