I learned commercial lending from an experienced lender whose gray hair matched his suit. I was sure he was lending before the crash of ’29. You get the picture. Man of the old school. I loved his stories about the “old days.” But I sometimes got annoyed by his pesky questions:
- “Is the land zoned properly for the project?”
- “The land-to-building ratio looks high. Is there excess land?”
- “What’s the neighborhood like?”
Frustrated that these questions had nothing to do with cash flow or credit, I once suggested that we get the loan approved and wait for the appraisal for the answers. He looked at me sternly, told me that would be a disservice to my client, and launched into a story from the old days. Here’s his advice in a nutshell: “If you wait for the appraisal it might be too late. Do some leg work and get back to me.”
That gray-haired lender in the gray suit was chock-full of experience. He probably learned the hard way. And those “pesky” questions? They’re as smart today as in the “old days!” Some examples from my recent experience:
Is the land properly zoned? It might be true that a business cannot get a building permit unless the property is properly zoned, yet sometimes SBA rules and local zoning rules don’t match. I ran into this situation recently. The borrower wanted to build a mixed-use building for commercial and residential use. It was new construction, so I told the borrower that SBA required 60% of the building to be owner occupied/commercial. Then I checked the zoning. Guess what? Local zoning required the property be no more than 50% commercial. Meeting SBA’s requirement would have violated the project’s zoning restriction. If it met zoning, it would not have been compliant with SBA.
Solution? As I see it, there’s just one possibility: Ask for a zoning variance. I have no idea what your chances would be. But they’re a far cry better than getting SBA to change its rules to allow 50% of a new building to be used for a residence.
Is there excess land? Determining whether a property has excess land is always tricky for me. I would prefer the appraiser tell me there is excess land. Yet, say there’s a 3,000 sq. ft. building on seven acres. I’ve learned to ask, “What are you going to do with all that land?” Acceptable answers might include providing enough room for semis to turn around. But if the answer doesn’t have the land used by the business borrower, we probably have excess land. Best to acknowledge it now and structure the financing correctly rather than wait for closing or – shudder! – when an SBA loan review audits that loan file.
How’s the neighborhood? One of the more embarrassing moments is when your credit approver asks the Loan Officer “Isn’t that building next to the adult bookstore/old meth house/business everyone is picketing?” and the Loan Officer answers “Um…I don’t know.” Best practice: Do the leg work. Walk the site before presenting the loan. Whatever the answer, for sure it’s better than “I don’t know.”
I learned a lot from that “old master.” Those pesky questions might be annoying. But they just could make it easier to get your loan approved!
Senior Associate, CDC/504 Programs
Here’s a Special JRB Invitation: SBA Expert Jan Garlitz is conducting all-inclusive 3-Day in-person 504 Loan Training classes Sept. 23-25, 2019. You’ll learn from the best and be fully equipped to close SBA 504 loans. JRB is pleased to host this event. Click here to learn more and register