Commercial Real Estate

A real estate transaction can be financed using either an SBA 7(a) loan or an SBA 504 loan.

These loan products can be used in combination to meet business financing needs not eligible under SBA 504 rules.

With an SBA 7(a) loan, the term can be up to 25 years depending on the use of loan proceeds. SBA 7(a) loans with a term of 15 years or longer have a 5-3-1 prepayment penalty, per SBA rules. For example: If you have a $1,000,000 SBA 7(a) loan with a term of 15 years or more and you choose to prepay $400,000 (at least 25 percent of the balance) within the first three years, the penalty depends on timing: in year one, you would pay a 5 percent penalty, which is $20,000; in year two, the penalty drops to 3 percent, or $12,000; and in year three, it’s just 1 percent, or $4,000. After the third year, there is no prepayment penalty at all.

With an SBA 504 loan, we structure the first trust loan with a 25-year term and a 5-4-3-2-1 prepayment penalty in the first five years only. For example, if you voluntarily prepay part or all of the principal during the first five years, you’ll owe a penalty that decreases each year — 5 percent in year one, 4 percent in year two, 3 percent in year three, 2 percent in year four, and 1 percent in year five. After year five, no penalty applies. The 40 percent funded by the Certified Development Company (CDC) is 25 years as well and has prepayment penalties for the first 10 years.

The SBA 7(a) product allows lenders to offer up to 100 percent financing on owner-occupied real estate in many instances. At FNB Small Business Finance, we extend financing to existing businesses for rent replacement and to businesses that fall under our Professional and Senior Care guidelines. Ask your Business Development Officer (BDO) for details.

In other cases, with an SBA 7(a) loan, we require an equity injection of 10 percent of the purchase price of the subject real estate.

If the real estate is part of a business acquisition transaction, the SBA requires 10 percent equity of the real estate and business acquisition.

Per the SBA rules, the SBA 504 loan product requires a minimum equity injection of 10 percent of the Total Project Cost. It also requires an additional 5 percent equity if the property is considered special use, and an additional 5 percent equity if the business is a startup.

The SBA 504 rules classify a business acquisition as a startup, so real estate acquired as part of a business acquisition transaction will require the additional 5 percent equity of the real estate portion of the deal.

If you are considering the SBA 504 loan product as an option, your BDO can introduce you to a representative of a Certified Development Company to answer all your questions about a 504 loan.

SBA rules allow a business owner to set up what’s called an Eligible Passive Company (EPC) to hold the real estate asset separately from their Operating Company (OC).

In the SBA loan structure, the EPC and the OC are considered co-borrowers. All owners of 20 percent or more of either entity are required to give an unlimited personal guarantee on the loan.

The EPC is limited by SBA rules in the amount of rent it can charge the OC. Rent is limited to the amount of the loan payment plus taxes, insurance and maintenance costs.

We encourage all borrowers to consult their accountant and attorney to determine their optimal ownership structures.

Both the SBA 7(a) and SBA 504 loan products require the Operating Company (OC) to occupy at least 51 percent of the space in the building (60 percent if new construction) to be eligible. SBA financing is not available for income-producing rental properties.

The SBA rules require that the EPC lease the entire building and property to the OC. The OC may sublease some space based on occupancy eligibility requirements. There are no rules governing the amount of rent the OC can charge on its subleases to other businesses.

The SBA rules prohibit the use of loan funds to be used for improvements to portions of any building that will be subleased by the OC to another company.

The SBA, FNB Small Business Finance and most qualified environmental consultants require the completion of an Environmental Questionnaire (EQ) by the seller of the property. If the seller refuses to complete the EQ, then a Phase 1 Environmental Report by a qualified environmental consultant will be required.

Our policy on all loans under $3 million requires both the EQ to be completed by the seller and a Records Search Risk Assessment (RSRA) report to be provided by a qualified environmental consultant. If the loan amount is $3 million or more, or if the EQ or RSRA identify any environmental risks, we require a Phase 1 Environmental Report to be completed by a qualified environmental consultant about the subject property.

The SBA publishes a list of National Association of Insurance Commissioners (NAIC) codes that correlate properties with inherent environmental risk based on the type of industry operating on it. Properties included on this list will require a Phase 1 Environmental Report.

If a Phase 1 Environmental Report indicates there are one or more Recognized Environmental Conditions (RECs) on the property, then a Phase 2 Environmental Report and any necessary remediation will be required on the property prior to closing.

All loans for real estate acquisitions require an appraisal by a qualified appraiser approved by FNB Small Business Finance.

All appraisals must be ordered, reviewed and approved by our team. Typically, we do not require appraisals to be completed prior to credit approval; however, we can pre-order an appraisal prior to credit approval once we receive the funds to pay for it from the borrower.

All SBA loans must be structured based on the appraised value of the property from the appraisal.

Generally, we estimate it may take four to six weeks for appraisal completions and internal reviews to be completed.

Our internal review process is generally completed within ten days after the application is received by our underwriting team.

After the loan is approved, and you accept and the loan commitment, it normally takes 45-60 days to close the loan. If there is construction involved, it will normally take longer because we cannot close until a building permit is issued.

We look for a Cash Flow Coverage Ratio sufficient to support the living expenses of the buyer and to repay the loan for the previous year and interim period for the subject business. Minimum requirements may vary depending on the details of the transaction. Your BDO can review your transaction and advise you.

Typical cash flow calculations include the net of:

• Business net profit per the company's financial statement.
• Depreciation, Amortization, other non-cash charges.
• Rent expense if rent is being replaced by property ownership.
• Charge for capital expenditures (CAPEX) for businesses with historic annual CAPEX needs.
• Other add backs (expenses a business incurs, but a new owner likely wouldn't) for non-recurring expenses may be considered on a case-by-case basis with sufficient documentation.

SBA rules require borrowers to pledge all available collateral to secure the loan. This includes all business assets and all personal assets of guarantors up to 100 percent of loan to discounted collateral value (LTDCV).

If related to business expansion, we require a thorough business plan with two years of projections and assumptions (first year: monthly and annual projection; second year: annual projections).

All SBA rules apply.