What are the terms and conditions for a construction loan? What are the requirements for refinancing and financing options? What are the rules for ownership and syndication? What are the minimum and maximum loan amounts, the SBA guarantee percentages, and the debt limits? Anne Mino, Senior Loan Officer at LiveOak Bank, shares her knowledge to answer these questions and more.
Can we get an SBA loan for development?
For construction, these loans are even more attractive. We offer a 26-year term, three years of interest only. The idea there is that you'll get 12 months for your construction process. We can extend it if it's a larger project, but then two more years of interest only for your lease-up period. And then, we capitalize everything the project needs until it can pay its bills. In other words, we are going to give you an interest reserve account that will make your debt payments during construction when there's no income. We'll also figure out what the operating deficit is during the lease-up period, and we can include that in the loan. It's a very all-encompassing loan. A lot of times, when we talk about what people can qualify for, they don't realize that it's as easy to qualify for a construction loan as it is for an acquisition loan. I'm not saying it's easier to do a construction project, but you can qualify just as easily. It just comes down to, "Do you have that 10%?" because we're going to give the project everything else it needs to get to stabilization.
Development is not for the faint of heart. I'm doing my first one. If I were a guy, I would have no hair by now. So, more power to the developers out there, especially in California.
Yes, it is challenging. California is the hardest state to build in. You'll have less competition in the long run, but it is the hardest to get through entitlements.
Can we refinance from a conventional into an SBA loan?
Yes, the rule is that we have to be able to reduce your monthly payment by 10%. And if there's a demand language in the original note and if it's on an unreasonable term, then it's also refinanceable. Let's say you got a hard money loan, and it was a 10-year note. It did have a low rate, and I may not be able to improve your rate, but as long as the term of that loan wasn't appropriate for real estate, which SBA would say it wasn't if it was 10 years versus 20 or 25 years, then that is refinanceable.
You also have a 100% financing option. Can you elaborate on that?
Yes, this is the people's favorite thing to hear. Once you own a facility and you've owned it for 12 months, you can expand either via construction or acquisition with no more money down. The rules are, first of all, you have to have owned it for 12 months, at least. If you're obtaining a 504 loan, they want you to own it for 24 months. But let's just stick with the 7(a) world rate now. After 12 months, as long as the ownership is going to match identically, and it's the same LLC.
Technically, if you're doing an acquisition, let's say, you're buying the facility down the street, you can roll it into its own LLC. The ownership of the two LLCs now needs to be identical, and they need to roll up to a parent company so that it essentially is one company that owns two LLCs, identical ownership, and the ownership can't have changed. If you came to me, and six months ago, you bought out your partner, I would tell you to wait 12 months because it's going to be a 12-month look back. After all, that ownership needs to be the same. It needs to be reasonable that you're sharing branding, marketing resources, third-party management, all of those things, if it's an acquisition, and then SBA says that is technically an expansion. And then, of course, if you're adding on to an existing property, that's also an expansion. Again, after 12 months, we can do that expansion construction loan with no more money into the project. That's a great way to utilize the SBA. Take your project as far as it can go, and build a portfolio with the least amount of money.
And on the construction side, let's say you buy a 3-acre parcel. If you only want to build on the first acre, that's great; that would be your phase one. When you come back after 12 months to do phase two, we can do it with no more money into the deal. Phasing is a nice way to extend how far your money is going to take you and build your storage portfolio.
Just to clarify on the ownership, each property LLC can be different, so long as they are under the same LLC above them.
No, they have to be the same. They can be in separate LLCs. And the way I like to talk about it is, if you may want to sell one property before you sell the other. It makes sense to hold them separately, but the ownership has to match. And then, as they roll up into a parent company, obviously, that ownership would match again.
So, my name has to match on the LLC, and whoever may be a partner?
Yes, if you're 50-50 on facility one, you need to be 50-50 with that same person on facility two.
Can we do a syndication on an SBA loan?
Yes, there are a few things the SBA cares about. They want to feel good that it's still owner-occupied real estate. It needs to make sense that the Managing Member, whoever's going to be on the debt, has oversight of the property. They want the majority stakeholders on the debt, and it goes back to, "Is this an owner-occupied property or is it a passive real estate investment?" There's a gray line there, and we kind of have to walk the line a little bit. This is where you want to work with somebody who understands the program and the intention of the program so that we don't trip any ineligibility rules. In general, any 20% or more of the owners of the new business need to guarantee the debt. If there aren't any, it's going to come back to who are the managing members, who is in control, and who is making the decisions. And SBA wants those people on the debt.
Is there anything that we haven't covered about SBA that you think is important for our audience to know?
Let's talk briefly about the equity. How do we come up with this equity? On the conventional side, you're probably looking 25 to 35% down. On the SBA side, anywhere from 10 to 15%, in some cases zero. But how can we source it? Cash is pretty obvious. Cash to a bank is checking, savings, and stock accounts, anything that you can easily liquidate. Typically, we don't look at long-term investments such as 401(k) and IRAs as cash unless it's a rollover or you have access to it. If you're of the right age, you can get to it penalty-free.
Seller notes can count as part of your equity injection. There are details there, so talk to your lender early if you want to try to use a seller note as part of your equity. Secured debt made to individual owners can count. Think about taking a HELOC out on a residence that can be used to source your equity injection, as long as we can see that you can pay it back personally and that you're not dependent on the new business. Minority investors kind of already talked about gifted funds; all the SBA asks for is a notarized gift letter stating that it's a gift and not a loan. And then, when you're talking about a construction deal, if you own land, the value of that land can count towards your equity injection and prepaid expenses. If you go through the entitlement process, let's say, you spend a couple of $100,000 on permits, drawings, and getting the property ready to build on. All of those prepaid expenses can count toward your equity.
One of the many reasons why I love this country is that if you cannot find a deal that fits on SBA, look harder because this is an incredible opportunity for people to get started or expand their business, not only in storage but car wash. Let's say, so long as you're absolutely creating the car wash, etc. Can you touch a little bit on the minimum and maximum amounts? How many SBA loans can I take?
You can have as many SBA loans as you want. You are limited in your SBA guaranteed dollars. Your SBA guarantee on the 7(a) side is 75% of the total loan. On the 504 side, it's 35%. You can't have more than 5 million in SBA debt, so your loan is larger because there's the bank is coming in with a piece of it, but your maximum SBA exposure is 5 million. Once you hit that, you can move into a different loan program called a 504 green program, and you can have unlimited loans of those loans. As many loans as you want; the minimum loan amount depends on the lender. You can do small Express loans for any amount. When it comes to commercial real estate and what we're doing with our self-storage loans, the minimum is 500,000, but there are banks out there that you can get a smaller loan through the SBA loan program. In general, we can go up to like 20 million if we get creative.
Anne Mino
anne.mino@liveoak.bank
www.liveoak.bank