SBA Loan Questions

11 Replies

Looking at purchasing real estate + business and I have questions regarding an SBA loan. 

The subject business has been leased out to a 3rd party and is currently being foreclosed on by the landlord. Upon foreclosure I am looking to open escrow to purchase from landlord.

I called a few community banks for an SBA loan and they claimed that tax returns were needed for the past 2 years to proceed with the loan, but with an uncooperative tenant that is being foreclosed on, I don't think that's happening.

Can someone educate me how difficult it is to purchase without tax returns, and if I have other - feasible - options I can explore to make this deal happen. 

Purchase price is 1 mil + and it would be hard to qualify for a commercial loan. 

Look forward to the responses  

Originally posted by @David G:

Looking at purchasing real estate + business and I have questions regarding an SBA loan. 

The subject business has been leased out to a 3rd party and is currently being foreclosed on by the landlord. Upon foreclosure I am looking to open escrow to purchase from landlord.

I called a few community banks for an SBA loan and they claimed that tax returns were needed for the past 2 years to proceed with the loan, but with an uncooperative tenant that is being foreclosed on, I don't think that's happening.

Can someone educate me how difficult it is to purchase without tax returns, and if I have other - feasible - options I can explore to make this deal happen. 

Purchase price is 1 mil + and it would be hard to qualify for a commercial loan. 

Look forward to the responses  

You'll have to get the tax returns for the business if you plan on giving any value to the business upon purchase. Otherwise just do an asset purchase from the business with either a 7a or a 504 SBA loan (depends on the assets). A 504 loan for just the real estate pretty straight forward. The 504 is for real estate only. You can do two loans, a 504 for the real estate and a 7a for the business assets that are non real estate (FF&E).

In general, as a banker, I'd rather see a client buy the assets and NOT the business or to give the blue sky valuation of the business an extremely low valuation.

Also, a general question would be, what is the value of the business if it's being foreclosed upon? It sounds like the assets are what you're buying anyway because the cash flow is deficient to support the liabilities.

Originally posted by @Michael Worley :
Originally posted by @David G:

Looking at purchasing real estate + business and I have questions regarding an SBA loan. 

The subject business has been leased out to a 3rd party and is currently being foreclosed on by the landlord. Upon foreclosure I am looking to open escrow to purchase from landlord.

I called a few community banks for an SBA loan and they claimed that tax returns were needed for the past 2 years to proceed with the loan, but with an uncooperative tenant that is being foreclosed on, I don't think that's happening.

Can someone educate me how difficult it is to purchase without tax returns, and if I have other - feasible - options I can explore to make this deal happen. 

Purchase price is 1 mil + and it would be hard to qualify for a commercial loan. 

Look forward to the responses  

You'll have to get the tax returns for the business if you plan on giving any value to the business upon purchase. Otherwise just do an asset purchase from the business with either a 7a or a 504 SBA loan (depends on the assets). A 504 loan for just the real estate pretty straight forward. The 504 is for real estate only. You can do two loans, a 504 for the real estate and a 7a for the business assets that are non real estate (FF&E).

In general, as a banker, I'd rather see a client buy the assets and NOT the business or to give the blue sky valuation of the business an extremely low valuation.

Also, a general question would be, what is the value of the business if it's being foreclosed upon? It sounds like the assets are what you're buying anyway because the cash flow is deficient to support the liabilities.

 Michael thanks for the response.

I like the idea of purchasing with a 504 which would be the real estate only, but given the nature of the business I feel it'll be hard to value the real estate high enough to where the business is virtually worth nothing.

And I'm suspect that doing both a 7a and a 504 may be difficult to pull off given all circumstances.

How feasible is it to price the land/building value high enough to offset the business cost so I could purchase the property? I ask, because having previous experience and my background, I know the business is thriving, making it worth paying for.

Would a banks oversee the taxes if I put a legit business plan with an executive summary together?

Originally posted by @Michael Worley :
Originally posted by @David G:

Looking at purchasing real estate + business and I have questions regarding an SBA loan. 

The subject business has been leased out to a 3rd party and is currently being foreclosed on by the landlord. Upon foreclosure I am looking to open escrow to purchase from landlord.

I called a few community banks for an SBA loan and they claimed that tax returns were needed for the past 2 years to proceed with the loan, but with an uncooperative tenant that is being foreclosed on, I don't think that's happening.

Can someone educate me how difficult it is to purchase without tax returns, and if I have other - feasible - options I can explore to make this deal happen. 

Purchase price is 1 mil + and it would be hard to qualify for a commercial loan. 

Look forward to the responses  

You'll have to get the tax returns for the business if you plan on giving any value to the business upon purchase. Otherwise just do an asset purchase from the business with either a 7a or a 504 SBA loan (depends on the assets). A 504 loan for just the real estate pretty straight forward. The 504 is for real estate only. You can do two loans, a 504 for the real estate and a 7a for the business assets that are non real estate (FF&E).

In general, as a banker, I'd rather see a client buy the assets and NOT the business or to give the blue sky valuation of the business an extremely low valuation.

Also, a general question would be, what is the value of the business if it's being foreclosed upon? It sounds like the assets are what you're buying anyway because the cash flow is deficient to support the liabilities.

 Correct me if I'm wrong, but wouldn't there still be an operating time period requirement from the lender for a going concern? If not for the business assets for the 'existing borrowers business' that'll be occupying the property.

I know the lenders in SO Cal have a going concern requirement of three (3) years as part of their borrower qualification criteria. This is for both the national and regional lenders too. 

We underwrite SBA loans and are a SBA preferred lender. We would not give any value to a purchase of a business without either tax returns or audited financials. 2 years would be sufficient if the business was only in business for that time. It would be a red flag if the business existed but tax returns were unavailable. The best guideline for submitting to a lender is to remember that lenders are naturally skeptical so any red flags need very good explanations.

SBA loans during the downturn was almost non-existent. They have in the last few years made somewhat of a comeback.

A lot of businesses get sold with the buyer putting 25 to 50% down and the seller carrying a note for the remaining to be paid back over 5 to 7 years time. The buyer tries to set the amortization at 25 to 30 years and an interest rate fixed at market and not above. 

@David G it will be very difficult to purchase a building with a failing business in it if you are trying to rely at all on the business that is failing and in foreclosure. You would have to have an active business to occupy the building that would be purchasing it to make the loan work. The key to SBA is the building has to be owner occupied by 51%. Trying to lend to a situation where the business going concern is being foreclosed on will most likely not happen as that is a turnaround situation which many lenders will not lend into. Just like analyzing any deal a bank will want to make sure the cashflow is there to do the loan. 504 loans are made for buying owner-occupied real estate but not really for buying going concerns. A 7a loan would be a better fit for that type of situation.

@David Avetisyan Because is the documentation that would be required for SBA there is really no way to make this work without the information.

The appropriate strategy here would be to use a bridge loan. Bridge loans work like hard money, but in the commercial space. The dollar amount limitations usually start out at $1M+.

They are asset-backed loans that can close in as little S 5 days. Once you take ownership, you could potentially then apply for an SBA loan if you have access to this information post closing. In addition to money and strong guarantors, you will also need a stout team to prove that you can turn around a foreclosed business.