Getting a Loan When You Lease Your Restaurant
Apple Podcasts, Spotify , Google Podcasts , Stitcher, TuneIn, Overcast, Pocket Cast, Castro, Castbox, Podchaser, Podcast Addict, Deezer ,Listen Notes, or RSS Feed
Today Michael is joined by Alan Nickelsen, Executive VP and Commercial Banking Manager of Synovus Bank in Pensacola, FL.
Alan shares the challenges that restaurants face to receive loans for building out and purchasing equipment for spaces that they lease. He shares which loans typically work for this type of restaurant owner, and what you can expect during the loan application process.
Episode Highlights:
SBA loans are government-backed loans that can help restaurant owners who lease their restaurant spaces and need funding for equipment or building out their restaurant.
Talk to your lender about an SBA 7a loan
Since SBA loans are government-related loans the process can take time, so patience is key to being successful in getting the funding you need.
Finding a trusted lender can help you navigate the process and assist in helping you keep up with the necessary deadlines.
For more information on The Restaurant Realty in 10 or to get the show notes from today's show head over to TheRestaurantRealty.com
Subscribe to get new episodes that provide uncensored straight talk geared to answer your restaurant and restaurant real estate questions.
Looking to lease, sell, or purchase a restaurant? We can help with that too!
Let's Connect!
Read the full interview below.
Michael Carro: 0:01
Welcome to The Restaurant Realty in 10. Ten minutes of uncensored straight talk for restaurant entrepreneurs. Weekly The Restaurant Realty in 10 dives into restaurant operations, facilities, real estate, and investments. Welcome to The Restaurant Realty in 10. I'm excited to have Alan Nickelsen with Synovus Bank back to talk about restaurant loans. Alan wrote several loans for me on buildings that we have in Downtown Pensacola, including the latest one, which was The Garden at Palafox and Main, along with a building we have that has Ruby Slipper from New Orleans. So Alan, welcome back to the program.
Alan Nickelsen: 0:33
Thank you very much happy to be here.
Michael Carro: 0:35
Well, we're excited to have you as well since lending is so important to our clients. And specifically today, we want to focus on those clients that are leasing space, it's a little bit more challenging to get loans because of the lack of collateral. So if I have a client that's going to lease a space that needs to do some building improvements, some build out and then wrap in maybe an equipment loan.How would they go about that?
Alan Nickelsen: 1:03
Yeah, you're exactly right. Those are probably one of the more challenging ones we've got. The restaurant industry itself is challenging at times. We've got COVID-19 issues out there and everything else for the modern day examples. But yes, from a leasing standpoint, we do kind of lack collateral in those situations, that equipment etc, which is some hard collateral, but oftentimes, the so called "build out" is not really able to be collateralized. We can't take the property, we don't have brick and mortar. Because of that it makes it harder. And so there's really, I would say there's a couple of options. And oftentimes you hear a lot in lending. It depends. We say that a lot is a lender, unfortunately, but it does. It depends. The reason I say that is sometimes you have a borrower or a guarantor, who has the wherewithal to maybe have some significant strength behind them where they maybe personally can qualify for some so called unsecured lending. And if they guarantee the debt, therefore you might be able to get some conventional financing that way. That's probably a rare example. So oftentimes, in this situation, we're looking at an SBA loan to the government backed loan, and typically look at a 7a loan, not a 504 but a 7a loan is able to finance what were the call the blue sky, the goodwill, airball, there's certain words you use for it, but that's probably the route you're gonna go down in that exam.
Michael Carro: 2:18
So let's say I sign a lease, does the lease term matter whether it's five years? Seven years? 10 years? 20 years?
Alan Nickelsen: 2:24
Good question. Yes, it does. So on an SBA 7a loan, we're able to go 10 years on financing for that. So you can have a 10 year commitment. However, to your point, the term of the lease needs to match the term of the loan. So that term, that lease would need to be 10 years.
Michael Carro: 2:37
Okay? So and that's also going to help out your amortization. By the way, I always tell people, if you're not willing to commit to 10 years, you're not really committing to your business, you're not showing the confidence, you know, I have restaurants that come to me and say, well, you think they do a two year lease. And that's what you don't believe in your business model enough. You know, you shouldn't be getting into the game, right? You know, because many restaurants don't hit a stride until you're three or four. And then once they are building up and get through their systems and processes, and really land on who their customer is, it takes him a while to get that word out. And so if you're only committed to a shorter period of time, many times, that's when your legs get cut out from underneath you. So now you've signed a 10 year lease...
Alan Nickelsen: 3:17
To kind of qualify that same a little bit. So you could do a five year lease with a five year option.
Michael Carro: 3:21
All right, perfect. And so now I signed a five year lease with a five year term, I've got a 10 year amortization, on my 7a loan, I buy an equipment package for $250,000. And I want to do another $150,000 in renovation for the space. So let's say I've got those two numbers, $150,000 and $250,000. Total of $400,000. How does that break down in the 7a? Do they just give you a loan of $400,000? Or what type of down payment do they need? Let's talk about those type of terms.
Alan Nickelsen: 3:48
To get a little more detail on the structure of something like that, you'd be looking at a 10% equity injection, so on it, using those numbers. $400,000, You have to come up with $40,000
Michael Carro: 3:57
But no difference on the build out versus equipment.
Alan Nickelsen: 4:00
No,that'd be all blended together and 10 year term, okay. And so and also to add full disclosure on a 7a so when something like that when I'm saying goodwill, airball blue sky, the SBA on something like that is going to look for additional assets to be able to grab if possible.
Michael Carro: 4:16
personal assets?
Alan Nickelsen: 4:17
Correct.
Michael Carro: 4:17
Okay.
Alan Nickelsen: 4:18
So in particular, you see someone's home or something like that, or even more typically, you'll see someone has a loan a mortgage on their on their house, but maybe they have equity. So the SBA is gonna come behind on 7a and say, All right, we're gonna take a second on your home. So if there's $100,000....
Michael Carro: 4:33
Hold on a second position or second mortgage.
Alan Nickelsen: 4:36
Both.
Michael Carro: 4:36
Okay. Yeah, I wasn't sure if you're taking a second meaning they're pulling your equity out today.
Alan Nickelsen: 4:41
No,
Michael Carro: 4:41
we're just attaching to it
Alan Nickelsen: 4:43
Attaching to it
Michael Carro: 4:44
Okay, gotcha.
Alan Nickelsen: 4:45
Yes. So just to grab so they have a $300,000 mortgage and it's worth $400,000. Or they say the view that is the margin that a little bit, there's $100,000 equity that say, okay, we're gonna take 85% of that and you'll get 80 to 85 percents of $80,000 or $85,000 in so called collateral attached to that loan.
Michael Carro: 5:05
And what's the process like for getting that type of loan with the SBA walk us through how long it takes, how many weeks, it takes how you work with your local folks.
Alan Nickelsen: 5:14
It takes patience. Patience and determination are two words that you'll hear a lot of because it does take a lot of information. A lot of it is based on the timeliness of it meaning recent interims dated within, say, 90 days. So as the process drags out, oftentimes the information you provided previously, is now outdated. And so you're gonna get frustrated, potentially, because bank will ask for information that they asked for before. But because so much time has passed, they it needed updated. And so information will include what is that build out? What is that consist of? What is the cost of the build out? What is the equipment, we need invoices of the equipment, obviously, we need financial information, historical financial information, personal tax returns, your personal financial statements, things along those lines, and you'll have someone when you're dealing the bank, you've got SBA closers working with that bank, and they're gonna walk you through that process. Typically, you have probably an attorney involved that will help with that process. So it's not something you have to know yourself. There are people there to help assist with that. But it can be a little cumbersome at times. But it's just one of those things that when you're dealing with SBA, which is government, we all know how government works. And unfortunately, that can take some time and drag things out.
Michael Carro: 6:25
Okay,
Alan Nickelsen: 6:25
So to answer your question, I think the timeframe, I would say, best case scenario, you're probably looking at 45 days is best case. And that's probably aggressive, honestly. So you're most likely 60 to 90 is what you're looking at.
Michael Carro: 6:39
Gotcha. Thank you. So if I go into the SBA, I get the loan, I start my construction, let's assume that the construction is $150,000 in the equipment was $250,000. How do I get my money? Is it on a draw schedule? Or do they just give me a lump sum in escrow? And then I pay for it? How do you get the money? And if it is a draw? Is it through inspections?
Alan Nickelsen: 6:59
Yes, it is going to be a draw process with the SBA they are going to want to see everything going on or make sure their money is being used for what is saying is being used for and so there will be so the loan will be an interest only period. So it'll work with the the borrower, so sometimes depending on the extent of the project, it might be three months, it could be six months or more. But whatever period that might be, you'll be paying interest only on that loan. And you'll be paying interest only on what you've drawn at that time. So if you've got a $500,000 loan, first month, you might only have $100,000. on it, your first month interest payments will be based on the hundred thousand dollars, not the full $500,000. As this project progresses, yes, you will provide invoices you provide documentation showing that the work has been done or completed, they will provide the money, they will also send an inspector out to make sure that money is being used where you're saying it's being used. We've seen situations before where that's not the case. And that's not a good situation for anyone. So we want to make sure that doesn't happen. And so they'll send an inspector up typically, that's gonna be once a month, they'll have a copy of plans and specs that you're working with. As you do this build out. They'll make sure that's going as planned and then they'll release the funds. Once the inspector comes back and says yes, the money is going where it says it's going.
Michael Carro: 8:07
What about equipment? Do they do the same thing with the equipment? If I order the equipment? Do we wait till it comes in? How does that work?
Alan Nickelsen: 8:14
You provide the invoices and then you can go ahead and pay for that. Yeah, that does not have to come in first, the bank will look at that, take the invoices and submit that payment.
Michael Carro: 8:22
All right,well, that's Alan Nicholson with synovus Bank talking about the SBA 7a loan for leased real estate, specifically construction loans and equipment loans in this episode. Thank you for listening. And we'll see you in the next one. Thank you for listening to The Restaurant Realty in 10. If you're interested in restaurants, whether operations facilities buying leasing or investment, The Restaurant Realty in 10 is for you. Please subscribe to this podcast and you can also visit TheRestaurantRealty.com for show notes, topics and additional information.