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By Jordan Blanchard Executive vice president and manager CDC Direct Capital
New Opportunities in SBA Lending
Loan-program changes could mean big business
The Small Business Jobs Act, signed into law this past Septem- ber, was a somewhat controversial bill primarily because it created the
$30 billion Small Business Lending Fund
for community banks — which was accused of being another bailout.
The fund represents a source of low-cost capital for community banks. It’s intended to increase their small-business
lending. Although it remains to be seen
what impact that portion of the Small
Business Jobs Act will have, one thing is
certain: The U.S. Small Business Administration (SBA) provisions contained in
the bill likely will increase opportunities
for mortgage brokers.
There are two primary types of SBA
loans involved in commercial real es-
tate: 7(a) and 504. The SBA 7(a) loan
businesses and use the same standard
for the 7(a) and 504 programs regard-
less of industry.
Both of these changes expire in September 2012.
The 504 debenture is a second-mort-gage, subordinate-debt instrument.
Because of the increase in the maximum debenture amount, it may be
common to see total project amounts
— purchase price or construction cost
— range from $10 million to $20 million. In the past, projects this large
were anomalies; going forward, however, larger loan sizes will be common.
Changes to SBA loans
SBA loans have been the primary
source of small-balance, owner-occupied commercial real estate loans for
many years. The Small Business Jobs
Act has several provisions that make
SBA lending even more attractive.
“The updated definition of a small business includes
those with as much as $15 million
in business net worth and as much as $5 million
in average net profit in the preceding two years.”
program can be used for general business purposes such as financing
startups, expansions or acquisitions;
working capital; equipment; and real
estate purchase or construction. The
SBA 504 program, on the other hand,
may only be used to finance real estate acquisition or construction and to
purchase long-life equipment.
Both programs offer real estate financing of as much as 90 percent of the
purchase price or construction cost on
the subject property — or more with additional collateral. They also require the
property to be owner-occupied, defined
as at least 51 percent of the net rentable
square footage for acquisitions and 60
percent for new construction.
Eligible property types include multipurpose, hospitality and special-purpose properties along with gas
stations, restaurants, contractor yards,
automobile dealerships and campgrounds. Ministorage facilities are recently eligible, though not related to
The definition of a small business
historically has been different for each
loan program — and even by industry
— based on sales, revenues, business
net worth or business income. One of
the provisions of the Small Business
Jobs Act is to amend and increase the
maximum-size definition for small
The following changes are among the
most critical to the 7(a) program:
Incentive to lend
The provision that will have the greatest impact on the SBA 504 market is the
temporary program that allows for 85
percent of the first mortgage to be sold
into a secondary market. Referred to as
the first-mortgage loan-pool program by
SBA, it was originally introduced in February 2009 as part of the American Recovery and Reinvestment Act.
It was to expire this coming February. Because of the time it took to implement the program, however, the
Senate introduced language into the
Small Business Jobs Act to extend the
program for two years from the date of
the first-pool issuance. The first pools
were issued this past September, so
the program has been extended to
The program gives banks an incentive to increase SBA 504 lending by providing them:
• liquidity and capital relief;
• commercial real estate concentra-
• premium income; and
• long-term servicing income.
The loan-pool program also is available to nonbank lenders and mortgage
bankers. To make a SBA 7(a) loan, a
nonbank lender must hold one of the
few Small Business Lending Company
licenses. The cost of these licenses, if
one is for sale, can approach $1 million.
There is no special licensing requirement for the first-mortgage lender of
an SBA 504 loan transaction. A private
financial company can make the first-mortgage loan.
Historically, few nonbank first-mortgage lenders would consider funding
the first because of the relatively low
return caused by the inability to sell the
whole loan or to participate in a securitization or syndication. The loan-pool
program changes that and provides the
leverage necessary to achieve a rate of
return economically viable for a nonbank lender.
existing debt will provide an even larger
opportunity to mortgage brokers.
A number of small-business owners have loans that will mature in the
near future at LTVs that are greater than
what a conventional lender will approve. The reduction in property values
has created a population of borrowers
who have no viable option other than
default if the current lender is unwilling
to extend the loan.
The ability to fund as much as 90
percent of a property’s existing value,
or 125 percent with additional collateral, will be a welcome solution for
The specific refinance provisions in
the Small Business Jobs Act are:
• the debt must have been incurred at
least two years before application.
• the business must have been oper-
ating continually for at least the pre-
ceding two years.
• payments must have been current
for at least the preceding 12 months.
• only non-federally guaranteed debts
are eligible. This rules out refinanc-
ing existing SBA loans.
• property must be owner-occupied,
per the definition above.
• the original debt must have been for
eligible fixed assets initially, which
would rule out financing debt that was
not used to finance owner-occupied
real estate or long-life equipment.
The refinance language contained in
the actual bill is general. The traditional
process to translate a bill to a functioning or amended loan program involves
the SBA issuing standard operating
procedures to interpret and clarify program guidelines.
What remains to be seen is if SBA inserts any additional parameters, such
as minimum LTVs, payment savings,
maturity dates, etc.
Mortgage professionals likely will
never see a better time to be involved in
SBA lending. SBA loans can now reach
more applicants, with more dollars and
with a higher approval rate. But various
aspects of this opportunity are time-sensitive, so brokers must be aware of
when elements of the program expire
and take advantage while they can. •
Refinancing with SBA
Although the increase in loan amounts
and potential lenders is important, the
ability to use SBA 504 loans to refinance
Jordan Blanchard is executive vice president
and manager of CDC Direct Capital, a wholly
owned subsidiary of CDC Small Business
Finance Corp., the nation’s largest certified
development company. CDC Direct Capital
facilitates the sale of 85 percent of first
mortgages from bank and nonbank lenders to pool originators. CDC Direct Capital
collaborated with Bank of America/Merrill
Lynch to issue the first pool under the 504
first-mortgage loan-pool program. Reach
Blanchard at firstname.lastname@example.org.