SBA Mortgages, The Negative Features

SBA mortgages have become very popular in the last 12 months due to the general economy, the banking crisis that has all but eliminated conventional commercial loans and because of the Stimulus Package the was rolled out in March of 2008.

Despite the fan fare, SBA mortgages come with their own set of issues that business owners should be aware of them before they make their decision to go forward with one or not.  Here’s the overview of the common complaints of SBA mortgages.  1.  Quirky set of underwriting rules that often defy common sense.  2.  Adjustable rates on the popular SBA 7a loan and 3.  High prepayment penalties on the SBA  504 loan.   

SBA Mortgages - Quirks

With any government entity there are often agendas that are either political or out of touch with reality.  Probably the biggest issue here is just the overall process of getting an SBA loan closed and the complex set of rules and guidelines that banks and lender have to follow in order to ensure that they will get the SBA guarantee. 

For example the typical SBA loan takes 75 -90 days to close.  Conventional loans normally take 60 – 75 days to close.  The forms and procedures for both the bank and the borrower are much less cumbersome on conventional loans and there is more flexibility with getting exceptions on non SBA loans as wells. 

However, it is important to point out that the SBA has done much in the last 3 -5 years to make the system more efficient and seamless.  For example they cut the SOP (the Standard Operating Procedural Book down from 800 pages to 300 to help underwriters grasp the rules easier). 

It is also very important for borrower to only work with very experienced firms in the SBA field.  The last thing you want to do is go with a bank that has only done a few SBA mortgages as they will likely add an additional 60 to 90 on top of the typical 75 day process.  So business owners should do their shopping as well as make sure that their timing restraints make the realities of the closing process.      

SBA Mortgages – Issue with the SBA 7a Loan

One of the main complaints to the classic SBA 7a loan is that the rate normally adjusts on a monthly or quarterly basis, against the fluctuations of either the Prime Rate or LIBOR.  Entrepreneurs are often concerned about the uncertainty of what their monthly payments maybe in a few years and often find it difficult to plan due to this. 

The reason for the set up is to encourage banks to lend on transactions that they normally would not consider.  For example, SBA mortgages often provide 90% financing.  No bank would do this without the government guarantee.  Further the adjusting rates helps the bank as their costs of funds fluctuate with the market as well.  So they are concern about offering fixed rates to borrowers that may hurt them in the future. 

Another thing to keep in mind here is that there are a few banks that will structure the SBA 7a loan with a 3 to 5 year fixed rate.  As of this writing, we know of 2 in the nation…  It is very rare, but it is out there. 

SBA Mortgages 504 Loan

The SBA 504 loan is the best commercial mortgage for businesses when purchasing buildings over $1,000,000.  The rates are very low and fixed and underwriting is still flexible.  90% financing is still available.  As of this writing the rate of the SBA piece is at a historic low of 5.14% on a 20 year fixed rate… 

However there is an expensive prepayment penalty that is concerning for many borrowers.  It is  a 10% step down, meaning it drops down by 1% per year over a ten year period.   Borrowers need to keep this in mind in term of their long term plans with the building. 

However there is an expensive prepayment penalty that is concerning for many borrowers.  It is  a 10% step down, meaning it drops down by 1% per year over a ten year period.   Borrowers need to keep this in mind in term of their long term plans with the building.  

In addition, borrowers should weigh this negative feature against the benefits:  1. Getting a low, long term fixed rate at 90% loan to value. 2. That they can lease out the property in the future. 3 and that they can refinance the conventional loan and that the SBA loan will re subordinate into second lien position.  4.  That the loan is assumable to other qualified borrows, should you want to sell the property.    

All in all, and despite the concerns, SBA mortgages have rightfully earned the fanfare that they are now receiving.  They are not perfect, for sure, but they offer many exceptional benefits and unlike the other commercial mortgages out there, they continue to close...