Discussing SBA 504 Commercial Real Estate Loans

Finding Creative ways to Keep Business Moving in a Tough Economy

EO:      Welcome to another update on the market with Net Lease Commercial Advisory. Again, I’m Eric Odum, Principal at Net Lease Commercial Advisory and today, we have with us Scott Jacobsen who is with – why don’t you introduce yourself…

SJ:        NorthStar Bank, Commercial Banking Manager

EO:      Scott has been a banker in this area for ….gosh Scott, it’s probably been 22, 23 years now?

SJ:        At least…

EO:      So, you’ve been around a little bit and he (Scott) presented me the other day with an opportunity I thought was very interesting in the Commercial Real Estate market in terms of the financing.  Of course, there’s been a lot of discussion about illiquidity in the market.  We have our feelings about illiquidity.  It really has less to do, in my opinion, with the banks and probably more to do with the borrowers.  But, we’re going to talk about a program today that can help on some of those illiquidity issues.  So let’s talk about it.  It’s the Small Business Administration’s 504 Loan Program.  Why is this program a program that people should pay attention to, Scott?

SJ:        The 504 Program’s been around for a long time, as long as I can remember and there are some key components to it which if you don’t know it, is very attractive — One being the 10% equity requirement for the borrower, where most banks typically will require anywhere from 20 to 30% equity.

EO:      That has been going up recently (on traditional commercial loans), right?

SJ:        Yes, that’s been going up – banks are requiring more equity (on traditional loans).  Everybody knows rates are so low today and the SBA rates are very low as well, and the way the program is set up, the SBA takes 50% of the loan amount and actually fixes in a rate, and that rate is in the low 5’s (percent), and they lock that in for 20 years.  So you get a 20 year fixed rate on the SBA’s portion of the loan, which is half of it, and 40% portion of the loan which the bank holds is locked in anywhere from 5 to 10 years.

EO:      So you still have a balloon, its just there’s a smaller portion of the amount that’s going to be subject to the balloon.  The government portion is a 20 year fixed loan which is pretty attractive.  I know dealing with a lot of small business owners when they’re purchasing their property…physicians and lawyers too, their thought is that ‘gosh in 5 years, I don’t know what the interest rate, I want to be a little bit more sure about what my payments are going to be’ and this seems like a really good way to stabilize their payments over that period of time and not worry about the balloon, the adjustment, interest rate, that sort of thing.

EO:      Let’s talk a little bit about who you think might be suited for this type of a product.

SJ:        It can be and For-Profit business that…we’re going to look at underwriting this credit to typical standards, which would be: a business has to be performing well, even in this tough environment, has to be in business for at least 2 or 3 years, has to have a little equity in their balance sheet, and you know, doctors, professionals, manufacturing distributors, they all qualify.  Where this program is really helpful, is if there’s something with the credit that just doesn’t quite get the approval in a traditional manner; the SBA program can push it over the top, because the bank actually at the end of the day, the bank is in at 40% LTV and the SBA is in for 50% so the capital or the equity so that the bank’s first position is very well secured.

EO:      So the SBA is essentially taking away some of the risk of the bank which makes it a more attractive deal for the bank to go ahead and make the loan.

SJ:        Yes, absolutely.

EO:      I think you talked about there was a chiropractor you had worked with…

SJ:        Yes, we had a case here just recently….. we had a Chiropractor that owns a half dozen locations, sorry, leases a half dozen locations throughout Tampa Bay and felt like this was a great time to negotiate those leases to purchase and was a little concerned about putting 20 to 30% equity into the traditional financing and thought this SBA program would be a good avenue for him to acquire those offices, lock in a fixed rate for 20 years for half of it and take some of the risk out of the balloon which you mentioned could sometimes give heartburn to clients when they know there’s going to be a balloon after 5 or 10 years.

EO:      Great!  So let’s talk about in terms of size…can you do this with $10k, can it be $50mil, what are the size requirements?

SJ:        Minimum size is $125k and maximum is $10mil.  So it’s pretty wide – it covers most transactions.

EO:      Most transactions. In Tampa, your typical physician practice was less than $1.5mil. Certainly more than the $125k – it’s going to be right there. I don’t want to make this sound like it’s only for physicians, because of course, you guys have had experience with manufacturing companies and distributors, but it seems to me that the professional practices tend to gravitate toward this more. Maybe that’s because they tend to be more balanced in the Tampa Bay area toward the professional industries.

SJ:        Well particularly if you’re a physician or anybody for that matter – if you’re going to be in your building and be there a long term – one of the requirements is that you have to occupy at least 51% of the space so it’s an owner occupied facility that we’re talking about.  But if you’re going to be there for a while and if you’re going to pay somebody, you might as well pay yourself.

EO:      It’s not a speculative investment then, this is something for owner occupied’s, running their business, has a sound business, has an established business, so that is what this loan program is really all about.  Let’s talk about some of the folks that perhaps can’t get this loan, because we talked about who can. Let’s talk about some who can’t.

SJ:        The ones that jump out at you: If you’re a not-for-profit corporation, you do not qualify, and if it’s real speculative then you wouldn’t qualify either.  Those are really the two big ones, and there are a few other ones: gambling establishments.  You know!  .….the obvious ones that jump out at you.

EO:      Ok, very good.  So, how does this compare with the fees to traditional bank financing?

SJ:        The fees…… the SBA’s got some programs now that they’re reducing fees to make it more attractive for borrowers.  There is a little over a 2% fee on the SBA portion to run it through and so that has to be an embedded cost, so that at the end of the day, if the SBA’s running 20 years on their fixed rate portion at around 5.25% then throw another 2% of closing costs,  you’re going to be somewhere in the 7.5% range all in which is still very, very attractive.

EO:      Then you throw in the balloon-free government portion, the SBA portion of it and it becomes pretty attractive.  So you have the origination fees which are a down side, but then of course you get extended lower rates through the term….. even with the fees included, it’s relatively inexpensive debt.

SJ:        Now, you compare that – it you walked into a bank today and asked for a traditional owner occupied mortgage, putting 20 or 30% down, and look at a 5 year balloon, our rates would be somewhere in that 6.5% range fixed for 5 years, and we’re going to charge anywhere from .5pt to 1pt so your cost is somewhere in that 7 to 7.5% range anyway for 5 years, where you can lock in the SBA portion for almost the same time but for 20 years.

EO:      Great. Terrific.  Well, why don’t we just shift a little bit here and summarize.  In terms of why we want to do this or why we at least want to consider this is

1. the SBA’s guaranteeing it, so you’re able to be perhaps a little bit more aggressive on underwriting than you guys typically would be.
2. It’s only 10% down and the government portion of the debt is for 20 years amortization with no balloon.

So, those are certainly the benefits to it.  People that we’re looking for (the folks you want to try to lend to) they’re going to be anybody with a track record, purchasing real estate, between $125k and $10mil. Is there anything else that I’m leaving out here in terms of summarizing this program?

SJ:        We haven’t really talked about – but there is the opportunity of throwing some of the equipment into the acquisition purchase and roll that into the loan amount. So, if there’s a capital intensive business or any business for that matter, we can roll that cost into the SBA as well as a significant portion of the fees can be rolled into the SBA loan as well.

EO:      Oh, that’s nice.

SJ:        So, there’s some great creative ways to make this worth while, and if you’re a business owner that your in a lease and you have the option to buy out that lease, we’ve seen a lot of activity recently as people recognize it’s a good time to be a value shopper for real estate and if you can lock in these rates for long term, it’s a good time to move on it.

EO:      Good point.  Scott, I’d like to thank you again for taking the time today to talk to us, and hopefully you guys got something out of it.  If anybody wants to get in touch with you Scott, how would they reach you on this program?

SJ:        Call me at 813-549-5030, or you can email me.

EO:      NorthStar Bank is located in the Beer Can building in downtown Tampa.  Again, we appreciate you joining us today and hopefully you got something out of it.  Feel free to contact Scott if you’d like to have more info on the 504 SBA Lending Program. Thank you again, Scott.

SJ:        Thank you, Eric.

(TAMPA, FL) — As vacancy in the metro Tampa office market climbs and rents recede, property owners and investors continue to look for the turning point that will signal the onset of an economic recovery.

Marcus & Millichap predicts a 20.5 percent vacancy rate by year end. Rents are forecast to slide 7.9 percent to $17.23 per square foot.

To see complete story on the Real Estate Channel’s “Commercial Real Estate Round Up.”

I attended the recent OPP LIVE conference in London, UK this past October and was asked repeatedly about the process of acquiring a visa by those interested in managing distressed properties in Florida or buying investment properties to manage.  With the  currently weak  dollar and the depressed real estate prices  in the State of Florida, I certainly understand why there was such keen interest.

While this interview focuses on commercial real estate investment, many of the points Mr. Perez covers can be utlized for other purposes, such as buying or starting a business in the US, or a buying a beach vacation home.  The important point I took from our discussion is the US is open for business  and investment from foreign investors, but one needs to understand the visa laws and work with a professional that can help them guide the way.

Mr. Perez’ website is a  wealth of information about visa requirements.  Click here for more information.

Full Transcript

INTERVIEWER:       Eric W. Odum, Lic. Real Estate Broker,  Net Lease Commercial Advisory, Inc.

INTERVIEWEE:       Fernando Perez, ESQ.

Eric:    Hello, and welcome to another series from Net Lease Commercial Advisory.  Today we have with us Fernando Perez.  Thank you very much for joining us Fernando.

Fernando: My pleasure.

Eric: Fernando is an attorney that has been specializing in immigration law over the past 27 years.  We’re very fortunate to have him sit down with us today to talk a little bit about some of the investment and visa requirements for investments, primarily with real estate, but also in covering a wide range of other types of activities in terms of buying business and whatnot.

Fernando has been a consultant in both the State Department and Congress, and he also has a face for television.  We know he’s been on FOX news and Univision, in terms of consulting on immigration matters, and so we’re very fortunate to have him with us today.

So hopefully you will be able to get a lot out of this and it will be able to help you make some decisions.  Thanks again Fernando.

Fernando: My pleasure.

Eric: Let’s talk a little bit about the immigration visa.  Typically, what people understand is that to get into the United States when you’re buying real estate or a business, you’re going to have to put down a million dollars—invest a million dollars, and hire 10 employees.  When I go out and I speak to people, that is the common perception, is that really accurate?

Fernando: Well it depends, which is a great lawyer answer.  What happens, Eric, is that there are two separate investment visa categories under the immigration laws, and people tend to confuse the two.  Now, there is a visa category which is called the EB-5.  It’s also been referred to as the Employment-Creation Visa or the Immigrant Investor Visa.  Now, the characteristics of that are that persons from any country can qualify, but it does require in most instances, an investment of at least a million dollars in a US business, and as a result of that investment, 10 jobs for US workers have to be created.

Eric: Okay.

Fernando: Now, while we’re talking—

Eric: Which is not really ideal for a real estate investor—

Fernando: Exactly.  It’s not going to be feasible in a lot of situations.  Now, there is a new variation that I will touch on with the EB-5 before I get into the Treaty Investor category.  There is a variation of the EB-5 that is an investment in something called a regional center.  Those are areas of the United States that have been designated by the government as distressed.  Now, if somebody makes an investment in a regional center, the investment amount is reduced to $500,000 and there is no requirement that you create employment because the investment itself, which has been pre-qualified, is already structured to create employment in the local community.  So that’s the EB-5.

The other investment category, and this is the one that really is the most practical to most individuals, is what’s called the Treaty Investor Visa or the E-2.  The differences are that the E-2 is only available to nationals of countries with which the United States has a qualifying treaty.

Eric: Generally, what kind of countries are they?  How many are there, do you know?

Fernando: There’s probably, off the top of my head, over 50 or 60.

Eric: It’s a lot, close to half of—

Fernando: It’s a lot.  Most of Europe qualifies.  England, Spain, France, Italy; all those countries qualify.  Canada and Mexico qualify.

Eric: Those are the big three that are investing in the United States.  It’s the UK, Canada, and Germany.

Fernando: Columbia, Australia; they are all over the world.  So, for somebody like that who is interested in doing something like that, just basically contacting someone like me and saying, I’m from such-and-such country, is there a qualifying treaty?  And we can tell them right away, yes there is.

So, assuming there’s a qualifying treaty, the next thing—and this is the thing that’s really important—is that when you’re dealing with the E-2, there is no minimum investment required.

Eric: A big difference from the E-5, which is a million dollars to $500,000.

Fernando: Huge difference.

Eric: I mean, really, no minimum amount.

Fernando: Exactly.  And if the investment is packaged correctly, for example, I’ve had investments qualify with an investment of $7000.  Now, that’s rare and there were a lot of other factors involved, but the point that someone needs to take away from this conversation is, don’t think that you have to have a certain sum of money ready to invest to be able to qualify for the E-2.  That’s the biggest difference between the E-2 and the EB-5.

The second thing is that with the Treaty Investor category, there is no requirement that you have employees.  If the investment in the United States, is able to generate enough income to support the investor and their family, there is no requirement to have employees.

Eric: Wow.  That’s another big difference.

Fernando: Huge difference.  Let’s just use a real example.  Let’s say that you have a British family that comes over here and buys a strip center.  It’s a commercial investment because their job is that they are renting this.  That clearly qualifies for E-2 treatment.

Now, the only “employees” they may have may be independent contractors.  Maybe they hire a company to mow the lawn to keep up the landscaping and somebody else to do repairs every now and then, but they don’t really have to have any internal employees that they, themselves, are supervising.  That’s perfectly fine.  As long as that investment generates enough money to support that family in the United States, then they are good to go.

Now, when somebody comes here in E-2, the spouse can get permission to work in the United States and the children are automatically authorized to go to school.  The children don’t have to qualify for a separate student visa, the wife doesn’t have to qualify for some separate type—it’s automatic.  Obviously there is a paper process, but it’s not going to be denied.

Eric: So let’s talk a little bit about the types of investments you can do.  If I wanted to buy a residential property down the street, am I able to do that?

Fernando: Well, yes, you can do that.  There’s nothing stopping you.  This is nothing to do with investments per say, but this is something that’s also misunderstood, and unfortunately it’s also misunderstood by immigration sometimes.

If somebody is here as a visitor, which is a B1, B2—or for a lot of Brits and people from European countries, they can come in under the Visa Waiver Program, which allows them to be here for 90 days without a visa.  Persons like that, it’s perfectly legal for them to buy a residence in the United States.  They don’t need any special permit, they don’t need to change their classification to buy that residence.

So if they want to come here and, for example, buy a vacation home, and they want to rent it out for part of the year and come back and live in it part of the year, that’s perfectly fine.  They don’t need a special category for that.  On the other hand, if they want to really use this as an investment that will allow them to live in the United States on a longer term, then simply buying a residence won’t do it.

Eric: Essentially, we talked about four options for them today.  So why don’t you go ahead and quickly summarize for our audience what those four options that we discussed—actually there are a lot of different options, but why don’t we talk about those four that we discussed, again, just to summarize things for our viewers.

Fernando: In the area of investment, and particularly in investment that’s real estate related, the four options are these:

The Treaty Investor category, which, as I mentioned before, is available to nationals of countries with which we have a qualifying treaty, requires no minimum investment amount, does not require any number of employees, and does not require the day-to-day management of the investor.

Then we have the EB-5 category in it’s purest sense, which does require a million dollar investment and does require the creation of jobs for 10 US workers.  When it is a million dollar investment, it does require the active management of the investor, it does result in a green card, and it’s available to people from any country in the world.  There is no qualifying treaty that precedes that.

A subset of the EB-5 is investment in a regional center.  The similarities are that it’s available to anyone and it still results in a green card, but if you’re investing in a regional center, the investment amount is $500,000, you do not have to create any jobs, and you’re not going to be actively involved in operation of the business.

The last area that we talked about is if somebody just wants to come here and buy a vacation home that they are going to use three to six months out of the year, even if they are going to rent it the rest of the time or just leave it closed the rest of the time.  It’s perfectly legal for someone to do that while they’re in the United States and simply a visitor for business or pleasure status, which can be someone who enters with a natural B1 or B2 visa, or somebody who enters under the Visa Waiver Program without a visa.

Eric: Perfect.  So that summarizes, essentially, the four options that we have   for real estate investors to get involved in the United States.  Certainly, Fernando, as an attorney, has a considerable amount of experience in this area.  We’re very thankful he was able to join us today.  So Fernando, again, I appreciate your time, and hopefully our viewers got something out of it.  I’m sure they did.

Fernando: My Pleasure Eric.

Eric: Maybe it will help some people in the future.  Thank you very much.

Fernando: Thank you.

Eric: All right, take care.  Bye-bye.

In their guidance, the FDIC is opening the door for banks to rework, negotiate through and prudently modify loans that are essentially deemed salvageable, even if they are considered high risk, according to current underwriting standards.

Separately, it should be noted that the IRS also recently provided guidance regarding CMBS loans to allow for an improved tax environment for lenders  renewing ballooning notes  that have excessive loan to value ratios.

For more information, here is the press release from the FDIC and an article from the Miami Herald.

*Performing/non-performing loans are those loans that do not meet current credit underwriting standards, but the borrowers continue to pay scheduled payments. This is a term that we will hear a lot in coming months. As bleak a picture has been painted about the CRE market, most of the issues with commercial real estate debt revolve around performing/non-performing loans.

Image Credit: www.pensionriskmatters.com

Canadians and Brits have long been significant investors in US real estate and Florida is one of their most sought after markets.  We posted on here recently about the pick up in activity many of us have seen in regards to inquiries about real estate investments from international buyers.  We are headed to the Overseas Property Professional show in London this week and are anxious to check the pulse of the world markets.  News from the Expo Real show for commercial real estate, held in Munich earlier this month, was surprisingly upbeat.  We will definitely provide an update on the show upon our return to the US next week.

In the mean time, we came across this article regarding RioCan’s (Canada’s largest REIT and retail landlord) increasing interest in the US market.

RioCan Real Estate Investment Trust, the largest real estate investment trust in the country, is getting closer to a major move into the United States –even getting RBC Dominion Securities’ opinion on a potential deal.

“We are looking around down in the United States,” Edward Sonshine, chief executive of RioCan, said in an interview with the Financial Post. “There are just so many opportunities down there. There will be individual opportunities that we will ask one of the investment-banking outfits to look into for us.”   (…..complete article on RioCan’s search for US commercial real estate )

Excerpt from the Tampa Tribune:

…..All told, Tampa ranks 46th out of 65 metro areas by highest rate of distressed commercial property, factoring in the size of each market. Las Vegas ranked first, with an estimated 32 percent of its commercial properties in some type of distress, followed by Detroit, at 24 percent.

Most-distressed commercial real estate markets

Percentage of properties in distress

1. Las Vegas 32 percent

2. Detroit 24 percent

3. Miami 20 percent

4. Tertiary West 19 percent

5. Cincinnati 15 percent

46. Tampa 6 percent……

Complete Article from the Tampa Tribune

Comments: Daily, we receive phone calls from individuals looking for commercial real estate in the Tampa Bay area.  Usually the prospective tenants will quote articles and facts about the commercial real estate market and then proceed to use these “facts” as evidence as to why they should be entitled to seriously under-valued rent or the right to purchase a property at pennies on the dollar.  Adjusting the expectations of some clients can be particularly challenging.  The reality of the situation is, however, that as sluggish as the market is in the area, it is really not that bad, particularly when compared to the rest of the US.  Yes, vacancies are high.  Yes, there are more distressed properties on the market than 2 years ago.  Yes, you can find better deals that you could back in 2006.  But, Tenants are still moving to the area (albeit at a reduced rate) and deals are still getting done.  As of right now, the market is soft in Tampa….but it is not dead.

The Tax Foundation is a  Washington DC based think tank that collects data and publishes research studies on tax policies at the federal and state levels. The group is most famous for its annual calculation of Tax Freedom Day for the United States, which it has produced since the early 1970s.  The Foundation’s mission is to “educate taxpayers about sound tax policy and the size of the tax burden borne by Americans at all levels of government.”

The Foundation recently released their their 2008 “Consensus Survey” on owner-occupied property taxes of 775 counties across the US.  Not surprisingly,  Pinellas Counties fared pretty well, ranking 405, lower than the national average  in Taxes Paid ($1641 compared to $1897), and Taxes as a Percentage of Home Values (.8% compared to 1.0%).  Pinellas County residents did, however, pay a higher percentage of taxes in relation to household income than the national average (3.1% compared to 2.9%).

Hillsborough County did not fair as well, ranking as 277 highest.  Hillsborough County ranked higher than the national average in Taxes Paid, Taxes as a Percentage of of Home Value and Taxes as a Percentage of Income.  Below is the comparative chart, with Hillsborough and Pinellas Counties in relation to the US average.

I would be negligent if I failed to note that this report takes in to consideration homesteaded/owner-occupied property only.  Data and rankings in this report would be considerably different for Hillsborough and Pinellas Counties (and presumably the entire State of Florida) if one were to include non-homesteaded property in this survey.  Commercial real estate, multi-family housing and investment or second home owners pay CONSIDERABLY higher taxes than their owner-occupied neighbors.  It is not unusual to see vacation home owners pay 5-6 times their homesteaded neighbors, with both properties being identical in every physical way.

For those interested in trivia, Apache County, Arizona pays the lowest property taxes in the country, $126/yr.  We wonder if there are any governmental services provided by the county.

Property Tax Comparison

See The Tax Foundation for the complete report on property taxes!

Also of Note:

The Tax Foundation ranked Florida #5 in 2010 as the State with the “Best Business Climate” Index.  This was unchanged from their 2009 report.  South Dakota topped the list as number 1, while Wyoming slipped to number 2.

For the complete list of “Which States are Best for Business?” Click Here!

Comment:  In a recent interview, Steve Hagenbuckle, Managing Director of TerraCap Partners states that Florida real estate, one of the hardest hit markets in the country will be one of the first to emerge.  Foreign buyers from Germany, Canada, UK and China, among a host of others are beginning to descend on Florida to scoff up deals on real estate that have not been seen in years.  While residential real estate is probably going to be the most significant beneficiary of the activity, commercial properties are also attractive, because of the weak US dollar against much of the world’s currencies.  I would expect that most of the international buying activity in our area will be centered on coastal residential real estate in Sarasota, Manatee and Pinellas Counties, but there are increasingly compelling arguments for international buyers to consider commercial real estate, as well.  Net lease properties with credit rated tenants are at their highest CAP rates in years and could offer outstanding value.

Excerpts:

(3:25 min mark)

Steve HagenBuckle (SH): “ …as we talked before, the southeast, right now as far as in the last 12 months,  has seen 47% of all international investing has been in the southeast on the residential side.  The State of Florida has taken on 26% of all international investing on the residential home side.  So, Over 1 out of every 4 homes bought by international investors (in the US) is bought in the State of Florida. “

Bloomberg TV (BT) :  “Where is the money coming from ,  you mention Canada, …we talked a little bit about China, what about for example the UK?  Are these people actually coming to use the property?”

SH:  Yes, they are vacation homes as well as investments….mostly vacation homes.  They are seeing that there is so much affordability that they may not see this opportunity for a long, long time.  So, they are viewing it as “now is the time.” We have a currency that is strong than the dollar currency. And, we feel that if the dollar is weakening or has the chance to do so, now is the time to move.  We are seeing a lot of interest from Latin American countries.  54% of Germans, when they buy real estate in the US, they buy in Florida. And 37% of the folks from Canada when they buy real estate in the US, they buy real estate in Florida.

The news of more potential store closures is a reminder of the particularly precarious times landlords have faced over the past 2 years.  Not only have owners seen the repricing of even healthy assets by as much as 30% to 40%, but tenant losses continue to mount with no predicable end in sight.  Today, I set out to compile a list of store closures already experienced this year and found this list instead on David Bodamer’s blog “Traffic Court.”  I will let the list speak for itself, but the sheer enormity of the number of store closures from various national and regional retailers is staggering.

“We saw a few glimmers of hope with credit losses, though it is still too early to tell”

“CRE is a looming problem and will be a bigger driver of bank failures….Residential is still a bigger issue, but commercial is catching up and I do think it will be a bigger driver of bank losses and failures.”

On “going slow” on bank closures:

“The FDIC does not mandate bank closures. That is the job of the OTC or other regultor. ..its the primary regulators call as to when a bank is closed”

Commentary:  It is not terribly surprising that commercial real estate will be a bigger driver of bank failures.  Anecdotally, commercial banks, with which I have had experience, package their residential loans and sell them to investors as securities.  Although volume of commercial mortgage securities (such as CMBS) increased dramatically over the last decade, by and large, commercial loans (with larger margins than residential loans) have been portfolio holdings, particularly with community banks.