Most people are at least somewhat aware of the SBA programs for financing owner-occupied real estate. One that allows business owners to purchase property at longer terms and amortizations than conventional financing, along with less equity injection. However, there is a similar program that gets much less fan-fare, but is very useful. Unlike the SBA, it can also be utilized to purchase investment real estate. It is called the USDA B&I Loan Guarantee.
The B&I Loan is designed to increase access to capital in rural areas throughout the United States by providing lenders with a percentage loan guarantee against the funded loan amount. Its means is to not only support the borrower, but the community at large. By providing a guarantee, the lender is more open to approving a loan it may otherwise decline. To take advantage of the program, the address of the real estate must be in a town with total population less than 50,000 residents. This is beneficial as the borrower itself is not required to be at this location, simply the underlying property. The borrower can be a for-profit or nonprofit organization, public company, individual or federally recognized tribe. There is no minimum loan amount, though many lenders tend to not go below $200,000 and also no restriction on maximum amount, however many lenders will put in place their own caps. Typically, this is $10MM, with some lenders going up to $25MM+. The percentage guarantee by the USDA is tiered based on loan size ranging from 60% to 80%. Additionally, most lenders require just 10% equity from the borrower towards the purchase. The loan is required to be fully secured based on sound loan-to-value policy established by the lender.
Regarding loan term and amortization, the B&I program goes up to 30 years fully amortizing. It can be a fixed or variable rate, or combination of the two. Interest rate is set by the lender and tend to be close to SBA rates. Another key benefit is that this can be used to refinance an existing real estate loan, both conventional and SBA.
With the growing utilization of SBA lending in recent years, many real estate owners run into an issue when wanting to refinance their building. It can be done in certain circumstances via another SBA loan, but more often times requires conventional financing which is more difficult to qualify for. The USDA B&I program is a welcome option to the mix. With any loan it is important to understand the up front and recurring costs. The B&I program has an initial 3% fee of the loan amount, which can be rolled into the loan. In addition, there is an annual percentage fee based on the loan balance; which currently is 0.5%. This fee is set prior to closing and will not change through the life of the loan.
Knowing all of the options available is important to the process of achieving your goals. Where and when applicable, the B&I Program could be right for you.
Bobby Young is CEO of Principal Commercial Capital Group.