CEO To Rainmaker
CEO To Rainmaker
Episode #73 Discover the Benefits of SBA 504 Loans for Business Real Estate
Unlock the full potential of your business's real estate strategy with insight from Jeff Sceranka CEO of Enterprise Funding. He's the guide you need through the maze of the SBA 504 loan program, revealing how a modest 10% down payment and an appealing fixed interest rate can be part of your next commercial property venture. Jeff contrasts the SBA 504 with other loans, such as the SBA 7A and conventional commercial mortgages, highlighting the unique benefits that could mean a world of difference for your bottom line. We tackle everything from the owner occupancy requirement to the ins and outs of loan fees, ensuring that you're equipped with the knowledge to make a smart, strategic investment.
This episode isn't just about the numbers; it's about the stories behind them. From a motel's metamorphosis into a high-end spa resort to the intricacies of joint venture deals, we cover real-world examples of the SBA 504 loan's impact. We navigate the eligibility landscape, discuss the vital role of Certified Development Companies, and shed light on the collaboration between banks and the SBA to streamline your approval process. While touching on the critical financial documents necessary for your application, we also forecast interest rates and offer advice for CEOs navigating the world of commercial real estate. Join us for a masterclass in leveraging the SBA 504 loan program to your advantage.
Jeff Sceranka contact:
Jeff@efc504.com
909-7923803
show link:https://bit.ly/46ezOqb
Episode number 74, the SBA 504, why every CEO should know how this loan program works. Excuse me, if you've ever considered owning your own commercial facility rather than renting, today's show is for you, so listen carefully. I don't want to steal the thunder of my expert guests, but I'm just going to give you a very, very brief overview, and my guest, Jeff Sarenka, will fill in the blanks. The 504 is a certain type of commercial mortgage which allows you, the business owner, to buy a building. If you're renting, or maybe you're already home but you need more space With only 10% down, 40% of the monthly payments are at a fixed rate. However, your business must occupy at least 51% of the square footage. There are two lenders involved a commercial bank and the SBA, and a certified development company, abbreviated CDC, which underwrites your deal, and the CDCs are certified and regulated by the SBA. When all the dust settles, you get 90% financing, 10% cash from yourself, 50% from a commercial bank and 40% from the SBA.
Speaker 1:With that, I would now like to introduce my expert guest on the program, Jeff Sarenka, who is the CEO of Enterprise Funding a CDC located in Redlands, California. Yo, Jeff, how are you? Hey, Gene, how are you? I'm fine. So, Jeff, let's just start with the basics. Let's just make an assumption that my audience doesn't know much about the SBA 504. What are the basic required documents? The timeline and any other eligibility criteria that I did mention before.
Speaker 2:So when a borrower wants to borrow money, the 504 program from SBA allows them to buy a building, buy equipment, do tenant improvements or build a building. So the first thing we ask them is what do you want the money for? If it's one of those four things, then I can do a 504 program loan for them with 10% down.
Speaker 2:What I'm going to ask them for is either an escrow instructions or a bid for the construction of a building and then a personal financial statement from them and then the tax returns on the company that they're going to occupy the building with. The 504 program is only for owner-occupied projects.
Speaker 1:Okay, Okay, All right, you know. Maybe you could do a quick overview, Jeff, of what are some other options that an owner could pursue if they wanted to buy a commercial building other than the SBA 504. Two of them come to mind. One is the SBA 7A program and other is just your garden variety commercial bank mortgage with no guarantee attached to it. How would you say the 504 stack up against those two common options?
Speaker 2:Well, the 504 is considered the best program for the acquisition or construction of real estate because it's only 10% down and our portion of the loan, which you said in your introduction, was 40% us, 50% bank. Our 40% is at a fixed rate for 25 years. So if someone goes conventional, they're going to be putting up more money for the down payment and they will get conventional terms based on the market conditions at that time. If they're going 7A, they're tied to the prime rate, going up or down on a variable rate loan and usually the term for that 7A loan is negotiated between them and the bank. So there are three options.
Speaker 1:Okay, okay. And is the 7A, that's floating rate for the duration of the loan? Then yes, it's never fixed.
Speaker 2:Well, it could be fixed by some banks at some times, because that's the program that they're offering to the consumer.
Speaker 1:And if they went 7A as opposed to 504, what have you seen in terms of what commercial banks are offering as general terms in terms of the length of the loan, the maturity or the amortization period?
Speaker 2:Between 10 and 25 years.
Speaker 1:Okay, okay, so it depends on the bank. So it pays to shop, right, yeah, what's the current rate today on an SBA 504?
Speaker 2:About 6.5% Wow.
Speaker 1:That's about 2% less than the prime rate at 8.5%. Yeah, and that 6.5% at the time that the loan documents are signed is locked in for 25 years. Yes, that is awesome, but is there a prepayment penalty attached to that, jeff? What happens if rates were to go down precipitously and somebody's sitting with an SBA loan at 6.5%? Now they can get it for 3%. Can they bust that contract without a hefty prepayment penalty? Or that's not allowed.
Speaker 2:The prepayment penalty is based on the debenture rate at the time that they took out the loan. So, as an example, if the debenture rate is 3.5% at the time they took out the loan, then they are going to pay a prepayment penalty for 10 years, on a sliding scale going down 10% each year, and that's based on the principal amount that they owe times the debenture rate and the second year. It's 100%. Second year, it's 90% of that. Third year, it's 80% of that Going down to 0 at 10 years.
Speaker 1:Okay. So to simplify it, then there is a prepayment penalty and it runs for 10 years and at the beginning of the 11th year, if they're still holding the mortgage and they want to pay it off, there is no prepayment penalty. Do I got that correct? Yes, you do. Okay, all right, and are there some general out-of-pocket costs that are unique to SBA 504 loans?
Speaker 2:No, there's no specific out-of-pocket costs other than those that the bank would charge them, that they want them to pay out-of-pocket.
Speaker 1:Our program includes the costs in our loan, I see, so they can finance the out-of-pocket. Can you give us a flavor of what the out-of-pocket costs might be that a commercial bank would impose for to enter into a role of a joint deal with you?
Speaker 2:There's an SBA half point fee on the principal balance of the first that a bank will charge the borrower. There are escrow cost, title fees, recording fees, etc. Document fees that the bank will charge the borrower when we do an appraisal, when we do an environmental report. Those fees are charged to the borrower either through the loan or out-of-pocket.
Speaker 1:Okay, Okay, all right. What's the smallest SBA 504 loan that you and a bank can do?
Speaker 2:We want to do something at least $250,000.
Speaker 1:for the total purchase price. Yeah, okay, oh, that opens it up a lot, I see. Okay. So what about? I've heard a lot of I've heard some stories on the street that the SBA has a program that if you're a little short on the 10% down payment, that the SBA or some other entity would loan you the money to finance the 10%. Is that true and is it permissible? You can borrow money for your down payment yes, can it be from any lender or can it be from the SBA? You?
Speaker 2:can do a seller carry back. You can do any lender and it's permissible. Yes, we just have to include it in our cash flow analysis.
Speaker 1:Okay, all right. So, in essence, if a borrower could pull that off, then they're getting 100% financing. If you will, yes, all right. So, jeff, you've been at this for a long time. Give me a brief overview of how you view your role versus the bank's role. I mean, is there any duplication or are you each doing slightly different things?
Speaker 2:Give me a kind of a feel for that. Well, what we try to do. I'm sorry for interrupting you. What?
Speaker 2:we try to do is qualify the borrower first and then have them shop the bank. Because if we qualify them first, we know what we need and we know what the bank needs and we get it all upfront and then give it to the bank after we've qualified the borrower. If they go to the bank first, that bank is gonna tell them yes or no after they go through all the process and then they contact us and then we have to go back and get all the documents again and those that are special to SBA. So it's much easier for us to just do the loan upfront, qualify them, tell them what we think are the strengths and weaknesses and then shop it to the banks that we think are gonna be the most interested in doing that deal.
Speaker 1:Well, that was my next question, whether you recommend which commercial bank that you wanna do this joint venture deal if you will, or is it the responsibility of the buyer to find their own bank? That's gonna do the 50% of the loan of the purchase price.
Speaker 2:Usually it's harder for the borrower to find the right bank because they don't know what the banks are looking for at the time.
Speaker 1:Yes.
Speaker 2:It's easier for us because we work with all the banks to know who has an appetite for their type of deal, and then we can give it to two or three banks and let them bid on it for the borrower.
Speaker 1:Okay, that's a nice feature. So do you have a few success stories, Jeff, that you don't have to mention the company name but just one that you feel particularly proud about? Presumably the applicant was renting and now they're a proud owner and how that all worked out and what you did, and just a best practice of your program what happened.
Speaker 2:Well, there's two different types of best practice. One is a REFI, which allows them to REFI existing debt based on the appraised value of their existing building, and we've had a number of success stories with that, like the Florida Mexico where we refinanced three loans and got them into a much lower rate and amortized it over 25 years. So that was a great deal. On the 504 side, on the construction project, Azure Mineral Springs and Desert Hot Springs was a motel that was just sitting there not doing much and our borrower came in and rebuilt the whole motel into a spa and they are a resort spa now and one of the most successful in the Coachella Valley.
Speaker 1:Interesting. I never thought that you could do use an SBA loan for a motel transaction, which kind of leads me into the next question. What are some? Are there businesses that are no-no, that the SBA and the banks will not touch by virtue of what they?
Speaker 2:do Any marijuana facilities that can't touch. They can't touch any developer non-owner occupied projects where somebody is building a shopping center and they're going to lease it out. Remember the operating company has to occupy at least 51 percent for an existing building purchase or 66 percent for the building of a new building.
Speaker 1:Okay, so is marijuana related the only type of company or industry that's on the no-no list.
Speaker 2:Well, basically the types of deals that we can do are restaurants, gas stations, hotels, medical offices, any retail facilities, as long as they're not of a non-pureant type of business. Most of the time, we can approve almost any business as long as its owner occupied.
Speaker 1:Okay, so it's a really short list of no-no companies. Yeah, it's a short list of things that we can't do. Okay, the success story that you quoted there is three different loans were all of those three loans against a building?
Speaker 2:Yeah, one of the nice things about the 504 is we use the asset that we're financing and we don't go after their house or other assets, as in 7.8, which they usually do. So if I'm buying a building for somebody, that building is the collateral for my transaction and not anything else.
Speaker 1:Yeah, okay, all right, I got you. Is there any other terms and conditions if you did a deeper dive that you haven't already mentioned, that prospective borrowers should know about, or do you think you pretty much have covered it so far?
Speaker 2:Well, our loans are assumable. So if they want to sell their building or they could sell it to another borrower who has equal or better credit, and we could let them assume that loan.
Speaker 1:That's a great one. That's awesome. I didn't realize that, so it's assumable. Okay, anything else?
Speaker 2:I think that they'll find that the process itself is no different than any other loan. We get the same information that a bank would get for a conventional loan. Our timing is three to five days when we submit to SBA for approval. So if they have a myth that it takes a long time, it only takes time based on the borrower's ability to give us the documents we need.
Speaker 1:Okay. So I've heard that obviously a bank has a loan officer doing their underwriting for their 50% portion, that the CDC, of which you're a CEO and have been certified by the SBA, underwrites the loan. So you have your loan officer and then you have to send your recommendation to the SBA, which presumably has a loan officer to say, yeah, we agree with you, jeff and your group. Let's rock and roll. Is that three separate entities that are looking at the deal All at the same time? All at the same time, and I'm assuming that they're not always in agreement?
Speaker 2:Well, the bank is usually the easiest, the CDC second and SBAs usually a little harder, depending on the circumstances. But since we've been in the business over 30 years, we don't send credit memos to SBA to approve. That we don't think will be approved.
Speaker 1:Gotcha, you've got the reputation with them and you know all of the SOPs and the protocols and all that kind of stuff.
Speaker 2:Yeah, we know what they're looking for and what we have to address. That's why we'd like to pre-approve them ourselves before we go to anybody, because we will know if there are areas where we have to be concerned and we can address those upfront so that they don't become a problem. The goal is to submit it and get it approved on one pass, and so that's our objective all the time.
Speaker 1:So it behooves a prospective applicant to contact a CDC that has experience, has done a number of deals, rather than a relatively new one, if you will. And, by the way, how many CDCs are in the country? 270, about every state, every state. Wow, okay, there so.
Speaker 2:California has the most CDCs in competition with each other, so we are very aggressive about trying to get new business and keep our business. One of the things that we didn't mention was that CDCs are a nonprofit organization and all of our excess revenue goes back into our local community. So if they use a CDC in the Inland Empire as an example, like us, our profits and excess revenues go back into the Inland Empire Because there are over 20 CDCs competing in the state. If they picked a CDC that a bank recommended that has headquarters in San Francisco, then all the money that the CDC makes on that deal goes to San Francisco Really important for us. If somebody is in the Inland Empire or is in California and wants to do a deal, that they contact us so we can keep the money local.
Speaker 1:That's an excellent point. In fact that was going to be my next question of whether you're a nonprofit or a for-profit, but you already answered that. So in the lending world I have some number of years of experience. Loans of any type. They get messed up, they get stuck in the pipeline. What are some common reasons why a 504 could get stuck in the glitch and is there anything in your opinion that a CEO could do to prevent that?
Speaker 2:Yeah, tell them not to hide anything, because it hurts.
Speaker 1:You mean people hide stuff on the application. They hope we won't notice. You mean the DUI 20 years ago, yeah, or the Bank of C5 years ago, or the DUI that's pending now that they don't want to tell anybody about it.
Speaker 2:So full disclosure, full disclosure, and don't be embarrassed, because everybody that applies for a loan has got something somewhere. Okay.
Speaker 1:I have heard that the SBA 504 program in fact most SBA loans it is the tax return that the underwriters put more emphasis than the financial statements, be they cash or accrual, that banks normally look at. Do I got that right? Is that the SBA doesn't really put a lot of credence in financial statements and they're looking strictly at the tax returns?
Speaker 2:They are looking at the tax returns, but they are also looking at the financial statements to see if they match the tax returns, and they are very interested in the interim financial statements. So let's take an example. It's now the end of December, let's say January 1st. The business has got financial statements for the end of the year for 2023, but they haven't filed their tax returns yet. Obviously, we are going to use those financial statements to underwrite the loan and so, yes, anytime where there's a partial year, sba wants to see the interim financial statements to see if they conform to the trends of the two years previous tax returns.
Speaker 1:Gotcha. Okay, gotcha. So you know. There's a lot of stuff going on in our economy, jeff, you know rising interest rates, inflation, bank failures, the 2024 presidential race, issues in Washington. Two questions when do you see rates going on? The 504 program and an easy question for you Is the SBA run out of money or is there still money to fund the program?
Speaker 2:I'll take the second one first. No, they don't run out of money for what we're lending, so we can always guarantee a loan in a 504 program. There's only been a few times where that was threatened and it was always fixed. So no, they're not going to run out of money. The economy In the old days we would look at the local markets or the regional markets and say that's where we determine what rates are going to be like. Today we look at Taylor Swift and everything else. Oh, you do too.
Speaker 1:Me too. Yeah, yeah, okay, yeah, her and Travis.
Speaker 2:That's it. So when we're trying to figure out where the rates are going, did she attend the football game or not? It includes the rates the next day and the Treasuries.
Speaker 1:Oh, most economists would not admit to that.
Speaker 2:I know that, I understand that, but we think that the rates are going to stay the same or go down for the 504 program.
Speaker 1:To go down.
Speaker 2:Okay, over the next year. Yes, oh, we look at that. Remember, our rate is tied to the 10-year Treasury. The 7A rate is tied to the prime rate, okay, okay, as T-bills go, so does our program. Okay, the prime rate goes, so does the 7A.
Speaker 1:If we're looking at 6.5 percent now, in your opinion they won't rise above 6.5. They might come down less than 6.5.
Speaker 2:Yes, I think they're going to go down during the year.
Speaker 1:How do you beat that? Let's just say it goes down to 6. A 6 percent mortgage to buy a building with only 10 percent down payment, and 40 percent of that purchase price, which is the SBA's portion, is fixed for the next 25 years.
Speaker 2:You can't beat it. That's why the 504 program is the best program to buy or build real estate for owner-occupied companies.
Speaker 1:I agree with you, and this is not a paid political announcement Now.
Speaker 2:I'll say one other thing that will be a little sensitive, but I can say it because I've been around a while. Seven as are tied to an variable rate because a bank is able to increase the rate as the market goes.
Speaker 1:Yes.
Speaker 2:Yes, when they do that Seven A loan, they sell it in the secondary market. Yes, it's a premium for selling that loan.
Speaker 1:Yeah.
Speaker 2:If our word goes to a bank and says I would like to do a loan to buy or build real estate, it is possible that the bank may not tell them about the 504 loan. They will tell them about the Seven A because they make more money on the Seven A.
Speaker 1:Yes, yes, yes.
Speaker 2:It's not an indictment on them. They are a for-profit business. No, I understand, I understand. But to get them to understand the 504 program sometimes isn't as easy. That's why we recommend they come to us first, and then we can qualify them and show them what our opportunity cost would be compared to a Seven A.
Speaker 1:Well, I've had many clients that are seeking finance for expansion and we talk about all the debts. They'll tell me oh yeah, I have a mortgage on the building. Okay, what kind is it? Seven A. And I look at them and I go oh my God, a variable rate loan. They have interest rate exposure. As you know, in many cases with a Seven A loan not with a 504, is that they will require additional collateral, which is code for maybe a deed of trust on the owner's house. Right?
Speaker 2:That's why our program has a big advantage, because we use the asset that we're financing as the collateral.
Speaker 1:The message to my audience is that you need to shop, you need to be cognizant of all of the various loan options and just don't sign up quickly without some due diligence, just because someone says this is a great deal for you. Verify it.
Speaker 2:Yeah, if they talk to us first, we will be able to help them through the process, and if the 504 program doesn't work for them, we'll be glad to help them get a different type of product.
Speaker 1:That's the way it should be. So, Jeff, what are some resources or websites that a CEO could tap into for future guidance or support about the program that you could recommend?
Speaker 2:EFC504.com. Okay, our website. We have all the information on the program there.
Speaker 1:All right, I'll put that in the show notes so people can remember that Now. So you've alluded to the fact that the SVA has a pre-payment penalty for the first 10 years. First 10 years yes, I'm presuming banks have pre-payment penalties on the first, they vary.
Speaker 2:They're based on the prime and the deal that they've struck, and they're usually from three to five years, because their loans are usually fixed for up to 10 years, so they have a shorter term, and so a barber will have to refinance that loan sooner. So their prepayment penalty is lower. But on a bank you typically can prepay on a yearly basis a certain percentage of the principal balance With a 504 loan.
Speaker 2:Your prepayment is based on the entire principal balance. You have to pay off the entire loan to prepay Most of the 504 borrowers. Don't get into the 504 program for a short term loan Right.
Speaker 1:Well, my point being is that with a commercial bank, that they are not going to give 25-year fixed rate loans like the SBA is Right. They may do and I guess it's all negotiable. I know it's negotiable whether it's floating or fixed. If it's fixed, most banks, if you're lucky, might give you a five-year maturity or a 10-year maturity with a 15 to 20-year amortization. But my message to my audience is you need to shop the terms and conditions of the bank, because that's part of the deal. You're going to be making two loan payments, one to the bank and one to the SBA, and you want to make sure that your bank loan is the best that it can be that you deserve. So just don't leap at something without reading the fine print.
Speaker 2:Yes, and that's very common for people to get in a quandary because, let's say, they go to their local bank and their local bank tells them well, give me all this stuff. And then three months later they say, well, I'm not sure if I want to do this deal, and the borrower was in escrow and they had a 60-day financing contingency, and now they're 90 days and they've had to get an extension and maybe put cash in and they still don't have a loan. And now they've got to start all over with another bank. And that's one of the reasons why we shop at four of them before they start the process, because we know that once they open escrow they've only got so much time to close that escrow and to satisfy that financing contingency and we don't want to put them in a position to start with a bank and then have the bank turn them down and then they have to go find another bank.
Speaker 1:Right. Well, for any business owner that's growing, a critical decision is do I lease or buy? And it's not something that decision is not something that you should hurry through. But clearly, to me, based on my experience, the 504 loan program is the best in the market and it's just a matter of which CDC they work with, what city they live in, which bank they pick. As we're getting close to running out of time, jeff, is there any could you give me like maybe three key takeaways from our talk today that you want to make sure that the borrowers understand about the 504 program and your role as a CDC sort of a wrap up comments?
Speaker 2:Sure, the first thing is that we find the lender for them and pre-underwrite them, so that they don't have to worry about something happening that they didn't expect.
Speaker 1:That's a big one.
Speaker 2:Second is that we are a fixed rate program, so they don't have to worry about the rates going up or down during the term of their loan with us. That's a huge one. And the third is that our rate is tied to the Treasury, not the prime, and that's an advantage to the borrower normally.
Speaker 1:Okay, very good. Well, jeff, thank you so much. I appreciate it. Again, without repeating myself, this is a really critical decision because owners that can get approval are now building equity in a physical asset, as opposed to renting something where there's no ownership and there could be legacy issues down the road it could be estate planning issues that now they own this asset and if this say, sometime down the road 20 years, 25 years they want to sell their business, they don't have to sell the building.
Speaker 2:No.
Speaker 1:And they can keep that for a form of residual income. So I thank you so much, jeff. Welcome, and hopefully we'll see each other soon.
Speaker 2:Okay, thank you, Gene. Happy holidays to you and all the people who are going to be listening to this podcast.
Speaker 1:Same to you, jeff. Thank you so much. Bye, bye, welcome, bye, bye. At this time, I'd like to thank my sponsors the Small Business Development Corporation of Orange County and the IE Desmond and Lewis, a full service marketing company. If you like the show, leave us a good review, whether you access the show via your favorite podcast or YouTube. And thanks for listening. Tell a friend and I'll see you in a couple of weeks. Bye, bye.