Q&A with SBA 504 Lender Chris Hurn, Mercantile Capital Corp.
Tell us about Mercantile Capital Corporation.
Mercantile Capital Corporation is the leading owner-user commercial property lender in the nation. We specialize in the SBA 504 loan (aka The SmartChoice Commercial Loan).
What is the SBA 504 program, and how did you come to specialize in it?
The SBA 504 program is designed to help owners of small and mid-sized businesses purchase their commercial property with as little as 10% down. It also gives borrowers longer terms than conventional financing (20-25 years) and below-market, long-term, fixed interest rates (currently around 5.59%). Plus, these loans don’t have any balloons or restrictive covenants. I like to call 504 loans “the best-kept secret in commercial real estate financing” because they provide the highest cash-on-cash return financing available for owner-occupied commercial property, and they’re still relatively little-known and under-utilized.
Commercial real estate ownership is one of the quickest and easiest ways for business owners to create wealth for themselves and grow their businesses. It’s the same logic that causes us to own our homes -- we want to build equity with mortgage payments rather than throw away money on lease payments. The SBA 504 loan is the perfect tool to accomplish this for most small and mid-sized businesses, and we decided it’s important enough for us to make it our exclusive focus.
What separates you from other SBA lenders?
I’d have to say that our specialization in the SBA 504 program is what sets us apart. I can’t name a single other lender that ONLY does SBA 504s, which is why we’ve become the acknowledged experts in this type of financing across the country.
Can you provide a few examples of deals you funded?
I sure can. Here are a couple deals we’ve closed this year:
Acquisition of a 2,815 sq. ft. medical office building in Carrollton, TX ($592,000 total project cost).
Ground-up construction of a 9,913 sq. ft. veterinary hospital in Port Orchard, WA ($2,765,156 total project cost).
Expansion of mixed-use/retail office property to 36,214 in Houston, TX ($8,376,000 total project cost).
Each of these Clients was able to put down just 10% of the total project cost and get long-term, below-market, fixed interest rates. As of June 30th of this year, we’ve closed loans worth more than $69 million in total project costs.
Are there properties you’ll lend on that other SBA lenders may not?
It’s been my experience that lots of other lenders aren’t interested in dealing with projects involving ground-up or extensive construction. We, on the other hand, welcome construction projects. Sure, they’re more cumbersome than straightforward acquisition deals, but we’ve become awfully efficient at getting them done with minimal headaches (for us AND our Clients).
What properties will you NOT lend on?
Of course, per SBA guidelines we can’t finance non-profits (churches, etc.), gambling establishments or adult entertainment venues.
What are the latest or pending developments in SBA financing?
The Small Business Jobs and Credit Act, enacted back in September 2010, gave business owners the ability to refinance commercial debt using the 504. I was very encouraged with that provision, as I’ve been a proponent of such a refinance provision for years, going back to 2004 when I was first quoted about it in the Wall Street Journal. I fully expected it to be a dramatic boost in the economy. Unfortunately the Small Business Administration has been dragging its feet with this new program. It wasn’t until late February of this year that the agency finally released the regulations for refinancing, and they made them so restrictive that they had only 12 submissions in the first couple of weeks. As of June 6th, 10 months since the law was passed, a mere 42 loans have been approved for just $37 million. Approximately 1,700 of the 2,400 submissions have been deemed ineligible, and this is because of the restrictive and onerous regulations the agency mandated back in February.
One glaring example of the foot-dragging is that the law allows for 504 refi proceeds to be used for working capital, but that particular regulation hasn’t been rolled out from the agency. So even though the law says it’s permissible, we can’t submit this type of deal. A second example is according to the law we can lend up to 125% of the original value as long as there is additional collateral pledged, but we don’t have any regulations here either. The program has a very limited life, through September 2012, and even though it has $15 billion allocated to it, the foot-dragging of the SBA, has restricted our ability to help America’s small businesses by doing these 504 refis. The agency, one that I’m a big proponent of, needs to be pushed to get this remedied, and allow the 504 refi provision to have the impact on our industry (and the overall economy) we need it to have.
On another note, interest rates are still at historic lows, and with the 504 they’re fixed for 20-25 years, making it the best time to buy commercial real estate. Those business owners who are able ought to consider making the move from renting to owning.
How much can brokers charge on SBA loans?
It all depends — we look at it on a case-by-case basis. In the end, though, I often tell mortgage brokers that half a loaf is better than no loaf. In other words, don’t get too greedy and lose the deal.
Do you have an outlet for non-SBA loans such as investment property financing?
To some extent. Again, it depends on the deal. Better to contact us and let us decide.
How did you end up co-founding Mercantile Capital Corporation? What is your background?
My experiences as a business consultant and as a financier with GE Capital probably contributed the most to my decision to co-found Mercantile. At GE, I learned about how beneficial SBA 504 loans are for small business growth. I also realized how underutilized they were, and saw an opportunity for a specialist firm to flourish. Later, I became CFO of a large commercial real estate brokerage in Orlando called NAI Realvest. There I met my eventual business partner, Geof Longstaff, who saw the same opportunity I did, and a short time later Mercantile was born.
Thanks for the interview. How should borrowers and brokers reach you to discuss a loan?
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