The Official Blog of the SBA 504 Experts

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SBA 504 Loans: Eight Quick Tips You Need to Know Now

SBA 504 Loans: Eight Quick Tips You Need to Know Now

Get organized – most competent lenders can give you a checklist of their needed documents immediately. Full documentation loans (like SBA 504’s) are worth spending the extra time on in order to get organized and shave a couple hundred basis points (100 basis points equals 1.0%) off interest rates. This will add up to tens of thousands of dollars, if not more, over the life of your loan.

Get pre-approved – this saves you time by knowing what you can afford to “shop” for. There is no sense wasting your time or your real estate broker’s time looking at $2 million buildings if you can only afford a $1 million one. Lenders have gotten very efficient and accurate with these (assuming you provide the documents they need to examine), often issuing these in as little as 24 hours.

Consider low down payment and longer-term loans — this preserves your capital for better utilization, keeps your cash flow high, and allows you to redeploy the “capital savings” into other profit-generating business activities. Small business owners no longer have to put down 20 percent to 30 percent or accept fifteen-year terms with five-year fixed rates from ordinary lenders to get a “good deal.” The SBA loans we provide (504’s) are a perfect antidote to ordinary loans. The key point here is to actually do something with the “capital savings” you get from only putting a third to half as much equity down and getting up to 25-year terms.

Buy commercial real estate for the “right” reasons – if your likely exit strategy someday is not an IPO, but rather selling or simply closing your business, then it makes great sense to effectively “pay yourself rent” rather than some absentee landlord. As soon you have the capital for the down payment, you should consider turning that rental payment into a mortgage payment that will at least give you something for your effort – just like buying a home instead of renting an apartment. By doing this, you no longer will be throwing away your lease payment monthly, but building equity in an appreciable asset that also offers multiple tax advantages and income-sheltering opportunities not available with leasing.

Consider adding other furniture, fixtures and equipment (FF&E) into your SBA 504 loan — as long the FF&E costs are still a minority of your overall project costs and the FF&E have relatively long useful lives, you will get to amortize these on the much longer real estate terms (which will greatly improve your cash flow) at the same time that you depreciate these over shorter, allowable IRS schedules. This aspect, combined with your commercial property, gives you truly the highest cash-on-cash return for your total project costs when you employ 90% loan-to-cost SBA 504 financing.

Consider buying/building more square footage than you need right now — you can always grow into it, but this will also allow you to get some rental income until that time. In virtually all situations with SBA loans, you will have to occupy at least a simple majority within one year of buying the property.

Always establish a real estate holding company or what is known as an Eligible Passive Concern (EPC) to own your new property — the formation of a master lease between an EPC and your operating company is how you’ll tie the two together. If you later decide to sell your operating business, you can keep the real estate company (and by default, the real estate) from which you can continue cashing rent checks. It is in this way that owning your commercial property can become a great retirement asset for small business owners everywhere, all while “paying yourself” to do it.

Consider partnering with another business owner in your EPC if coming up with the down payment is tough – if you have a profitable business and your competent lender already pre-approved you for X dollars, this solution will allow you to gain the advantages of commercial property ownership even while you share the equity requirement and upside with another. Please understand that your new partner’s operating business will also have to be examined to commit to your loan, and don’t forget to always use good judgment when partnering with someone else. Make sure to clearly stipulate the buy-out provisions in your operating agreement or other documents ahead of time — disagreements do occasionally occur, but corporate entity documents are usually better at resolving disputes than personal memories.

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Listening to each other to build a powerful resource . . .

One of the greatest reasons we had for starting this 504 blog is that as small business owners ourselves, we recognize the importance of listening to and learning from our clients and our valuable referral partners. We hope this SBA 504 Loan forum will be a great resource for both business owners wanting to build or buy their commercial properties, as well as commercial real estate professionals like ourselves to learn from each other and more about 504 loans and their benefits.

504 Blog Entrepreneurs: what’s the good, the bad, and the ugly of what it’s like navigating through the commercial lending or commercial real estate process, and what other related experiences have you had in your own business? What advice would you like from us or the other commercial real estate experts involved with this blog? What advice can you share with other entrepreneurs in or about to start the process?

For our referral partners: what has been your experience with the clients you’ve worked with? What are their greatest concerns? What do you (as a real estate broker, mortgage broker, CDC, etc.) want to see from a lender? What would you like to know more about from your peers on the 504 Blog?