CONSTRUCTION LOANS DON’T HAVE TO BE INTIMIDATING

Posted on by Joel Soforenko

Construction don’t have to be intimidating, especially when the long term financing is structured through an SBA 7(a) or SBA 504 Loan.

Here’s what is often overlooked:

  1. An SBA 504 Loan can finance Owner/User occupied properties and finance up to 90% of the project cost.  Only the purchase of the land and the construction can be financed.
  1. An SBA 7(a) Loan can finance Owner/User occupied properties and finance up to 90% of the project cost – WITH cash for Inventory Purchase, Equipment Purchase and Working Capital.
  1. Either of these options can be used for an existing business or a start-up business.

Planning is the key.

  1. Has a location been chosen?
  1. Will the project and location have the needed Appraised Value upon completion?

    a) The only way this can be known is if the Borrower obtains a commercial Brokers Price Opinion or Broker’s Comparable Market Analysis as part of the initial research.

    b) Find a Commercial Real Estate Agent who offers this service.  This Commercial   Real Estate Agent will want to be paid.  The cost should be between $150 and $350 dollars depending on where the project is located and the size of the project.

  1. Have Professionals been chosen: Architect, Civil Engineer and General Contractor

    a) Sometimes the General Contractor will have construction plans depending on the ‘simplicity’ of the structure (ie. warehouse vs. offices)

    b) The Civil Engineer will give options for where the building can be located, ingress, egress, water run off systems, etc.

    c) General Contractors often want to be paid for their time to create an itemized budget and draw schedule.

    d) Note:   Any money paid to professionals for planning the project will usually be credited toward the Down Payment (better known in the SBA World as the “Cash Injection”)

  1. Has the Governmental Bodies who issue the Zoning and Permits been contacted to know if there will be any push-back to the project?

    a) Zoning Issues – Not only will the zoning allow the project, but if not, what is the governing bodies thoughts on allowing a Zoning Variance.

    b) Permits – Will there be any issues with the Building Inspector or the governing body’s issuance of the building and any additional requirements of completing the project?

  1. SBA Issue: Net Income Available to Qualify for the Loan

    a) Will this qualification be Net Income Based or Projection Based

    i) Net income based means the current business has enough excess income to qualify (at a minimum of 1.15 Debt Service Cover Ratio)

    ii) Or, the new location will allow the business to increase Gross Income.  This option will need:
    Two Years of Projections, an extensive Letter of Explanation for the Gross Income Increase, and                  there may be a need for a Business Plan.

    b) Down Payment (Cash Injection)

    i) The standard Down Payment/Cash Injection for an SBA Loan is 10% for standard real estate
    and 15% for unique properties (an incomplete list of unique properties are: car wash, hotel, assisted        living facility)

    ii) If a Down Payment/Cash Injection is required, the source of funds must be disclosed (usually be bank statements or other documents showing the funds in a particular account or investment account)

    iii)        The Down Payment/Cash Injection must be in the money account for two months prior to the deposit being given upon signing the contract for the land and two months before the closing of the loan.

    c) Personal Guarantees – Required by SBA Regulation

    i) The standard requirement for giving a personal guarantee is any person who owns 20% or more of a business (Corporation, LLC, Legal Partnership, etc.) must give the SBA Lender a personal guarantee
    ii) And, if the business has a Key Employee, this Key Employee may have to give a personal guarantee.

Example:         Father & Mother owns the business.  They do not                                                                                                         have any day to day involvement in the business and                                                                                                   do not make any of the business decisions.

Son is the President of the business and Daughter is                                                                                                    the Vice President of the business.  These two people                                                                                                  manage the business and make all business decisions.

In this case, most likely the SBA Lender will require the                                                                                              Son and Daughter to guarantee the loan

This also means the Son and Daughter will have to fill                                                                                                  out and submit all required SBA Financial Documents                                                                                                  and other SBA Forms.

  1. The above are some of the crucial questions and issues presented for a             construction project which will be financed with an SBA Loan.
  1. The key is researching early and getting all of those ‘ducks in a row’, so the project is way ahead of its required planning and document proof.
  1. These issues help identify SBA requirements (and general construction requirements) before the project stalls.

    CONCLLUSION

I’ve helped obtain SBA financing of construction projects others have walked away from.  If you are working on an Owner Occupied Project and want to learn the specific planning, give me a call and I will help you get it across the finish line.