SBA loan program boosts businesses by building an ownership stake

Evolutions Medical Spa’s lease at 1309 State St. expires next week. The Santa Barbara business entertained renewing the lease or moving but didn’t think about purchasing a building, co-owner Brian Perkins said.
“We hadn’t considered that as a possibility because most commercial loans needed 30 percent down and that was more than we could do,” he said.

Perkins didn’t consider a Small Business Administration loan until he met Annette Jorgensen of Business First Bank, just down the street at 1035 State St. Among other features, the SBA 504 loan allows businesses to put 10 percent down, rather than commercial loans that often require 25 percent to 30 percent.

“The fact that it’s a shared risk with the bank and backed by the SBA makes it more likely that you are able to get approved and get the most bang for your buck,” Perkins said. “This is the best way to get approved and be able to buy a property.”

Evolutions secured a $1.3 million loan to purchase 3,000 square feet at 350 Chapala St. and become owner-users.

“We’re able to get more space and the cost of the mortgage will only be slightly more than what we’re paying now in rent,” Perkins said.

Business owners can attain 90 percent financing through an SBA loan while the Santa Barbara commercial real estate property values remain low and interest rates hit historical lows. There’s a unique opportunity for owner-users right now, said Francois DeJohn, a partner at Hayes Commercial Group.

“I’ve been doing this for 21 years now and I’ve never seen a time where you have low interest rates, motivated sellers and lower prices all at once,” he said.

Ninety percent of an SBA loan is guaranteed. A bank guarantees 50 percent of the loan while the government backs the second 40 percent, which mitigates the bank’s risk and allows the institution to offer owner-users attractive loan terms, DeJohn explained.

Other benefits include longer loan amortizations and fixed-rate interest rates, according to the SBA Web site.

“SBA loans incentivize businesses to stay here,” said Jorgensen, an SBA loan specialist who recently started working at Business First Bank after 21 years at Community West Bank. “Buying the property allows businesses room for growth and gives them a chance to retain employees because you aren’t moving out of the area.”

To qualify for an SBA 504 loan, the for-profit business must occupy 51 percent of the building, demonstrate that its loans are current, prove the business is well-established and making money and have a net worth less than $15 million.

There are also more up-front fees than a commercial loan, DeJohn said. But right now, the combination of a 10 percent down payment, 5 percent fixed interest rates and longer amortization periods make SBA loans more enticing than commercial loans, he added.

“A company can leverage current lending conditions to become an owner-user,” he added, making reference to MultiProbe’s recent $3.95 million purchase of the buildings that house its headquarters at 819 Reddick St. and 425 N. Milpas St. “SBA financing in combination with the current buyers’ market can make this purchase possible and affordable.”

Owners of companies like Evolutions Medical Spa have the freedom to put money back into their business and be their own landlords. It’s a good risk for the banks and a great deal for Evolutions, Perkins said.

“Now we own the space and we’re getting equity in the building with every payment we make,” he said. “We’re really pleased to be able to own the space where our business is operating.”