803: Special Guest Interview Joshua Kim on SBA Loans (Part 2)
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00:01
Welcome to Episode Three of Season Eight of the Growing Empire Show. Today I'm back with my special guest, Joshua Kim and this is part two of our episode regarding how to fuel your investment portfolio purchases using SBA loans. So stay tuned.
00:16
Welcome to Growing Empires hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
00:35
So where does the SBA line up in comparison to other financing options that are out there for businesses?
00:42
Yeah, glad you asked. So the main reason that banks do SBA loans is because there's a government guarantee associated with it. It's also in the bank and where they call it a credit enhancement, right. If you own real estate, you know, or have a ton of liquid cash and you know, the deal you want isn't that great, they call that credit enhancements. Because it's mitigating the bank's downside risk. Right now, and this is one of the other benefits, I forgot to mention, the 7A Loan. Which is the more common loan product, because you can use it for anything, you know, where's 504 is real estate only. The guaranteed percentage is traditionally 75%. What that means that the bank gives Jen a loan for a million dollars to go buy a building or a business or whatever. And let's say, you know, something really bad happens. COVID 2.0 happens, the business goes under the bank will actually get 75% of that back from the SBA. The SBA, once they go through the process and they file for the SBA will cut them a check for $750,000. So their downside risk is only really 250. Right now, it's actually 90%, which means they give you a loan for a million dollars, their downside risk is actually only 100 Grand. Wow, it's it's Yeah, it's a very powerful thing. I have a couple deals that I'm working on right now for people. And you know, we've brought it to the table, and they're like, you know, if this was a regular, if we didn't have this 75% guarantee, we probably wouldn't do it. But, you know, in the spirit of the SBA program, and the reason the government does that, obviously, it's to encourage lending to small businesses, right. And, you know, small businesses, often they don't have the collateral to back something that might be more production space. So this is the government's way of basically incentivizing banks to still do loans to provide capital to small business owners. Because you know, again, at the end of day, small business owners are the backbone of the economy. That's where most of the jobs are created, not at the fortune 500 level. And so that's, you know, that's the main benefit is that you're gonna be able to get deals done with an SBA loan, that you would not be able to get done with a traditional loan. In that same vein, the down payment requirements, specifically for the audience here on real estate, are a lot lower. You know, most times it's only 10%. So, yeah, like the surgeon I have, he's buying, you know, seven and a half million dollars worth of real estate. Well, buying plus getting capital for, you know, for the growth side or whatever. It's like seven and a half million dollars, you know, he's only going to have to put down 10%, for for everything. I mean, you go to a conventional lender, they're gonna want minimum, what, even if it's owner occupied 20 25% .
03:07
25-30 nowadays. Yeah, yeah, there's still some lenders out there doing 20%. But you've got to have a very long standing relationship to come close to that. And, you know, with other commercial products, the terms are not favorable. I mean, they're usually five year fix, and then they float and prepayment penalties and all kinds of, you know, crazy stuff. But if that's what you need, that's, you know, other than an SBA, or other options.
03:33
You got to pay the price to get it done, right. And often for most business owners, it's, it's a negligible difference, because the benefit they get from getting the deal done is, you know, far exceeds that. But yeah, I mean, and then the other thing, too, and I'll mention because you touched on it, so so for real estate, you can go up to 25 years with SBA. And, you know, depending on the lender, you can, you know, obviously, as we help a client shop alone, that's one of the things we're doing is we're negotiating for them. Like, hey, how long are you willing to fix the interest rate? And so it always kind of depends on the bank, and what rate you want to lock it in at. I mean, you know, some banks are willing to lock it in for five to 10, you know, five to 10 years, you know. If they want to lock it in at 10 years, they might be pricing it a little bit above where it is today, and what you could get it at at, you know, if you locking in on five years. But the point is that it's possible. I mean, they're they're willing to do that and the term is fixed. I mean, you can't change how long the term is. That's that's dictated by the SBA policies for these loan products. Real estate, it's 25 years. You can ask for shorter if you want, but they can't force you to take a shorter loan term, right. So but yeah, that's, yeah.
04:40
Awesome. So does it make sense to work with a consultant when you're getting an SBA loan if you don't really know where to start?
04:48
Well, yeah, and so I'll just I'll put it this way. Even if I was in the, if I was in the market right now to just go buy an apartment building at you know, something you can't use an SBA loan for because there's no there's no business to tie to it. I would probably just ask you, I'm like, hey, Jen, like I'm trying to do this deal I've got, I know I have the equity capital to get it done, the deal looks good. I need help finding a lender. Why? Because I mean, that's not my expertise, I don't have the contacts. I don't really understand what different products are out there. You've got a world of experience working with, you know, with lenders like that for the deals you work on on a daily basis. So in much the same capacity, I say, is kind of self serving, because one of my business does is that. But we're able to really shortcut the process. I mean, the business that I have is called 7accelerator(.com), and we call it an accelerator for a reason. I mean, we're able to really cut back on the time it takes someone to get the financing they need, by making sure that get set up with the right lender to start. Because I've seen, I've seen dentist with five locations who want to go buy a building get declined by Bank of America and Chase. Because they, you know, they’re like oh, we want you to put down 25%. It's like, I don't have to it's an SBA loan. I should only have to put down 10%. And so, you know, just think about that. If the dentist who's making two and a half million dollars a year, I you know, with an 800 FICO and plenty of assets, he's having friction with certain lenders on an SBA loan, like most other guys that I mean, that's that's pretty high up there, you know. So that that's really where us in a consulting capacity can help as we just make sure that a borrower is going to be paired up with the right lender for their project to start. Because, you know, Jen, you could refer someone to me and say, Hey, I got a guy, he wants to go by business. He needs $2 million. I'm going to send him to a different lender, then I send David to. I sent David to a lender that specializes in, you know, smaller, quick turnaround working capital loans. Like under, you know, under half a million, right. And that's, that's all I needed. So it's a different credit box for every lender, which I'm sure you understand being in real estate, there's different lenders that do different types of types of programs. And that's really, that's really where the value is. You know, we're able to shortcut the time. But also, you know, when when you have that knowledge, you can rate shop and get better pricing from lenders.
06:53
Okay, are you able to use the SBA loans, if you are also entitled to grant money or opportunity zone money and different things that really have to do with the location of the property that you're buying? Can you use SBA loan conjunction with that?
07:08
Yeah, there's, there's there's no, there's no clauses in SBA loans that would preclude you from that. I mean, I know people that have used it for, you know, the caveat, though, I'll say is obviously, like with opportunity zone products, usually, people are just doing it as like a 1031, cap gains deferral, right. I mean, it's, that's the whole point of it. And they're not looking at it, like, Hey, I'm going to go buy this building, because I want to go put my business in it. So I don't see a ton of overlap between those a lot of times. But, that's not to say you can't. I mean if you are looking like let's say you got a manufacturing business, and you want to go buy a piece of real estate, and there's one, you know, in your vicinity. It's in a good area and it's in an opportunity zone. You can get an SBA loan to buy that building, you know, 1031, selling your old one or whatever, and take advantage of both benefits. I think, you know, if you're able to do that, you definitely should. Because a lot of those programs out there, I think are great. You know, grant money, there's, there's, there's nothing that will preclude you either. If anything, it'll strengthen your deal, because you can go to the bank and say, Hey, we're eligible for these grants. I'm working with a company right now, more on the tax credit side. But they, they've got some really cool technology they've got how to describe it. They have they have a UV light scanner that can basically scan if they initially built it for food, but it turns out, it works perfectly for COVID. But it can it can test for bacteria particles, and virus particles on food just with with a special black light scanner. And so for them, they have the majority of their revenue has actually been coming from state, federal and local grants and stuff like that. And so we're able to show the bank like, Hey, we these guys have a $1 million a year contract with, you know, the state of North Dakota or these guys have a whatever grant from the federal government of whatever, right. So grant money is often something that actually strengthen the deal, because they'll say, Okay, well, you've got a good business, because otherwise, the government would not have given you all this money.
08:57
Understood. So did I catch this correctly, that you can use an SBA loan for not only the acquisition of the real estate, but you can also use it for construction costs?
09:07
Yeah, you can use it for TI expenses or just straight up ground-up-construction as well. A ground-up-construction is obviously, it's trickier. The bank will require more than 10% probably close to like 20, 15 or 20, depending on if they consider the property if it's going to be like a general use versus a special use. You know, general usage is just office condos. A special use would be like an assisted living facility. Right. I mean, you can't you can't lease that out to anyone. But yeah, you can do that. And then tenant improvements is something that's that's big. I'm working with a lot of dentists right now. They're like, Hey, you know, ever since COVID is kind of started going away. Everyone's coming out of the woodwork they need to go back to their dentist and I don't have chairs. I don't have enough chairs. I need to go knock down three walls put more chairs in hire more people. And you know, they're coming they're coming to meet it, help them find a lender who's who's gonna build to that. So yeah, TI, and, you know, any sort of construction costs, it's it's a very common use. Especially right now. I mean, there's there's so much going on.
10:02
The episode will continue in just a moment.
10:05
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11:02
So what situations would be better for conventional loans versus SBA loans and vice versa?
11:08
Yeah, so that's a great question. A lot of it, I think, depends on certain industry. So just I'll use dentists as an example. So a lot of conventional lenders, and you know, rightly or wrongly, and it's actually kind of a touchy subject in the dental industry. They liken it to some of the what the banks do with young associate dentist, it's given a bottle of whiskey in a loaded gun, right. As long as you have your dental degree, like a year of experience and a pulse, they'll pretty much just blindly give you up to like three quarters of million or $1 million for your first practice, right. And I often tell dentists, like, go take that money. They price it at absolute rock bottom, it's actually cheaper than SBA, which is crazy, to me. But once you hit that cap of 750, or million dollars, whatever the number is, they really won't help you anymore, above and beyond that. So SBA comes in, great for the guy, like once he's actually started his practice, he's like, hey, maybe I want to start a second location, or I need more money to grow. I need more money to buy it my partner. Maybe they use that million dollars to build out the practice scale it up, but they don't actually other real estate. And now they want to own the real estate that they're in, just because they know they'll be there for a while. So there's certain industry specific situations like that, where going with a conventional loan product is going to be better. I mean, I tell him, like, Listen, if just put the one side to side, you're going to go with, you know, Chases practice finance solutions every time. But they have limitations, right. So that's what I'd say that's there's certain situations where conventional is better. And you know, I don't I don't compete with those guys. I said, Listen, like go take that money. And then when you need more, call me because they're not going to help you above, you know, 750 to a million dollars. There are obviously a lot of situations where SBA is far better, right? Like I told you about the other dentists who, you know, that was his problem, he had multiple locations already. You know, he didn't have a lot of debt, you know, despite having five practices, he didn't have a lot of debt was running very profitably. And you know, the lenders just were like, Hey, you know, we don't want to do this, because we've kind of hit our dollar amount. So SBA is the perfect solution for him, he's actually looking at buying a pair of other practices in the same city that he's in with the real estate, and just expanding it into his network of practices. SBA, as it as it relates to the audience, I'd say a lot of times, like if you have a business, and you know, you want to get some sort of real estate loan for SBA is 99% of the time going to be better than conventional, because of the better rate fixed, you know, you've got a long, you know, got a much longer term, and the down payment requirements are going to be a lot less. So those are just generally speaking situations where SBA is going to be better. A lot of it's going to be on the real estate side, a lot of people go with SBA loans, primarily because of the lower down payment requirements. But, yeah, I mean, there's there's a lot of situations where conventional does have its merits. I mean, for example, you know, someone from the audience were to reach out and say, hey, I want to go buy an apartment building, I'm gonna say, Hey, I can't, you know, I can't help SBA doesn't do apartment buildings. You know, go talk to Jennifer, she's got someone, she's got a loan broker that specializes in, you know, apartment buildings. So that's the other limitation of it is it's it's kind of got a more narrow scope as far as what you can actually do with it. It's got to be tied to a business and it's got to meet a couple, you know, very broad categories or guidelines. But, you know, if you can qualify for SBA for your transaction, a lot of times it's going to be better than most conventional options are.
14:26
So what about a situation like a mixed use building so say, because we have a lot of those around here. So somebody owns a mixed use building that maybe has a laundromat that should be owner operated, you know, on the first floor, the retail and then they're like apartments above? If you're buying the business and the real estate essentially, and you were going to do you know, an owner operator for the laundromat, could you use an SBA loan to acquire that building?
14:54
So what you're contemplating is not only buying the real estate on the ground floor, but you also own all the real estate above. So you just lease out all the apartments? It's possible what what I would what I would say is mixed use is is a possibility. Where it gets tricky is you kind of have this majority occupancy test. So they look at like, okay, what's the total square footage of the building? And what percentage of that is, you know, basically sectioned off for business use? So in that case, let's say it's a 10 story building, the laundromat takes up the whole floor less the reception to the apartment building or whatever the you know, the main room, all that. I would imagine the, the laundromats only going to be maybe about 5% of the total square footage of the building. They would come back and say, Hey, you know, there's there's not enough owner occupied space here for this to really qualify. Now, if they were coming in and saying, Hey, we're not going to go buy the apartments above us, we're just here to buy the ground floor. And, you know, we lease out the other part of the ground floor to the apartment building for their Administrative Office, the mayor whenever that would work. But at that point is because it's closer to like a 50/50 split. And you can make the argument, hey, I've got an owner operator business. You know, we're buying some other space with it, and that we just sublease out. But it's got to be majority. So you know, 50.1% of the space out there, you have to be able to argue is for the business. That's really one of the only limitations with SBA.
16:21
Is there anything that prevents you from doing like a combination loan? Like what if I want it to fit out for a business in a space like that laundromat? So let's say I wanted to fit out the whole laundromat, but I use a conventional loan or even a commercial loan to buy the actual real estate. Could you do that?
16:37
Yeah. So that that's actually there's, that's actually a great situation, I'm dealing with one exactly like that right now. Not on a mixed use property, but for a dentist. So she used a conventional loan to buy the buy the building. And then basically, she's been having issues with a local lender about giving her more money to do improvements. She wants to expand because it's, you know, COVID, and this and that, and they're they're just very, they're very conservative right now. And so I'm like, yeah, look you on the building, we can get you an SBA loan to do all the, you know, the capital improvements, leasehold improvements, whatever, you own the building. And because she owns the building, we can actually amortize it out 25 years, we don't have to do it on a 10 year term. Because she owns the real estate, we can put it out 25 years. But yeah, that's definitely an option. You know, you go out there and say, Hey, I use conventional to buy the real estate and I want some SBA capital now to either do improvements for a business or, you know, maybe borrow some money to put the you know, put up the business there. Maybe you want to open a restaurant, you know, you got to go buy the ovens, the equipment, all this and so yeah, that's that's definitely an option.
17:35
Okay, what's the typical timeframe from the time of application to the time of funding for an SBA loan?
17:42
Yeah, so, I love that question. And I usually ask people, you know, how long is a piece of string? Right? It's gonna depend on a lot of factors. So, you know, if you've got an established business, and you're going into the bank and say, Hey, I need you know, $300,000 of expansion capital. The SBA has, you know, anything under 350, they actually have like an expedited underwriting and approval process for existing companies. And so, for example, like David's, it was, like 30 days from application to being funded, it was 30 days, quick. I've also got other deals where it takes 90 days. Because a lot of times, and this is a misconception to clarify, for people, it's usually not, if you're working with a competent SBA letter. And again, what I said earlier about not all banks are created equal, you got to work with a competent lender. The holdup is rarely with the lender, if you're working with one that has experience with SBA loans, it's usually on the borrower side. Like in the case of a real estate transaction, it's usually the buyer or the seller. So the bank will take the application package. They'll get back to you guys in two weeks and say, Hey, here's your approval letter. Here's, here's our legally binding commitment to lend. And then they give you a laundry list of stuff they need to close, right. And you know, we need copies of this, this, this, insurance. You know, all the typical stuff that a lender is going to ask for for lending on a piece of real estate, right. Hatters insurance, they got to be named as the last payee, all that boring stuff. And usually, what happens is, you know, the seller can't find something. Oh, shit, I don't know what that is. Let me go call my lawyer. A Where's Oh, I don't know, we always What do you mean, we don't have it? Okay, so then they have to like go draft, you know, they don't have an operating agreement for the LLC, or they don't have this and all that. So I tell people, if you have all of your stuff buttoned up, you have all your ducks in a row, when you go in for the application. You can go for application of funding in 45 days, even on a real estate deal. Right? But a lot of times there's there's documents missing and you know, It’s nobodies fault, just you know. It's getting a multimillion dollar loan to go buy a building or buy a business. It's got moving parts and you know. Everyone wants to make sure it's all there. So that's, that's what I would say is it's going to depend a lot on how complete that package is and how quickly the borrower can bring documents to the table for the closing checklist. But 45 to 60 days is a very typical timeline on on like a real estate purchase. I'm working with some, you know, some other dentists Now they're they're trying to buy a building with a 7A loan and I'm like, Hey, you know, you got your contract here financials generally together, we get this done in 45 days. But a lot of it's gonna depend on you getting stuff back to us quickly. Because look, once we get you the checklist, if you had all the items on the checklist next day, we could close. But you know, it usually takes two, three weeks for them to pull the rest of stuff together.
20:18
Okay, so how would my listeners get in touch with you if they would like to reach out to you for guidance?
20:25
Yeah, so I'm sure we can put a link to my site, my consultant site on the on the show below. But if you want to email me directly, it's Josh@7accelerator.com. And, you know, just reach out and just kind of give me a synopsis of your project. If it's something I think we can help with, I'll let you know we can book a call. Maybe walk through it. And, you know, again, our the process for getting an SBA loan is not as complicated as a lot of people think. It's just about working with the right banks. And you know, that's really the value that we bring to people is, you know, I've got a young face, but my years of experience dealing with SBA loans both on on my own businesses that I had, and helping other people with it, I it's just the time savings. Getting put with the right lender to start I'm sure you can, you can attest this in real estate. I mean, there's there's lenders out there, loan brokers they bring to the table who's like, yea yea yea, we can do we can do it. And then last second, they fall through. You know, one reason or another. And that nobody likes that, in, in the real estate realm. Nobody likes it in the business realm either. I mean, if it's if it's alone for other sides, so we just we just make sure that we bring someone to the table that will be able to execute and get it done. Multiple, yes, for whatever reason, one can't get the deal done. They don't like it, you know, it's not too much of a time delay.
21:34
Okay. Well, as you mentioned, we'll keep all of your information in our show notes page for reference. But, Joshua, I appreciate your time today and all your expertise on this topic of SBA loans. I thought it was very beneficial. And I'm sure my listeners will absolutely enjoy the time that we took today to discuss. So thank you so much.
21:52
Yeah, thanks, again to anyone in the audience. If you've just got questions about SBA or you want to know how you might be able to use it for your business or you know, keep more money in your pocket at the end of the day, feel free to reach out. I did also mentioned it on there is of a business that specializes in tax credit consulting. So if you do anything with commercial real estate, you you buy it, there's there's a lot of tax credits available on the state and federal level. We can help you identify. So if you're interested in a little bit more about that, even though it's not the main topic of the podcast, feel free to reach out. I'm sure we can help you with that too.
22:21
Okay. Well, again, I appreciate all your time. Thank you for listening to the two part segment with Joshua Kim on SBA loans. I hope you got a lot out of those episodes and until next time, take care.
22:35
For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio, visit growingempires.com
Click here for more information on how Joshua’s team can help you with SBA loans.