Small Business Administration goes into real estate.

Small Business Administration goes into real estate

Forget most of what's been said about the U.S. Small Business Administration and its loan program. Borrowers looking for start-up capital or a loan without collateral need not apply. Borrowers turned down elsewhere for insufficient credit are also basically out of luck.

But, ironically, the SBA has deals for those looking for commercial real estate loans.

Small commercial real estate loans are all but off limits to most troubled savings and loans, and banks are accustomed to dealing almost exclusively with big accounts. That has left buyers of business properties with few options when it comes to financing $500,000 to $1.5 million deals. The few loans that are available often have to be paid back in less than 10 years and carry prohibitively high interest rates.

Through the SBA's so-called 7A loan guarantee program, however, private lenders get up to $750,000 of their business loans backed by the U.S. government in case the borrower defaults. These same lenders are also able to offer 25-year loans - with no balloon payments and often with less than a month's wait for approval - all at conventional loan rates.

Economic development firms approved by the SBA may also be eligible for special loan programs such as small general contractor loans, seasonal line-of-credit guarantees, energy loans, handicapped assistance, export revolving lines of credit, international trade loans, disaster assistance and pollution control financing.

All of these so-called 502 and 504 loans added together, however, form a very small portion of the SBA's activities in comparison with its 7A loan guarantee program. The application process can also take up to nine months and is primarily an option only for firms creating many new jobs.

Originally conceived as a federal program to bolster entrepreneurs, the SBA's guarantee program has evolved into a massive commercial real estate lending operation.

The agency estimates that at least 35 percent of its $676 million in California loan guarantees last year went to finance real estate deals. This year, report local lenders, between 40 percent to 100 percent of their SBA guaranteed loans are being disbursed for the purchase or development of commercial real estate.

After shopping several lenders for a $450,000 loan to finance the purchase of their Culver City office space, Richard and Willy Guldstrand decided to try getting an SBA loan through private lender Government Funding Corp. of Hollywood. Main line lenders "didn't want to touch our loan application," said Willy Guldstrand. But with an SBA loan guarantee, she said, "we had no problems."

"The banks were much harder to deal with," said Agapito Cordero Jr. He and his family borrowed $480,000 to finance the purchase of an automobile body shop in La Puente. "The commercial loan was more expensive," he said, because lenders didn't want to spread his payments over 25 years. The SBA-guarantee program made it possible to get a long term loan, he said.

By hooking up with the SBA, "we've been able to help customers we couldn't otherwise make a loan to," said Jim Whitney, senior vice president at American Pacific State Bank in Sherman Oaks. That's why, he said, "the SBA program is becoming a more frequently used method for real estate financing."

At American Pacific, he said, more than half the SBA loan disbursements go to finance the purchase of commercial real estate. The bank prefers such loans, he said, because they carry the backing of the federal government and allow the bank to be more flexible in some of the terms it offers to qualified borrowers.

He predicted that in the future many lenders will compete to become SBA lenders - especially as a secondary market develops among investors interested in buying whole SBA-backed loan portfolios on Wall Street. New underwriting requirements have also forbid many lenders from making what can often be very profitable small business and real estate loans. The SBA's backing, however, can make these loans pass regulatory muster.

But the loans are not available to everyone. Only about one out of every 20 interested borrowers actually qualifies. Further, the property being bought or developed must be used as the buyer's place of business. Most important, say lenders, is that the borrower exhibit a healthy cash flow and bottom line.

"What we look for first is management," said Jerry Morita, an executive at Mechanics National Bank in Paramount. "We view it primarily as a business loan, not as a real estate loan."

Morita estimated that 30 percent of his bank's SBA-backed loans are being used for real estate. And, he said he expects such loans to become more common. Most banks don't make long-term commercial real estate loans anymore, he said, so "the SBA program is becoming more and more competitive ... it provides a cushion to stretch out payments."

This cushion, added Sidney Moray, chief executive officer of Government Funding, makes SBA-guaranteed loans "the most attractive game in town." In fact, his company did nothing but SBA-backed loans last year, racking up a loan volume of $59 million in California - and making his company number one in SBA lending statewide.

"We are literally swamped with requests for loans," said Moray. What most prospective borrowers don't understand, he added, is that the reality of SBA loans today has little to do with what the program was like just a few years ago.

Gone are most loans directly from the government and incentives for lending to women and minorities. Gone too are the days of risky loans that created an astronomical default rate in the 1970s. Borrowers, said Moray, qualify almost exclusively on the basis of their pro forma - nothing more and nothing less.

If all the numbers add up to the borrower's favor, said Moray, loan approval can be a very quick process. The SBA can provide borrowers with a list of so-called preferred lenders which are authorized to approve a loan without first passing the paperwork to the SBA.