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Deal Summary
INSIGNIA Financial Services arranged a $11,250,000 SBA 504 financing package for the $12,400,000 acquisition of a 71,777 square foot flex industrial building in Santa Clarita, California. The property serves as the operating company’s headquarters, and the financing represents 90% of total project cost.
| Item | Detail |
|---|---|
| Transaction type | Owner-user acquisition, SBA 504 |
| Property | Flex industrial |
| Location | Santa Clarita, California 91350 |
| Purchase price | $12,400,000 ($172.76 per square foot) |
| Total project cost | $12,500,000 |
| Total financing | $11,250,000 (90% of project cost) |
| Borrower structure | Eligible passive company owning the real estate, leased to the operating company |
The Transaction
The sponsor, an owner-operated business, set out to place its headquarters in owned real estate and found it in a concrete tilt-up business park building in a well-established commercial corridor. The building combines loading capability at the rear with finished frontage space at the front, a combination that suits an operator with warehouse and customer-facing requirements under one roof.
The acquisition was financed with a first mortgage from a national bank, a second-position SBA 504 debenture issued through a Certified Development Company, and a 10% equity contribution from the borrower. Interim financing funded the SBA portion at closing and was repaid from debenture proceeds, which is the standard sequence for a 504 loan and one that requires the interim lender, the Certified Development Company, the first mortgage lender and escrow to close in coordination.
Capital Structure
| Source | Amount | % of cost | Terms |
|---|---|---|---|
| First mortgage, national bank | $6,450,000 | 51.6% | 4.25% fixed, 25-year term and amortization, 10-year declining prepayment schedule |
| SBA 504 debenture, net proceeds | $4,800,000 | 38.4% | 25-year term, fixed rate set at debenture sale, second lien position |
| Borrower equity | $1,250,000 | 10.0% | Cash contribution at closing |
| Total project cost | $12,500,000 | 100.0% | Land and building $12,400,000; other project costs $100,000 |
The gross debenture amount was $4,858,000, which includes SBA and Certified Development Company administrative costs and the underwriter fee financed within the 504 loan. The $4,800,000 net debenture proceeds shown above are the portion that funds project cost. Collateral consists of a first deed of trust to the bank and a second deed of trust to the Certified Development Company, with an assignment of rents from the property owner under its lease to the operating company. The operating company and its principal guaranteed the SBA loan.
Property Summary
| Item | Detail |
|---|---|
| Building size | 71,777 square feet |
| Site area | 6.41 acres |
| Year built and construction | 2004, concrete tilt-up |
| Loading | 4 dock-high doors, 6 grade-level doors |
| Zoning | BP, Business Park |
| Trade area | Population of approximately 250,800 and average household income of approximately $125,300 (2018 estimates) |
Structuring Considerations
Occupancy and the owner-user requirement
The building was marketed as a partially leased asset, with roughly 44,861 square feet of vacant space representing about 62.5% of the rentable area. That vacancy made the property a natural fit for an owner-user buyer, because the SBA 504 program requires the operating company to occupy a defined share of an existing building and permits the remainder to be leased to third parties. Under the authorization for this loan, the borrower leases 100% of the property to the operating company, which may sublease up to 49%, and the vacant space allowed the operating company to meet the occupancy requirement while existing tenants stayed in place.
In-place tenancy and lender protections
Existing retail tenants remained in the building, and each of the three third-party tenants executed a subordination, non-disturbance and attornment agreement with the first mortgage lender. The in-place rent roll gave the borrower rental income to offset a portion of ownership costs.
Capital efficiency
At 90% of project cost, the structure limited the borrower’s cash investment to 10%, well below the equity a conventional loan at 65% to 75% loan-to-value would have required. The combined structure also placed a long-term fixed rate on the entire project cost, with no balloon payment on either loan.
INSIGNIA
Owner-occupied commercial real estate is a core part of our practice, and SBA 504 financing is one of several programs we use for lower-middle market business owners who want to own their commercial real estate. The same approach applies to industrial, flex, retail, office, hospitality and self-storage properties.
This summary describes a closed transaction for informational purposes. Terms reflect the loan documents at closing and are not an offer of financing or a statement of current pricing, which varies with market conditions, property type, sponsor credit and program requirements. All loans are subject to credit approval.
