New SBA loans may help businesses keep real estate

March 7th, 2011

New SBA loans may help businesses keep real estate

As published in: Las Vegas Business Press

Michael Spears’ Collision Authority is just the kind of small business that Congress had in mind last year when it created a new version of an old Small Business Administration loan product.

Spears, one of three partners in the Collision Authority, said business is great. However, commercial real estate loans on two of the company’s four auto body repair locations were maturing and needed to be refinanced.

It was a case of being in the wrong place at the wrong time. He and his partners financed the Southern Nevada properties about five years ago through conventional commercial real estate loans. They borrowed the money based on real estate values at the peak of the real estate boom. Real estate values in Southern Nevada shriveled like a plum into a prune over the last five years. Probably no other area of the country experienced such a precipitous drop in realty values.

As a result, Spears and partners William Falls and Victoria Dessaints faced the onerous task of raising cash to refinance the loans.

Without a cash injection, the value of the property no longer represented 25 percent of the amount owed on the real estate. Bankers said they wanted a 25 percent down payment or equity interest to refinance the commercial real estate loans.

In a move that the Lone Ranger would appreciate, Congress came to the rescue for the Collision Authority and a lot of other small businesses like it.

Congress enacted the Small Business Jobs Act, authorizing Small Business Administration real estate refinance loans that require only 10 percent down in payment or equity, not 25 or 30 percent.

“This makes it a lot easier for small businesses in general to hold on to their cash,” Spears said.

Congress authorized the SBA to offer a new version of the agency’s long-term, 504 loan product that provides attractive financing for real estate and equipment. The new kind of 504 loans became available on Feb. 28 to small businesses that must refinance or make balloon payments on loans by the end of 2012.

Standard 504 loans, which are still available, can only be made to businesses that are expanding or modernizing. The Collision Authority, which employs 110 workers, intends to expand by adding three more body shops over the next few years, but expansion isn’t required under the hybrid 504 loan program.

The government still wants businesses to grow, but lawmakers decided it would be great just to prevent loss of jobs through the modified 504 loan program.

Without the new 504 program, some businesses would be unable to refinance, would lose their properties to foreclosure and would lay off employees, said Barbara Morrison, chief executive officer of TMC Development, a certified development corporation that arranges 504 loans for businesses in Northern California and Southern Nevada.

TMC accepted an application from the Collision Authority for a loan of an undisclosed amount through Bank of Nevada.

“We are seeing quite a lot of interest,” Morrison said. “I think it’s going to be a program that a lot of small businesses in Las Vegas find attractive.”

Debra Alexandre, president of the Nevada State Development Corp., the largest certified development corporation based in the state, agreed. Her nonprofit organization competes with TMC in Nevada in making 504 loans to businesses that need to finance real estate they own and occupy.

Alexandre explained how 504 loans are set up.

A commercial bank, which could be either a giant national bank or a small community bank, makes a first mortgage for 50 percent of the loan amount. A government-guaranteed bond provides 40 percent of the loan and the borrower must come up with 10 percent equity.

The bank may set a fixed or variable interest rate for its portion of the loan, but the subordinate bond will have a fixed rate.

The hybrid 504 program is available only to owner-occupants of real estate with loans that have balloon payments or maturities before year-end 2012, Alexandre said.

To qualify, a small business must not have been late for more than 30 days in paying the existing real estate loan over the last year.

Many of Nevada’s banks are expected to use the program so clients can refinance maturing commercial real estate loans, Alexandre said.

Bank of George Chief Executive Officer Diane Fearon said, “We think it’s going to provide a flexible vehicle for the bank and a number of good borrowers.”

The new 504 loans will help some small businesses, Bank of North Las Vegas Chief Executive Officer James York said, but others will be unable to raise enough for even a 10 percent down payment.

“It’s a Band-Aid,” York said. “It’s not stitches.”

Stan Wilmoth, chief executive of Reno-based Heritage Bank, said he believes 504 loans may save some Nevada businesses from oblivion.

By extending the length of the loan and lowering interest rates, the 504 program can free cash for businesses, he said.

“It’s all about getting out and helping people,” Wilmoth said. “It’s about working through this economic tsunami together.”

Contact John G. Edwards at jedwards@reviewjournal.com or 702-383-0420