CRE Midwest

SBA 504 loans value $1.4 billion in first quarter 2011

The SBA 504 loan program has recaptured its buzz in the current economy and recent numbers indicate that more firms are using the innovative program to secure commercial real estate deals.

The SBA 504 loan program has recaptured its buzz in the current economy and recent numbers indicate that more firms are using the innovative program to secure commercial real estate deals.

Financial markets are beginning to thaw as loans terms have soften for some, but for many firms attempting to complete real estate deals current guidelines and requirements are still not economically feasible. Many of those that survived the economic downturn are now growing and require new space. Instead of turning to traditional financing, where they may be met with lukewarm response, programs like the SBA 504 have helped bridge the gap and make many real estate deals a reality for potential owner-occupiers.

SBA 504 loans allow small businesses to finance the purchase, construction, and renovation of commercial real estate, as well as the acquisition and installation of heavy machinery and equipment. In the transaction, traditional banks to supply 50 percent of the eligible financing, an SBA approved Certified Development Corporation (CDC) provides a second mortgage equal to 40 percent of the eligible financing, and the borrower puts 10 percent down, avoiding a hurdle that would likely be at 20 or 25 percent down with a conventional loan.

The first quarter of 2011 experienced a 20 percent increase in the value of SBA 504 loans approved and a second consecutive quarterly increase of 13 percent or more, according to the National Association of Development Companies (NADCO), a trade organization representing CDCs.

Christopher Crawford, president and chief executive officer of NADCO, attributes the increase in activity to small business optimism and the Small Business Jobs and Credit Act of 2010, enacted in September 2010. This legislation, according to Crawford, made SBA 504 loans more attractive and attainable.

Under new rules, CDCs can now guarantee a loan up to $5.5 million, an increase from $4 million, and borrowers can have a net worth of $15 million, up from $8.5 million. Borrowers also must have an annual net profit of less than $5 million to be considered a small business and thus eligible for the loan.

The more than 2,300 loan approvals in the first fiscal quarter represented the most loan approvals in the first quarter in the last 10 years.

Gabe Beukinga, vice president for SomerCor 504 Inc. in Chicago, attributes the increase to traditional lenders re-familiarizing themselves with a process that may have fallen by the wayside during the real estate boom.

“When credit was loose, banks wouldn’t use 504,” says Beukinga. “Now, they want to mitigate risk and they are looking to 504 loans to do that.”

SomerCor 504 is one of nearly 300 CDCs in the U.S. The firm has been in business since 1994 and it is consistently in the top 15 producers of SBA 504 loans in the country.

Beukinga says that he has been quite busy lately, most recently working on a $7 million industrial purchase in Lake Zurich and a $5.5 million purchase of a 35,000-square-foot, four-story building on behalf of an advertising agency in Chicago’s West Loop area.

“Right now, a borrower can get a 20-yr fixed rate at 5.8 percent (on an SBA 504), compared to a 6.25 percent on a conventional loan,” he said. “Buyers are looking to lock in.”

The program will also receive another boos this year as the regulations for using SBA 504 loans to refinance existing debt were approved in the Small Business Jobs Loan. Approvals can be expected to increase at least ten percent through the balance of the fiscal year due to refinancing by small businesses, according to NADCO.

“There is more buzz about 504 now than there was five years ago,” says SomerCor’s Beukinga.

By the numbers:

  • During the first fiscal quarter more than 2,300 SBA 504 loans were approved;
  • The total value of loans approved was almost $1.4 billion and the average loan value was $579,200;
  • On all measures, the totals achieved during the first fiscal quarter exceeded the 10-year average level of activity (1,862 transactions, $1.0 billion in value and $541,300 average loan value)
  • More than 21 percent of the 4,600 approved loans during the quarter were in five of the most populous states—California, Florida, Texas, Illinois and Ohio;
  • California had the most loans approved (469) and the greatest total value of loans ($328.8 million);