Out of the Box Real Estate Financing

As someone interested in both real estate development and finance, I follow John Andersons musings at RJOHNTHEBAD. John is a developer and leader of the Incremental Development Alliance, and often teaches at Small Developer Boot Camps promoted by the Congress for New Urbanism. In a recent post, John discussed how his friend and fellow developer, Monte Anderson, recruits local entrepreneurs as tenants for the buildings he renovates or builds. Monte mentors these entrepreneur tenants to build their businesses with the end goal of helping them qualify for SBA 7(a) loans in order to purchase the buildings. John described the arrangement as a win/win. This made me curious, what is the SBA 7(a) loan program?

The SBA 7(a) Loan Program provides loans to small businesses. The funds received through this loan program can be used for myriad purposes, including the purchase of real estate. The SBA does not provide strict eligibility criteria, but does provide some universally applicable requirements. To be eligible for assistance, businesses must: (i) operate for profit; (ii) be small, as defined by SBA; (iii) be engaged in, or propose to do business in, the United States or its possessions; (iv) have reasonable invested equity; (v) use alternative financial resources, including personal assets, before seeking financial assistance; (vi) be able to demonstrate a need for the loan proceeds; (vii) use the funds for a sound business purpose; (viii) not be delinquent on any existing debt obligations to the U.S. government.

Once these minimal requirements are satisfied, a business owner can use the SBA 7(a) loan proceeds for myriad purposes. Loan proceeds are perhaps typically used to fund working capital requirements, purchase equipment or machinery for the business, or to help expand the existing business. But the loan proceeds can be used to purchase real estate in the same fashion that Monte and his entrepreneur tenants have used the SBA 7(a) Loan Program. Beyond the purchase of real estate, the SBA also allows for 7(a) funds to be used for the construction of a new building or the renovation of an existing building.

So, despite the SBA 7(a) Loan Programs wrapping as a business loan, the program may prove valuable to a real estate entrepreneur or small business owner who has found the right property but is struggling to find financing.

Complete SBA 7(a) Loan Program information can be found here.