Rising Real Estate Market Impacts SBA Lending

The Valley region’s red-hot real estate market has helped and hurt Silverio Robledo’s business. Robledo is president of SoCal CDC, which ranks No. 5 on the Business Journal’s list of 504 lenders. The Small Business Administration’s 504 program funds companies to purchase commercial real estate where they operate. The interest rate is fixed and usually no collateral is required beyond the acquired property. While the federal government guarantees the loan, borrowers get the money from lenders, such as the Mission Hills-based certified development company SoCal CDC. While the rising economy has pumped up the financial statements of small borrowers, it has also pushed up real estate prices – especially in the Valley region. “The biggest hindrance is we’re in such a built-out area that there’s very little available commercial buildings,” Robledo said. “It helps drive up the price.” What makes acquiring financing through an SBA loan more amenable for many businesses is that, with a federally backed loan, there is a lower down payment – only 10 percent up front as opposed to the 20 or 25 percent required from a conventional loan. “Under an SBA 504, they get a 25-year fully fixed loan. There’s no variable – they know they’re going to get a fixed rate,” Robledo said. The steady interest rate is appreciated, “especially in this rising-rate environment,” he added. SoCal CDC covers all of Southern California’s major counties, however “our primary focal area is greater the San Fernando, Santa Clarita and Antelope valleys,” Robledo said, who noted that his is the only CDC headquartered in the region. “They are distinct markets. San Fernando Valley has very strong and diversified businesses here that are much more established. In Santa Clarita, we’re seeing more high-tech type businesses. Antelope Valley seems to be finally getting on board. There is good activity out there.” Working capital The SBA’s other type of loan, called a 7(a), covers working capital, equipment purchases real estate or business acquisitions between the range of $25,000 and $5 million. U.S. Bank SBA Business Development Officer Sean Thomson, out of the company’s Glendale office, manages the bank’s SBA portfolio from Central California down to San Diego. U.S. Bank ranks No. 4 on the Business Journal’s list of 7(a) lenders. Thomson said 2018 signaled a changing of the guard, which he guesses will only increase in 2019. “There’s been an uptick in business acquisition as baby boomers retire,” Thomson said. “We’re optimistic about 2019 being even better.” For commercial real estate, “not many people are pulling the trigger on purchasing,” Thomson continued, attributing the phenomenon to higher property rates and recently imposed hikes on interest rates. “We’re in the peak of the economy and typically this is what they do in this kind of an economy.” By all accounts, the 2018 economy has been robust, “and it’s robust because businesses are doing very well,” Robledo said. “They have been helped by the (new federal) tax reform.” Thomson sees no great variances over which of the real estate sectors – office, retail and industrial – is thriving the most. Rather, it breaks along the lines of industries. For example, U.S. Bank stopped doing hospitality loans and cut back on its hotel portfolio earlier this year, but “now we’re coming back,” he said. Range of applicants Robledo’s lending institution sees an “across-the-board” gamut of businesses come through his doors for help, including wholesalers, professional services, doctors, dentists and hotels. However, his five-person team tends to favor more traditional, bread-and-butter type businesses over inexperienced startups. “Our typical SBA 504 has at least five to seven years of existence,” Robledo said. “They need to walk first before they can run. We’re looking at their ability to pay loans. We’re also looking at prior credit (and) management ability: Is (the business) good enough to sustain a slowdown?” There are certain businesses that SoCal CDC won’t lend to, including marijuana-related firms as pot is still not federally legal. Also, it won’t handle religious- and adult entertainment-related companies. “We’re looking for more mom-and-pops: tire shops, auto repairs, beauty salons,” Robledo said. Thomson at U.S. Bank will consider every sector with the caveat of different cash requirements depending on the type of business. Thomson said he saw a negligible amount of businesses missing loan payments. “U.S. Bank is a conservative lender,” Thomson explained. “We have a more vigorous process to get approval, so our default rates are very low.” Since Robledo launched SoCal CDC in 2011, “we only had one borrower that went to default out of 140 transactions,” the firm’s founder said. “It speaks to the strength of our underwriting and credit analysis.”