This year proved to be a busy year in Southern Nevada for SBA 504 loans, which are designed to help small-business owners start or grow their companies through the purchase of commercial real estate.
The U.S. Small Business Administration (SBA) has included additional requirements for the 504 program for the coming year. Among the major changes are a few related to life insurance, business licenses and excess liquidity.
Life insurance
There’s a certain liquidation value assessed for any property in the event the owner doesn’t have a succession plan if they pass away during the initial time period after the loan funds.
Life insurance will now be required when applying for an SBA 504 loan. For every $1 million borrowed, $50,000 (or 5 percent of the amount borrowed) in life insurance will now be required.
Excess liquidity
This new rule deals with how much cash you have in reserves for your business. The SBA will allow explanations of excess cash that might previously have shown on paper that your business has enough cash to pay for commercial real estate without needing the 504 program. You will be required to account for where the cash is allotted, but you are now given much more leniency in the application.
Business license
This is something new with the 504 program and is a requirement to provide a business license prior to closing on the loan. Next year, you will need to physically have the license in hand prior to closing.
This will especially affect those in food service industries, because improvements, certificates of occupancy and certificates of completion will need to be approved by the health department before applying for the business license. It slows down the ability to close quickly, with an average of 30 to 60 days, likely depending on the industry.
If you are buying the property you already operate from, this will have little to no effect on your process, and a quick close is more probable, since you would already have the business license for that location.
Overall, there has been much discussion about Southern Nevada’s economy and what 2020 has in store. For commercial real estate, we’re growing at a rate of approximately 2 percent to 4 percent every year and see that continuing next year. Steady and sustainable growth like this is the biggest indicator of a healthy market.
Another indicator is a diversified economy, and Southern Nevada’s diversification continues in the coming year. We are seeing continued expansions of education programs that bring new professionals to the market, as well as sports and entertainment venues that will drive tourism and thus additional businesses to serve them.
My industry is driven by small-business owners, some of whom have been holding cash and waiting until just the right time to grow or purchase property for their businesses.
When their lease agreements come up and their rent increases again, they realize they could be investing in themselves with their own offices or buildings. And they see lower pricing as an opportunity to finally come off the sidelines and buy. This in turn will correct the lower prices, moving the stability of the economy forward.
If your business is growing and you want to know how to purchase real estate for the business, talk to your real estate adviser or bank about whether the SBA 504 program can work for you.
The U.S. Small Business Administration 504 loan program allows small-business owners to finance commercial real estate and other fixed assets with long-term, below-market, fixed interest rates. SBA 504 loans can be used to finance the total project cost (TPC), which can include the purchase price, construction/renovations, equipment, soft costs and closing costs.
A typical 504 loan project requires a down payment of 10 percent of the TPC from the borrower, with the remaining amount split between a first mortgage provided by a commercial lender and a second mortgage provided by a certified development company (CDC).
By enabling owners to keep their capital working to grow the business and create jobs, the 504 program provides long-term stability to both businesses and communities.
