Why commercial real estate rules matter in your loan structuring.
Actual SBA 7(a) Maturity Rule
May use a blended maturity or a maturity up to the maximum for the asset class comprising the largest percentage of the use of proceeds. When loan proceeds are used for multiple purposes (land, building, working capital, and machinery, equipment, or the refinancing of any of these purposes), the maturity may be the blended maturity based on the use of proceeds or up to the maximum for the asset class comprising the largest percentage of the use of proceeds.
What this means to you
If you have a deal where commercial real estate is an option or being offered by the seller, this may be a great cash flow addition. Understand that the real estate carries a full 25-year term under the SBA 7(a) program (fully amortized) and the business carries a maximum of a 10-year term. If these two are combined, then the loan term will be blended if the real estate value is less than 50% of the loan amount. Here is the newest rule change and how it can really help your deal: if the real estate value is 50% or more of our loan amount, the entire loan can be amortized for 25 years. This can be a great increase in your buyer’s cash flow as the rent now becomes an add back and the term on the business goes from 10 years all the way up to 25 years. Do the math.
Why you need to know this
This rule is an option and not automatic with many lenders these days due to internal policies. Be sure you know and understand what term the lender you’re working with will approve and how it affects the buyer and your discretionary earnings. Many times this rule can be the difference.