SBA Loans Spur Industrial Action

When The Small Business Jobs and Credit Act was signed into law recently, commercial brokers and agents were among those who breathed a collective sigh of relief. “SBA lending right now is critical for industrial building sales,” said Steve Scott, principal at commercial real estate firm Lee & Associates. The new Jobs Act signed by President Obama Sept. 27 extends SBA loan enhancements first put in place under the American Recovery and Reinvestment Act of 2009, which reduce fees for borrowers and increase the government guarantees bank and non-bank lenders receive on agency loans. The much anticipated fee reductions can mean savings for business owners of $8,500 for every $1 million of project value. Scott who is in the process of closing an SBA financed purchase of an industrial space, said these fee reductions were critical to the transaction. “The fact that the fees are being waived was a huge factor in the deal we’re in escrow with, it was almost going to be a deal breaker for them [if the bill wasn’t passed],” said Scott. The bill allocates $505 million towards fee reductions, and the funds are expected to last only until the end of the year, which may spur an uptick in demand for loans as business owners seek to take advantage of the savings. SBA fee reduction programs have been extended several times since ARRA was passed in 2009. Funds from the last extension were exhausted in May, and real estate agents, brokers and lenders noticed a drop in the number of loan requests. “SBA loans declined markedly when fees went back in place in May,” said Dennis Dishaw, President of ACI Capital Inc. a company that helps businesses secure commercial loans. These fees, which include loan origination and underwriting costs, can represent anywhere from 2-3 percent of the loan amount, he said, and represent a significant added expense for business owners. Roberto Barragan, president of the Valley Economic Development Center, said SBA 504 loans – an SBA loan program widely used by small business owners to buy commercial real estate – dropped during the months following May. “When fees were not waived we saw a good 50 percent drop in 504 demand,” he said. “We even had some instances where business owners were pre-approved for a loan and they decided not to move forward because of the fees,” he said. The new jobs act enhances loan programs to make it easier and more affordable for business owners to purchase property, often with as little as 10 percent cash into the transaction. “Anything right now that encourages business, that allows small businesses to purchase real estate to expand their business and create new jobs is fantastic,” said Barragan. “It’s unfortunate we’ve had to wait so long for it to pass.” The bill also raises the maximum on SBA loans from $2 million to $5 million allowing companies to not only finance larger more expensive buildings but also enable existing borrowers to buy an additional owner-user property with SBA financing that previously was not possible if they maxed out on the old $2 million SBA limit. “Probably the biggest change to impact the real estate community is that the maximum loan has moved from $2 -$5 million,” said Dishaw. “Theoretically, you can now buy a $6 million building and only put 10 percent down.” Real estate agents that specialize in hospitality will pay special attention to this, said Dishaw, as traditional lending for hospitality loans has been virtually non existent, and now, because of the increase in loan size, this may become a viable financing solution for acquiring small to medium sized hotels and motels. Changes were also made to the qualification requirements for some SBA loans, he said, allowing larger businesses to qualify for the small business loans. Already SBA loans have played a significant role in helping spur industrial property sales in a stagnant commercial real estate market, according to brokers. Especially in the down economy when traditional lenders have retrenched, SBA 405 and 7(a) loan programs have increasingly helped business owners acquire their own facility rather than lease it. “In industrial user purchases, anywhere from 5,000 to 25,000 square feet, the SBA program really has the lion’s share of the lending market right now,” said David Young, senior vice president at NAI Capital’s Encino office, who is currently involved in three SBA financed deals in escrow. “It’s definitely been the trend this year and we anticipate it will become even more prevalent.” In fiscal year 2010 which ended in September, SBA supported more than $22 billion (54,833 loans) in lending to small businesses through its two largest loan programs, 504 and 7(a). In fiscal year 2009 the SBA supported $17 billion (47,897 loans). According to the SBA the average weekly loan volume for fiscal year 2010 was $333 million, which was a 29 percent increase over the average weekly loan volume of $258 million for fiscal year 2009. Industrial brokers like Colette Ramirez have seen first hand that the program is working to spur transactions. “The only way we are putting this deal through escrow today is because of the SBA financing,” she said of a recent transaction. “The SBA financing is what is allowing us to move forward.” Helping The Industrial Market President Barack Obama signed the Small Business Jobs Act into law Sept. 27. The bill extended the Small Business Administration Recovery Act provisions, which increases loan guarantees for the SBA’s 7(a) loan program to 90 percent for small business borrowers. The bill also lowered fees for the 7(a) and 504 programs. Other Key Provisions: • Raised the maximum loan size for SBA loan programs from $2 million to $5 million and up to $5.5 million for manufacturing loans • Limits on SBA 7(a) Express Loans have also been raised to up to $1 million, intended to give small businesses more access to working capital. • Establishes a Small Business Lending Fund of $30 billion to provide smaller community banks with low cost capital (as low as 1%) if they go above and beyond 2009 small business lending levels. • Establishes State Small Business Credit Initiative to provide up to $1.5 billion to states to support state run small business lending programs.