Loans for Financing Commercial Real Estate

KEVIN O’FLAHERTY: I’m joined by Amanda Hark from Heartland Bank, and tell me again — 504 loans; is that the topic today?

AMANDA HARK: SBA 504 loans, yes.

KEVIN O’FLAHERTY: Okay, SBA 504 loans. Amanda was telling me about that yesterday, and it seems like a great deal and a great way to refinance your existing commercial loan. Amanda, I’m going to let you take it away. Let’s start by telling me little bit about yourself and what you do.

AMANDA HARK: Sounds good. I currently work for Heartland Bank and Trust. I’ve been in banking since 1998. I started out as a teller, worked my way up, was in credit for many, many years. I really do think that that is what creates a good banker is having a firm knowledge of financial statements, and accounting, and all of that stuff. After I did that, I decided I know a lot of people; I like numbers; but I really, really enjoy people, small businesses. It’s time to be a loan officer.

KEVIN O’FLAHERTY: How long have you been a loan officer for now?

AMANDA HARK: Since 2006.


AMANDA HARK: It’s been since 2006, 2007 maybe — right at the beginning of 2007.

KEVIN O’FLAHERTY: So what makes your bank great? Why Heartland Bank?

AMANDA HARK: Heartland Bank is a family owned bank that’s based out of Bloomington. We made it through all of the bad stuff there in 2007, 8, 9, 10, and we came out booming. We’ve been buying other banks especially in the area here. We just assumed American Midwest Bank, and we’ve got now 68 locations that are around between Bloomington and Chicago. The best part about us, though, is we’re about 2.8 billion in assets, which means we can legally lend one company up to about 30 million. Not that we don’t want that large middle market stuff — We like to help the small business owner, and that’s where we ingrain ourselves. We know all the products that are based around small business owners.

KEVIN O’FLAHERTY: That’s great because not every bank is focused on the small business owner. I’ve met bankers that say unless it’s a certain million-dollar revenue business, ten- million, they’re not terribly interested in dealing with them. It’s great that you focus on that.

AMANDA HARK: Last year I did a loan that was 12 million, and I also did a loan that was 20,000. You can see that we’re all across the board. The best part about us, though, is that you don’t deal with the loan committees. We’re structured in a way to where I’ve got a phone; I can pick it up; I can call our president, or the head of our credit department, and say, “Hey, look this is what I’m looking at today. What do you think about this?” And they’ll tell me proceed or don’t proceed. If I don’t proceed.

KEVIN O’FLAHERTY: That probably expedites the process a lot.

AMANDA HARK: Yeah, it does. You’re not waiting for loan committee after loan committee after loan committee like a lot of the banks that are out there. The best part about that, though, is that — Say I can’t do that today. I’m not just going to say, “Hey, no. We’re not doing it.” It’s going to be, “Okay. I can’t do it today, but let me help you find a bank that can,” or, “Let me help you get your financial situation in order to where you will be able to do this within six months, or a year, or two years. Let’s get you to that place.” That, once again, goes to that credit background that I understand balance sheets, and cash flows, and all of that.

KEVIN O’FLAHERTY: So tell me about SBA 504 loans. What are they? How do they work?

AMANDA HARK: I personally love these. Right now, as an example, we have a customer that has always rented. She spends around $3,500 a month in rent; she’s a small business under a million dollars a year in revenue. That’s a lot of money to be spending in rent. The best part of 504 is that if you’re not special use — special use meaning a gas station, or a car wash, or something like that — you only have to put 10% down. It’s called the 50, 40, 10. You put in 10% equity; the bank puts in 50% equity; and then the SBA does 40%. The bank is in first position on the mortgage. We love it because we’ve got a 50% loan-to-value. You will love it because they give you a 20-year fixed rate. You don’t get that from a bank. From a bank you’ll get a 5-year fixed rate.

KEVIN O’FLAHERTY: So a bank stays typically an adjustable rate loan so.

AMANDA HARK: No. From a bank it is a fixed rate loan, but it’s only for 5 years. It’s amortized out over 20 years, but you only get a 5-year fixed rate. You also get a 5-year term. Where with an SBA 504, the bank is required to give you a 10-year term. Now, the rate can change after 5 years, but you’re required to have a 10-year term meaning the bank must take that loan again after the 5-year rate is up.

KEVIN O’FLAHERTY: Okay. I apologize I’m not as up to speed on commercial lending as you are, obviously. When you say it’s not an adjustable rate, but there’s this 5-year fixed rate: What happens at the end after these 5 years in a traditional loan?

AMANDA HARK: In a traditional loan we re-underwrite it completely meaning you get a whole new rate; we look at again; we can actually turn around and say to you, “We’re not really liking this. You need to get out.”

KEVIN O’FLAHERTY: So what would happen at that point? The entire balance of the loan would be due and owing?

AMANDA HARK: — would be up for maturity. Where with this the balance of the loan is not up for maturity until 10 years. We still look at your financials. We still talk to you about what you could do better, what you’re doing well already. But you have a 10-year commitment from the bank, and that’s really great. Now, the SBA portion is even better. That’s 40% of your loan you have fixed for 20 years. Right now that interest rate is 3.88% for 20 years. You do not need touch.

KEVIN O’FLAHERTY: That’s a great deal.

AMANDA HARK: It is a great deal.

KEVIN O’FLAHERTY: You blew my mind in the way that a tradition loan works. Are these loans that are secured by the property we’re talking about? AMANDA HARK: They are. They are secured by the property, and they’re at 90% loan-to- value.

KEVIN O’FLAHERTY: Okay. So if the 5 or 10 years come up and the bank says, “We’re not going to continue with this loan,” that – And I just want to make sure I’m clear on this — that business owner then has to just pay the entire balance? Or what? — Forfeit the property and have the– AMANDA HARK: There’s many different ways to do it. I’m not a workout lender. I have done that in the past, and, yes, the bank can foreclose. The bank can do many, many different things. If you don’t make your payment, they could always find another bank to go to as well. But normally a bank will be out there for five years at a time before they completely reevaluate and renew your first mortgage.

KEVIN O’FLAHERTY: Okay. What are the situations when banks in a tradition loan would actually decide not to continue? Is it that the business is failing or something like that? Or is that a rare thing or a common thing?

AMANDA HARK: It depends on the state of the economy. Back when I was in workout lending in 2008, 2009, it wasn’t really a rare thing. Today, we don’t see as much of it as a bank. Our portfolio is pretty clean. Problem loan-wise, we really don’t have any on our books at this point. It really depends on the state of the economy.

KEVIN O’FLAHERTY: At the very least after that 5 years in a tradition loan, your rate might be jacked way up, so that it’s hard to plan for how much you’re going to be allotting to your rent — AMANDA HARK: And remember rates fluctuate. So today rates are pretty good. You can get a 5-year fixed loan, 25-year amortization at 4%, 4.5%, something around there. Where in 5 years from now, you have interest rate risk. You don’t know exactly where it’s going to be. Looking back even for floating rates — if you look at prime in 2004 — we were at 4%. By 2008 we were up to 8.5%, and then it plummeted. So during that time businesses really saw an increase in their interest expense.

KEVIN O’FLAHERTY: With this SBA 504 loan, the SBA portion of the loan is locked in for 20 years at that rate, and then the bank’s portion of the loan, you said, is 10 years that it’s locked in?

AMANDA HARK: With a rate reset after 5.

KEVIN O’FLAHERTY: Okay. AMANDA HARK: Yes. But you’re guaranteed that it’s locked in for 10 years.

KEVIN O’FLAHERTY: I’ve heard that SBA takes a little longer than a regular loan; is that true?

AMANDA HARK: There are SBA preferred banks. With a SBA preferred bank, which we are, it does not necessarily take longer. You do have to go through two approval processes. Once it’s approved with us, we hand it over to the SBA. On an average I have found that it takes two to three weeks.

KEVIN O’FLAHERTY: Oh, really? In my head I had about six months on that.

AMANDA HARK: No. Especially with a 504 — We work with some great guys at the SBA. It really is about three weeks.

KEVIN O’FLAHERTY: So what does it take to qualify for one of these loans? I assume that you have to give a bunch of your financial information, but what is the type of person that would qualify and the line between that person and the type of person that wouldn’t qualify for one of these loans.

AMANDA HARK: It’s all based on cash flow. We like to see at least a 1.25 coverage. That means on all of the debt that you have, you can cover that one full time, and you can have 0.25 left over in your bottom line to apply towards retained earnings.

KEVIN O’FLAHERTY: Okay. What’s the process for applying for one of these loans?

AMANDA HARK: The first thing that you do is apply to the bank. The bank always has — It’s basically called a personal financial statement. The SBA does require you to have 100% personal guarantee on any one of their SBA loans. There are other SBA loans besides the 504 that we won’t talk about, but the SBA likes you to be all in. So you fill out the personal financial statement that allows us to pull your credit. After we pull your credit, then we make sure that you’ve got an okay credit score — there’s no huge delinquencies, missed payments. After that then we ask you for three years of business tax returns, and three years of personal tax returns. We like to see interim statements as well. Now it’s late in the year — I’d really like to see financial statements from June at this point too.

KEVIN O’FLAHERTY: So if you’ve got three years of tax returns that you’re getting — Let’s say you had a decent year, a down year, and maybe a pretty good year where you’re cash flowing positively. Do the bank and the SBA need to see positive cash flow for three years running, or do they just need to see that you’re in a good position now and that it’s — You know what I’m asking?

AMANDA HARK: I know what you’re saying.

KEVIN O’FLAHERTY: What happens if there’s been a year where your business took a hit in those three years, but you’ve recovered from it?

AMANDA HARK: Everybody has a bad year. It really depends on the circumstances. Once we know those circumstances — Maybe you had a huge capital expenditure one year because something happened, and you needed a new truck; you needed a new roof; you needed a bunch of other stuff. Things like that happen. If it were something like that, and it actually is going forward going to help your business, then that’s one thing. If it were another thing where you are just in a sector of business that just plummeted, it could be something completely different.

KEVIN O’FLAHERTY: It’s really a fact specific inquiry that you’re doing here.

AMANDA HARK: Yeah, and we do; we dig deep; we talk to you; we understand your business 100% before we get into everything. I, personally, am not in residential lending because that’s in a little box. Commercial lending, to me, has a lot of grey lines. You can cross over those lines for certain things. We’re still obviously monitored by the fed and everything like that, but it’s a lot more open to what we’re able to do. That’s why I like the business.

KEVIN O’FLAHERTY: You would think, and correct me if I’m wrong, but you would think since this is secured by the collateral of the actual property that there’d be a little bit more wiggle room than just a regular straight up line of credit, right, as far as what your business has done in the past, or is it basically the same guideline?

AMANDA HARK: You also have to remember that a traditional, conventional loan that you get at a bank is 80% loan-to-value or less. This is 90% loan-to-value. We have a little bit less wiggle room collateral-wise. If I have to go in and foreclose on a building, it’s going to be a lot easier to be completely paid back if I’m at 70% or 80%, than I would if I’m at 90%.

KEVIN O’FLAHERTY: Sure. Because the value of the building might have decreased, and there are costs associated with that.

AMANDA HARK: There’s a lot of attorney fees and everything, which you know about, that are associated with that. It really depends. But the thing that we like to see is when a business owner that’s been renting for many years can suddenly own their own building. They pay less overall because what it would cost for the mortgage, the real estate taxes, and the insurance can be less than what they’re paying. They can save money by owning their own property as long as they’ve got that 10% down.

KEVIN O’FLAHERTY: Thanks for sharing your wisdom with us today.