SBA’s 504 loans help more owners buy property

August 19th, 2011

SBA’s 504 loans help more owners buy property

As published in the: San Francisco Business Times

Bay Area lenders saw a 13 percent jump in the number of SBA loans that allowed small business owners to purchase the property used in their businesses.

Some lenders are making a big push for commercial mortgages made under the Small Business Administration’s 504 loan program, which allows a business owner to buy their property with just 10 percent down. A bank makes a loan on the property for 50 percent of the loan value, while the SBA lends a second mortgage covering 40 percent of the purchase price.

Despite this year’s weak economy, bankers say some small business owners are eager to take advantage of low interest rates and reduced prices on commercial real estate. The SBA also recently expanded the 504 program to allow eligible borrowers to refinance mortgages on their owner-occupied commercial property, but the jury is still out on how many will take advantage of that opportunity.

In the Bay Area, during the first 10 months of the SBA’s fiscal year, through the end of July, 272 SBA 504 loans totaling $459 million were made, according to CDC Small Business Finance, a certified development company that helps borrowers secure 504 financing. CDC Small Business Finance said it assisted with three of the region’s 504 loans for total financing of $20 million.

Lenders are also doing their part to pitch 504 loans. City National Bank, with 11 offices in the Bay Area, is waiving $3,000 in appraisal and environmental survey fees for loans through year-end. The bank will waive its loan origination fees when $50,000 or more in new money is in a City National business checking account at loan closing. Banks see the SBA’s 504 loan program as a means to win borrowers’ other banking business. During the first half of the year, City National’s small business lending doubled from a year ago, with SBA loans up 74 percent.

“We see our momentum building,” said Bob Brant, City National’s Northern California regional executive in San Francisco.

One of City National’s clients taking advantage of market conditions to buy real estate is Inland Metal Industries Inc. in Hayward. The company is doing well, with business that includes making battery cases for Tesla Motors. Inland is also pursuing business from Fortune 500 companies to startups that Inland invests in and even rents space to inside the Hayward headquarters it has just purchased.

Inland’s revenue jumped to $26.5 million last year from $13 million in 2008, underscoring the prosperity some companies are enjoying despite the anemic economy.

The 200-employee company was leasing its manufacturing facility and decided to buy it using the SBA 504 program to take out a $4.1 million loan, saving the leasing costs via City National’s mortgages.

“I’ve already saved $5,000 right off the bat,” said CEO Stan Sutton. “Who knows where lease rates could go? Now, I’ve locked in my costs.”

Also seeing a rise in 504 lending is San Francisco-based TMC Development. In the nine-month period that ended June 30, reflecting the government’s fiscal year, the firm facilitated financing for $197 million in 504 loans, a 42 percent jump from a year earlier, and 235 loans, a 50 percent increase. That put TMC second nationally in loan volume and third for number of loans.

The figures reflect the strength of California’s small businesses who were able to weather the downturn by not carrying too much debt heading into the economic storm, said CEO Barbara Morrison.

“Our performance this year indicates that more businesses have the balance sheets that are necessary for growth,” Morrison said. “The borrowing capacity of small businesses as a whole has increased, and they are taking advantage of attractive property values and low interest rates to acquire commercial space.”

She said sectors actively participating in 504 borrowing include apparel makers, ethnic grocers and health-care operators.

TMC’s average loan size rose 6 percent to $836,000, reflecting larger companies are purchasing the bigger spaces they need to operate.

A key advantage of the 504 program is the 10 percent down payment, which allows business owners to keep more cash in the till to possibly expand operations or buffer against any further weakness in the economy.

“These are the businesses that are creating jobs,” Morrison said.