SBA 7A Commercial Real Estate Loans

The Small Business Administration doesn’t directly underwrite loans but instead provides guarantees through a variety of programs. The name for the agency’s main program comes from Section 7(a) of the Small Business Act of 1953, which authorized the administration to provide loan guarantees for small businesses in the United States.

The SBA 7(a) loan program actually consists of multiple loan guaranty programs that are authorized under Section 7(a). Not all of these programs are available to real estate businesses, but several of the more notable individual programs are.

The primary individual program that’s of interest to real estate businesses is the SBA Standard 7(a) Loan. Other programs that may be helpful are the SBA 7(a) Small Loan, the SBA Express Loan, the SBA Veterans Advantage, and the SBA CAPlines. (The SBA Express Loan is different from the SBA Export Express, which is only for export businesses.)

SBA 7(a) loans can be used for long-term working capital, short-term working capital, purchasing equipment, acquisitions, and -- most important to real estate businesses -- constructing or renovating buildings. With regard to buildings, any business-owned buildings are eligible. These loans can provide financing for office buildings, shopping centers, hotels, and mixed-use projects where the owner occupies more than 51% of the property.

Additionally, SBA 7(a) commercial real estate loans may be used to finance distressed properties. Because the loans are guaranteed by the Small Business Administration, lenders may be more willing to underwrite one for a property that’s not really suitable collateral.

The advantage of 7(a) program over the 504 is when a sale of a business is combined with a sale of commercial property and working capital is needed. As SBA forbids financing a business purchases or working capital under the 504 guidelines.

The most common SBA Standard 7(a) Loan provides eligible businesses with substantial access to funding. These loans can be underwritten for up to $5 million and have maximum maturities of 25 years. The SBA sets maximum interest rates, but borrowers and lenders are allowed to negotiate lower rates. The SBA will guarantee up to 85 percent of the loan’s value for loans as high as $150,000, and 75 percent for loans over $150,000.

SBA Express Loans act as lines of credit, which can be helpful when completing a building or renovation project. These are available for up to $350,000, of which the SBA will guarantee as much as 50%. The loan duration can be up to 7 years. A notable benefit, the SBA will respond to applications for this type of loan within 36 hours.

CAPLines also function as lines of credit, and there are four types of CAPLines available. The most relevant to real estate is the Contract CAPLines and Builders CAPLines, although both are normally purchased by contractors rather than investors. These lines of credit last for up to 10 years or 5 years (for Builders CAPLines).

The SBA’s Veteran’s Advantage doesn’t offer a specific loan type but is rather a fee-reducing benefit that can be applied to any other SBA loan program. The majority of veteran-owned businesses can apply for this after applying to their desired loan program.

SBA Guaranty: The main feature that all SBA 7(a) loans come with is a guarantee from the Small Business Administration. The guarantee ensures that lenders will recoup some of the loan amounts if a borrower defaults, and that will make lenders more willing to approve loans. In order to obtain a loan, businesses must work with an SBA-approved lender.

Maximum Interest Rate: Since the SBA sets maximum interest rates for each of these loan programs, businesses know that their loans will come with fair rates. These loans are intended for situations where businesses can’t secure affordable and reasonable financing without assistance, and many businesses that are in such situations would otherwise pay extremely high-interest rates.

Prepayment Penalty: Businesses should be aware that all SBA 7(a) loans come with prepayment penalties. The penalty time frame, amount, and structure vary among individual Section 7(a) programs.

Loan Assumption: SBA 7(a) loans are assumable, so long as the purchasing business meets the SBA’s eligibility requirements. Transferring one of these loans to a purchasing business requires going through an approval process with the SBA.

Personal Guaranty: Although the SBA guarantees these loans, all Section 7(a) loans require a personal guaranty by anyone who owns 20% or more in the business.