Sales Offices Can Be Financed With SBA-Guaranteed Loans
While the U.S. Small Business Administration (SBA) does not have a program specifically focused on providing financing for constructing model homes, home builders can obtain guaranteed loans under the SBA’s 7(a) program.
Home builders are considered small businesses if their annual revenues do not exceed $31 million.
The SBA-guaranteed loans can be secured by real estate, which could include a home builder’s office or other facility that would be used to conduct business. The SBA does not guarantee speculative building; however, a model home often serves as a sales and administrative office until the time it is sold.
The SBA also guarantees short-term lines of credit, but these are typically intended to fund a contractor’s temporary working capital needs.
The maximum term for an SBA-guaranteed real estate loan is 25 years, far exceeding the financing term needed for a model home. The length of the desired loan should be discussed with the lender because SBA-guaranteed loans can carry significant prepayment penalties.
SBA charges the lender a fee in exchange for guaranteeing 75% of the outstanding loan balance. This fee is passed along to the borrower in addition to the interest on the loan, which can be either fixed or floating.
To offset the costs of its loan programs, the SBA charges lenders a guaranty fee for each loan that is approved and disbursed. After paying the fee to the SBA and making the first disbursement of the loan, the lender may charge the borrower for the fee.
The following fee structure applies to the loans:
- For loans of $150,000 or less, a 2% guaranty fee is charged. Lenders are permitted to retain 25% of the up-front guarantee fee on loans with a gross amount of $150,000 or less. A 3% fee is charged for loans of $151,000 to $700,000 and 3.5% is charged for loans greater than $750,000.
- For loans greater than $1 million, an additional 0.25% guaranty fee is charged for the amount exceeding $1 million, bringing the fee on the portion greater than $1 million to 3.75%.
- The SBA prohibits charging a loan applicant processing fees, origination fees, application fees, points, brokerage fees, bonus points and other fees that could be charged to an SBA loan applicant are prohibited. A commitment fee for a loan made under the Export Working Capital Loan Program may be charged.
While the interest rate for an SBA-guaranteed loan — either fixed or variable — is negotiated between the borrower and the lender, the rate is subject to maximums:
- Interest rates on fixed-rate loans of $50,000 or more must not exceed the prime rate plus 2.25% if the maturity is less than seven years, and prime plus 2.75% if the maturity is seven years or more.
- For loans between $25,000 and $50,000, maximum rates must not exceed prime plus 3.25% if the maturity is less than seven years and prime plus 3.75% if the maturity is seven years or more.
- For loans of $25,000 or less, the maximum interest rate must not exceed prime plus 4.25% if the maturity is less than seven years and prime plus 4.75% if the maturity is seven years or more.
- Variable rate loans may be pegged to either the lowest prime rate or the SBA optional peg rate, which is a weighted average of rates the federal government pays for loans with maturities similar to the average SBA loan. The peg rate is calculated quarterly and published in the Federal Register. For the period of October through December 2007, the rate is 5.125%.
The lender and the borrower negotiate the amount of the spread, which is added to the base rate. An adjustment period is selected identifying the frequency at which the note rate will change. It must be no more often than monthly and must be consistent over the period of the loan, e.g., monthly, quarterly, semiannually, annually.
Loans made under SBA’s 7(a) program are a maximum of $2 million, and SBA’s maximum exposure is $1.5 million.
Most banks are qualified to make SBA-guaranteed loans, and builders interested in exploring the possibility of participating in this program should contact a bank in their area.
For more information, e-mail William Renner at NAHB, or call him at 800-368-5242 x8597.
Webcast of NAHB Fall Construction Forecast Available Till Feb. 5
The webcast of the NAHB Fall Construction Forecast Conference held in Washington, D.C. on Oct. 24. is available for purchase through Feb. 5.
The conference webcast includes panels of nationally recognized experts discussing economic trends, government policies, developments in the housing industry and the results from NAHB's recent surveys.
Purchasers will receive unlimited access to the webcast archive though Feb. 5, as well as electronic copies of the conference handouts and presentation material. Purchasers can watch at their own pace, rewind, fast forward and review important sections.
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To purchase the webcast, visit www.nahb.org/cfcwebcast.
For more information, contact Kate Carrigan at NAHB, or call her at 800-369-5242 x8244.
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Free NAHB Kit Gives Builders Back-to-Basics Tips to Navigate the Slowdown
What was once expected to be a relatively mild housing slump following three years of record new home construction and sales has given way to a significant downturn.
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