Securing Financing for Real Estate

Before buying commercial real estate, there are several options businesses can consider that will make financing the deal easier.

The first question you should ask is whether the building is owner occupied. If the real estate is at least 51 percent owner occupied, the Small Business Administration has a loan enhancement program called the CDC/504 program. The 504 Program provides small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization.

Proceeds from 504 loans must be used for fixed asset projects, such as: The purchase of land, including existing buildings; improvements, including grading, street improvements, utilities and landscaping; construction or modernizing of new facilities, renovating or converting existing facilities; or the purchase of long-term machinery and equipment.

This program enables applicants to maximize the loan amount while obtaining a fixed rate for an amortization period of 20 years with a 10 percent down payment. Traditional bank financing requires a down payment of at least 20 percent with a fixed rate of up to five years.

According to Hugh Curley, NH SBA public information officer and business development specialist, 504 loans have increased significantly in NH. In 2009, there were 84 loans written for a total of $26.4 million. For the first six months of fiscal year 2011, 62 loans were closed, representing a total of $29.3 million. If this trend continues for the remainder of the fiscal year, the value of the 504 loans written should double and the number of loans written should increase by 50 percent. This is good news for the NH economy and means businesses have the means and capacity to absorb more debt for investment than they could two years ago.

The program has undergone some revisions over the past few years. As a result of the Jobs Bill Act, some positive changes took effect Sept. 27, 2010. The maximum 504 loan allowed increased from $2 million to $5 million. Because the CDC/504 portion is 40 percent of the total deal, the total maximum package increased to over $12.5 million. This is a permanent change to the program.

There is also a refinancing option that allows businesses with a balloon mortgage coming due the opportunity to convert it to a 504 loan. This is assuming they meet the criteria requirements for 504. This refinancing option will end Sept. 27, 2012. A business can borrow 90 percent of current appraised value, or 100 percent of current outstanding principal balance, whichever is lower.

Clay Prewitt, president of Custom Banner, used the CDC/504 lending program in 2009 to relocate his company from North Berwick, Maine to Rochester. Custom Banner is a wholesale printer of banners, flags, tradeshow backdrops and table throws. Prewitt saved $12,000 annually in debt service versus leasing costs, and the savings helped the business get through the recession.

The SBA's 504 loan product has been a vital tool for financing owner-occupied commercial real estate in New Hampshire for many years. The program's recent expansion to include refinancing of eligible conventional mortgages can be equally valuable for both lenders and small businesses, says Greta Johansson, NH SBA district director. The 504 loan product offers extremely attractive terms while reducing the conventional lender's exposure, helping alleviate challenges faced by businesses with reduced equity and cash flow and improving the lender's liquidity and collateral position. It's a winning proposition for all parties.

Loan demand is increasing, says Allison Field, regional vice president of The Provident Bank with NH offices in Exeter. Although not quite at pre-recession levels, there is increased demand in commercial real estate activity. Also, many businesses do not qualify for the 504 program and banks do many stand-alone deals. One result of the recession is that some appraisals are coming in low, and banks must adjust lending. As a result of multiple bank failures, the regulatory environment has tightened. That makes some deals more difficult to put together without the 504, because down payment requirements are too high.

The key areas in any commercial real estate deal are collateral, credit worthiness and cash flow. Most businesses have had a rough few years, and that might be reflected in their financials. Banks must analyze whether businesses managed themselves properly through the recession by tightening expenses, margins, sales and profitability. Many bankers and economic development professionals report improved business sales and profits in 2010 over 2009.

Another source of funds is the Regional Development Corporations (RDC). There are 10 RDCs in NH that have revolving loan funds. They work in partnership with other financial institutions, usually taking a collateral position behind a bank. This collaboration provides enhancement to the loan making it more likely the business will be able to borrow the funds.

Warren Daniel is regional manager of the Seacoast office of the NH Small Business Development Center, a partnership program with the U.S. SBA, the NH Department of Resources and Economic Development, the University of NH and the private sector. Daniel can be reached at 603-330-1929 or warren.daniel at unh.edu. For more information, visit www.nhsbdc.org.