The current economy has given rise to many questions about how a veterinarian should go about financing the construction of a new facility. The buzz in the marketplace is that construction costs are not coming down, appraisers are approaching the market conservatively and banks have tightened credit standards for real estate lending.
All these statements are true. But many veterinarians just don’t have enough space to continue to grow their businesses and need new facilities. Will all this news prevent a veterinarian from securing the needed funds to build her building?
It doesn’t have to. There are different financing options and one of the scenarios can work for your situation.
The market has three primary products available for veterinarians looking to construct or renovate their facilities: conventional bank financing, SBA 504 loans and the SBA 7(a) loan product.
The best loan type for your project depends on the appraisal, cash equity injected into the project, current business cash flow, size of the project and additional items important to each lender. As you begin your evaluation of the loan products, it is important to consider each loan type and talk to lenders involved with each product.
The conventional loan product is appraisal-driven and generally is a very good fit for a business that has equity available to inject into the project. The general lending outline for a conventional loan product would indicate that a bank can lend up to 75 to 80 percent of the as-built appraisal.
As a borrower, this means you will need to be prepared to cover a minimum of 20 percent of the project costs, or alternatively, have equity in the land to cover this amount of the project. In this type of loan, the borrower will also generally incur additional out-of-pocket expenses for soft construction costs (architect, engineer, permitting and other preparatory expenses).
Although this type of loan does require a larger upfront commitment from the borrower, banks are excited about the opportunity to make this type of secured loan and are offering very competitive five- to 10-year fixed rates. In certain instances, borrowers have even been able to secure fixed rates for a longer term conventional loan.
The SBA 504 Loan
The Small Business Administration 504 loan product is also an appraisal-driven loan and has a smaller down payment and some great features for a borrower owning a business that has cash flow to support the proposed project.
This loan is structured with a conventional first mortgage that will cover 50 percent of the appraised value of the property, an SBA 504 loan that will cover 35 to 40 percent of the appraised value and an equity contribution from the borrower of 10 to 15 percent of the appraised value.
This allows the borrower to contribute a smaller down payment to fund the construction and build a new facility.
There are several key points to note in this program. The first mortgage is priced by the bank and can be a fixed or floating interest rate. Generally, this is very competitive, given the fact that the lender is in a secured position. The SBA 504 loan will provide the borrower with an attractive 20-year fixed interest rate, which will fix at the time the project is completed.
These rates are very attractive as they currently price in the low- to mid-5 percent range. For the borrower, the key is that you must be able to fund 10 (has to show historical cash flow) to 15 percent of the project. In this situation, you also have to cover the soft construction costs, and be able to fund any appraisal shortfall.
Overall, this is a great product for an existing business looking to secure long-term fixed-rate financing with a lower down payment.
The SBA 7(a) Loan
The final product available to assist in constructing a new facility is the SBA 7(a) loan product. This is different from the conventional and the SBA 504 loan products in that it is a cash-flow-based loan, as opposed to an appraisal-based loan.
This means the lender has the ability to reduce or eliminate the down payment needed to accomplish conventional and SBA 504 financing.
Using the SBA 7(a) program still requires an appraisal; however, due to the guaranty provided by the government, the lender is able to wrap all costs including all soft costs, difference in cost per square foot and appraised value, and any additional equipment or shorter term assets into the financing.
This product can be a great tool for a borrower who has a growing revenue base and needs to expand operations but has not had the chance to amass the required equity for other financing options.
Overall, lenders in the marketplace are excited for the opportunity to extend credit to a well-qualified veterinary practice.
Banks have stayed on the sidelines over the last 36 months and are now in a position to identify opportunities to make high quality loans.
Most lenders we speak with and the market as a whole would indicate that lending to veterinary practices is one of these high-quality opportunities.
The next step, then, is to spend time discussing the project with a lender and learning which product will provide you the best path to meet your practice goals.
Travis York is a senior loan officer in the Atlanta office of Live Oak Bank.
This Education Series article was underwritten by Live Oak Bank, based in Wilmington, N.C.