June 12, 2015

By Bob Coleman
Editor, Market Trends Thursday Special Edition Part 3

Yesterday, I ran the numerous comments I received why SBA 7(a) should not finance an 100% CRE loan.

I received one excellent lengthy post that deserves its own report, I’ll run that next week.

As usual, both sides present strong arguments. Enjoy the read!

By the way, I received criticism that I was in the pocket of the CDCs for bringing up the discussion.

That was interesting since the SBA 7(a) trade organization issued a statement yesterday in response to my reporting. NAGGL chose to align itself with that side of the argument by criticizing its members offering 100% CRE financing as “bad for the lender and SBA, bad for the borrower, and bad for the 7(a) program.”

Here are the comments supporting 100% SBA 7(a) CRE financing:

We offer 100% financing to medical/dental industries. Per SOP, we would have to take a lien on the personal residence in that event (assuming business assets aren’t sufficient).

AS long as the deal is properly underwritten, risk is fully assessed, cash flow supports the deal, and available additional collateral is taken – I see no problem. The complaints, to me, seem like sour grapes from other lenders who don’t like that they are not as competitive. WE offer 100% 7a general purpose CRE financing in selected cases that meet appropriate criteria. We don’t do a ton of it but we do offer it.

There are circumstances where I might consider 100% financing to be prudent – Maybe both house as collateral AND low-risk industry? Would add if there was additional collateral with the low risk industry and strong CF

The SBA should only allow 100% financing of CRE deals if the liquidated collateralization (using standard margins on equipment, outside real estate, etc.) at the time of origination is 1:1. That would be a simple addition to the 50-10 and would temper much of the overzealous 7(a) lending currently being done – especially by larger institutions – while still providing a viable 7(a) option for the borrower.

Clearly prudent lending would require enough collateral to liquidate and cover the loan amount either from the primary or secondary collateral. Truly 100% CRE loans with no equity is not prudent lending.

7(a) life is but a dream!
With respect to Question 3, the exception would be if we also took a first lien on another commercial property.

I would consider 100% financing but only with 100% collateral position so only if I took additional collateral in addition to CRE. In Texas we cannot take the home, but can take other collateral.
If a business has reasonable equity and assets other than the real estate that can keep the leverage ratio at a decent number then 100% finance is not out of the question.

We would typically require a borrower injection (some skin in the game) however if I had a comfort level that SBA would honor a guaranty without an injection as long as it was a great file, I may begin to offer the product to be more competitive in the marketplace.

The answer to 3. is I would consider it prudent for a variety of industries based on cash flow and other risk factors indicating low risk for the transaction.

I feel as long as the owner/borrowing entity shows a minimum of 20% “equity” on the balance sheet (retaining earnings, loan from shareholder on standby, rent expense that adds up to 20%) that would be replace the need for the 10% cash injection. The 504 Program is very different, as it falls under the lender’s conventional credit policy and should have a cash injection requirement.

We need to retain the discretion to consider non-financial intangibles in credit decisions. It is becoming conventional to do 100% CRE lending for certain industries in non-SBA lending. Why not allow us to do the same when there is elevated risk, such as newer business, expansions and such…?

If a lending institution offers 100% CRE financing w/o an SBA/governmental enhancement then adding an enhancement to deals that don’t quite meet the standard criteria is fine. If the institution doesn’t offer “free standing” 100% financing for CRE then those institutions should be prohibited for whoring deals off the back of government programs.

Question 3 denotes taking a home as additional equity. If there is sufficient equity in a home, the debt service coverage ratio is strong, business and personal credit are excellent, the industry is low risk, and all other factors are outstanding I would consider the request

SOP for 7a does not set a LTV parameter. It does require the loan to be fully secured with all available assets (real estate). Fully secured is further delineated with appropriate liquidation rates. I have financed well over 100% on CRE for professionals, but the total project included CRE, equipment, and working capital. The borrower still had to inject cash equity, but the net loan proceeds resulted in a loan with an LTV in excess of 100%. Even after they pledge all personal real estate.

100% financing on solid no risk deals.
Prudent lending would include an evaluation of all factors when making a loan decision. This includes evaluation of overall business equity and collateral adequacy. The SBA reviews institutional risk through OCRM and individual loan characteristics on each defaulted loan prior to purchase.

Key is the word “prudent”. Rent replacement is almost always to the benefit to the Borrower and is risk adverse to the Lender.

100% SBA financing has been around for many years for Medical/Dental/Vets…some Lenders are expanding into other Professional industries as well…bring it on I say

100% financing is considered only when the reliability and probability of continued sufficient cash flow is high. Being in business for more than 5 yrs AND when the purchase of real estate lowers fixed costs is important to the process. We generally look for 10% equity in the deal but will consider 100% depending on the other described factors.

#3 state law prevents taking homestead as collateral for a business loan. Would consider 100% financing if had safe/low risk industry and took other CRE with significant equity.

I still believe each deal needs to be reviewed based on its own merit. Blanket statements such as 100% financing do not support the individuality associated with each deal.

I did 100% for CRE once before. An existing business in a cramped leased location with no bank debt and excellent working capital wanted to buy a building to expand. To me, this was an easy decision to fund the entire purchase price, and trade a lease payment for a mortgage payment. This was about 5 years ago. This year, he was able to convince a bank to offer conventional financing to pay off his SBA 7a loan.