SBA 504 Purchases and Refinances: a bonus or burden for practice owners?

Natalie Schmook

March 16, 2021

Over the last few months, there’s been increasing buzz about a unique aspect of December’s stimulus package: new terms to the SBA 504 loan. If you’re not familiar with it, 504 loans apply to “Major Fixed Assets”. For optometric practice owners, this means real estate.

So why the chatter? The interest rate and term sound incredible: 2.75% for up to 25 years. In addition, the stimulus package now allows for refinancing real estate through the 504 loan, something previously unavailable.

My clients will tell you I’m not afraid to do research and ask lots of questions. And since this sounds like too good of a deal to not take advantage of, I called my friend Stephanie Brown at Bank OZK to get the scoop on the revised loan program.

Stephanie verified that yes, 504 loans are now available for purchasing and refinancing up to a 90% loan to value on commercial real estate. But the tricky thing about these loans is that it’s actually two loans bundled into one. Just 40% of the loan is on SBA terms and the remaining 60% is on bank terms. Here's what this means functionally:

Of course my next question to Stephanie was why wouldn’t a doctor with a lower loan to value refinance at the 90% loan-to-value, then immediately pay off higher interest rate bank portion with the amount they were able to pull out with the refinance. The answer: closing costs. The average 504 loan has closing costs of 2-2.5%, which is a lot of money to pay to upfront just turn around and pay off a loan.

So who does the 504 loan/refinance work for? Stephanie says this is a great deal for a practice owner buying new real estate, but for refinances the difference in the combined interest rate needs to be greater than 1%. She also reminded me that historically speaking, the 4-5% rate the bank portion is offering is still a good rate.

One other caveat: 504 real estate needs to be at least 51% owner occupied (used by the practice or other businesses the OD owns) to count, otherwise it must qualify based on rental income from existing leases. It's also important to note that most SBA loans require a second lien on your home, something that surprises a lot of borrowers.

In summary, for doctors purchasing new practice real estate, the SBA 504 can be a great deal for an attractive long term loan and reasonable intermediate bank loan. For refinances, a loan's current interest rate really needs to be around 5% or higher to justify the cost, or can make sense if a doctor has a compelling reason to refinance just to extend out amortization and increase cash flow.

If you have questions about the 504 program, feel free to reply back with your situation, or even better, Stephanie graciously offered to share her contact information—she’s the expert!

Stephanie Brown

SVP Commercial Banker

3333 Riverwood Parkway, Suite 300, Atlanta, GA 30339

O: 678-449-3531 | M:404-414-4211

NMLS# 1213697

stephanie.brown@ozk.com

Have a great week,

Natalie

P.S.- Hayes Wealth Advisors works exclusively with Optometric Practice owners to help them build wealth outside their practices through customized, industry-specific planning. We have built planning tools to comprehensively answer the questions that face practice owners in today's environment. Our services are available both on a one- off basis or in the context of a full financial plan. Set up a call if you'd like to learn more about how Hayes Wealth Advisors can help you make the best financial decisions for your practice and family.

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