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.

OK this is it.  The 10 year Treasury hit ONE POINT EIGHT EIGHT today.  FHA fixed rate firsts are at 3.75.  30 year fixed residentials are at 3.875 no points no discount.  WHOA.  SBA 504′s are 5-5.25.  Life company money is at 5 and may be below for TEN I said TEN years.  IF YOU ARE LOOKING FOR MONEY ON A REAL ESTATE SECURED basis, commercial or res, NOW NOW NOW is the time to pull the trigger.  EM tim@silverlineadvisors.com, I’ll help point you in the right direction.  It may not get ANY better than this, a historical low.

As we all know by now, as of September 27th, President Obama signed the Small Business Jobs Act of 2010 into law, effective October 1st.  The administrative implementation of this law will take a little time.  

The major points of HR 5297 for the SBA 7a lending community are as follows:

• The 90% SBA guarantee for 7a loans has been extended through December 31, 2010.
• The waiver of fees for SBA 7a loans has been extended through December 31, 2010.
• A permanent increase in the gross loan amount for 7a loans has been approved to a maximum of $5 million.  At a normal 75% SBA 7a guarantee, the lender is looking at a guaranteed loan amount of $3.75 million.  The small business community has been working to increase the SBA lending limit from $2 million to $5 million for more than three years, so we consider this a significant victory.

Regarding the temporary reinstatement of the Recovery Act waiver of fees and 90% guarantee, there’s no telling how long the allocated funds ($505 million to be shared by 7a and 504) will last, especially given the number of loans already in the queue.  My advice to lenders is to submit loan applications absolutely as soon as possible to maximize the chances of getting funded before the end of the year or before the money runs out . . .  whichever comes first.

Regarding the new loan limit increase to $5 million, the SBA will need some time to get policies and procedures in place, and we don’t have much information at this point about how long their ramp-up phase will take and how long before the needed systems are in place and we can start submitting loans request for more than $2 million

The American Recovery and Reinvestment Act was extended through the end of March last night after Sen Bunning backed down. The 90% guarantee on the 7A is back once more, for a few weeks,  and the 3-3.75% guarantee  fees on small business loans are gone.  Until the $60MM runs out, or 30 days hence. The programs were extended for 30 days.  Presidenbt Obama  said, “The bill passed tonight by the Senate will extend access to health care benefits for workers who have lost their jobs, help small businesses get loans so they can grow and hire, and extend unemployment insurance benefits for millions of Americans who are looking for work.”

Per my colleague Mike O’Donnell, head of Colorado’s tremendous CDC, Colorado Lending Source (Check out their Website www.coloradolendingsource.org) this is the sad and lukewarm news.

Loans submitted to the SBA that have not yet been approved or loans that are in the process of being submitted to SBA for approval, are now being placed in a “recovery act” queue anticipating the return of subsidization in the near future.  Translation:  Be prepared to pay the GUARANTEE FEES see the archives on SBA Finance News if you need a refresher course.  Fees are up to 3.5% OF THE GUARANTEE AMOUNT  on 7A loans (and higher on loans over $1MM)  and 0.5% on the SENIOR part of 504 debt (the Bank loan not the Debenture).   You never know, the stimulus may be BACK but it’s ALL DRIED UP now.

And if you are waiting patiently for SB 2869, Mike says, be patient.

S. 2869:
This Senate Bill would increase loan limits on both the SBA 7(a) and 504 loan programs and also provide other enhancements including, most importantly, allowing the 504 program to refinance eligible conventional loans up to 80% LTV.

The Bill would have a zero impact on tax payer funds and currently has 21 co-sponsors.

We need it.  The President wants it.  Smart Republicans want it.  Let’s go.  Write Udall and Bennett.

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

Here Comes Santa Claus with the Santa Clause

Right down Santa Claus Lane (Pensylvania Avenue, Folks!)  Yes, it’s TRUE.  Fees of up to 3% on the SBA 7A and 0.5% on the 504 senior portion are GOING AWAY through the END OF FEBRUARY 2010! 

 AND it was tacked on to the Department of Defese Appropriations bill!  How CLEVER! 

The President,  Santa Obama, in our world,  signed the U.S. Department of Defense (DOD) appropriations bill, which included $125 million to continue through Feb. 28, 2010, the  fee waiver provisions of the e American Recovery and Reinvestment Act (ARRA) for both the SBA 504 and 7A programs!   The SBA estimates the additional funding will support $4.5 billion in small business lending.

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

Since not all of us speak SBA, I am going to translate and simplify the bad news for you. 

The SBA guarantee fees are coming back effective today, right now, November 23^rd

You supposedly have an option to WAIT for stimulus funds by putting your loan in a Recovery Act queue, and if you do, and if Congress appropriates the funds, and if the administrative regulations get implemented in time, and if all the water on the moon unfreezes, begins to flow and Bermuda grass grows there to facilitate a new PGA tour stop, you may have fees waived on your loan.

Don’t hold your breath.  We are submitting all of our loans with the guarantee fee.  That way we actually have a chance to meet your deadline and the purchase closing date

OK, what ARE these new fees, which are really the OLD fees?

First let’s talk 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.)

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 Obama-Mills-Reid Override.  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 Obama-Mills-Harry Reid Override, or OMOHRO (OK I made it up), of $1,062.50, so the TOTAL fee to the SBA is $50,937.50.  . Makes you want to abandon all attempts at capitalism.

Guarantee fees can typically be added to the loan and financed.   And that’s a good thing.  Surprise them at the end with the fee, that’s what I say, just add it to the loan amount it only increases the payments by a few dollars a month who will notice?

OK now here is the complex formula for 504 loans.  Pay attention.

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.

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.