For those of you with crystal balls.

[I.B. Washincars]

Hello guys, first off I want to tell you that I am a forum regular posting with an alias. I am not ready for my deal to be common knowledge, hence the alias. Anyway, I am about to make a large car wash purchase and will have a note of about 2 mil. I can get my interest rate locked in for 3 years, or 5 years for an extra 1/4%. I am leaning toward going for 5 years, but would like your opinions. I'm sure there's someone out there that can see into the future.

TIA

 

[Ben's Car Wash]

Hello guys, first off I want to tell you that I am a forum regular posting with an alias. I am not ready for my deal to be common knowledge, hence the alias. Anyway, I am about to make a large car wash purchase and will have a note of about 2 mil. I can get my interest rate locked in for 3 years, or 5 years for an extra 1/4%. I am leaning toward going for 5 years, but would like your opinions. I'm sure there's someone out there that can see into the future.

TIA

I'd STRONGLY consider doing it. Reasons; The low interest rates of today will only last a few more months. There is now a LOT OF TALK about stagflation, a rapid increase in inflation leading to very high interest rates like what we saw in the early 1980's. These interset rates hit in the high teens to low 20% back then. To lock in a rate now would be wise, even for a 1/4 point buy down.

Gold is telling the story now, it hit $1000 last week. A year ago it was a little over $700. Friday (yesterday) ended the WORST BLUE CHIP RUN in 5 years on wall street. The oversea markets are still very shakey. This leds me to beleive that low interest rate will only make it another 6 months or another .5 drop before they will climb to fend off inflation and hyperinflation. Factory veild & jobs losses are low by standards too. Most economist now say that we are in or will be in in another month a recession (hence the $600-$1200 checks to everyone in May).

Buy down the loan and lock it in. That's my advice WITHOUT A CRYSTAL BALL.

 

[Jimmy Buffett]

I called my lender yesterday. I could get 10 years at 6.05 or 5 years at 5.6%.Since I'm already locked at 6.15 I'm not doing anything.
FWIW many economists expect the rate to bottom at 2.5%. I'll probably jump then. Bernanke is still pretty new but he has not been shy so far about cutting. What is your time frame?

 

[Jimmy Buffett]

That's the fed funds rate which is now at 3%.
$2m. wow. You're the one with the balls! I hope your just "leaned over" as opposed to bent over!

 

[Greg Pack]

Hello Eileen,

I think I bought a carwash from your father, Ben.


What rates were you quoted and how long were you going to amortize?

 

[pitzerwm]

Personally, I would not do it, unless you have the ability to pay it off in 5 years because, there might not be a way to refi it then. Banks love to set you up for failure.

 

[pitzerwm]

Most economist don't say that we are going to hell. Most economist can't agree on anything. Things may go to hell, but we have survived it before. You probably meant the Best blue chip 5 year period. Time will tell how long this will last, in 2000 when the dot com bubble burst, it did take a few years to recover but it did recover. I personally don't/can't pay the capital gains taxes, and don't see any sure thing out there, so I'll trust that no matter what in 5 years I'll be better off than I am today. I will agree that with the sub-prime crap and the Dems in control for the next 8 years it will be a challenge.

 

[Jimmy Buffett]

The trick to dealing with economists is to pick 1 guy and stick with him. They often disagree but if you pick a good one and only listen to him you'll be right more than you'll be wrong. That is really about the best you can hope for. You can always find an economist to take any side of any argument. There are even economists who agree with Doug.

 

[Alan Bussey]

Eileen -

What is the index that will be used for your loan? FHLB? SWAP? Prime? LIBOR?

Right now (February 2008) the rate on a SBA 504 2nd lien fixed for TWENTY (20) years, fully amortizing, no balloon, no demand clause, is 6.13%. That rate has been dropping steadily for months, but for the February 2008 funding is about the same as it was last month (6.14%). Rates could be stabilizing. I think that this is an excellent rate to lock in for 20 years. So, even if the rate on your 504 1st lien, a conventional bank loan, jumps at the end of five years, the average will still be relatively low because of that fixed 2nd lien loan rate. For a car wash construction loan the down payment is normally 20%, the 1st lien loan is 50%, and the second lien is normally 30%.

Eileen, other important factors are the amortization period (length - 20 years or more is best), early maturity (balloon) date - balloons are bad, demand clause - really bad, prepayment penalty schedule - the lower and shorter the better, and prepayment amount allowed each year without penalty - 20% or more per year is ideal.

 

[mac]

If you laid down every economist head to toe, all in a straight line, they still could not reach a conclusion.

 

[Ben's Car Wash]

for Bill and his non beleiving eyes.

http://online.wsj.com/article/SB120242941040952119.html?mod=googlenews_wsj
{snip}
{As signs of a weakening economy proliferate, a growing chorus of economists says a recession has begun.

Global Insight, a Waltham, Mass., forecasting firm, yesterday declared that "the economy has slipped over the edge into a mild recession for the first half of this year."

Global Insight joins a handful of firms saying that the U.S. is now in recession, including Morgan Stanley, Merrill Lynch & Co., Goldman Sachs Group Inc., UBS AG and Northern Trust Corp.

Nigel Gault, chief economist at Global Insight, cited a combination of factors: flat consumer spending, worrying employment growth, a sharp and broad tightening of credit and -- "the final straw" -- a marked contraction in service-sector activity last month, reported Tuesday by the Institute for Supply Management.}

{As is usual at moments like this, there isn't unanimity among economists. Bruce Kasman, chief economist at J.P. Morgan Chase & Co., wrote earlier this week, "We are hesitant to forecast the onset of recession...We will wait for validation (or lack thereof) in [further] releases."

"There is no question that the economic news has taken an unusual and disturbing turn for the worse," Wachovia economists wrote this week. "We continue to believe we will just skirt an actual downturn, with real GDP coming in at less than a 1% pace for three quarters in a row."}

{The Bureau of Economic Research typically calls recessions long after they have begun. In 2001, it wasn't until November that it declared that a recession had begun in March of that year. And it determined in July 2003 that the recession ended in November 2001.

"We wait until sufficient data are available to avoid the need for major revisions. In particular, in determining the date of a peak in activity, and thus the onset of recession, we wait until we are confident that, even in the event that activity begins to rise again immediately, it has declined enough to meet the criterion of depth," the committee involved in dating recessions explained in a recent statement. "As a result, we tend to wait to identify a peak until many months after it actually occurs."}

 

[Ben's Car Wash]

And this too for Bill... and those of you who don't read, nor beleive what I say here:

http://online.wsj.com/article/SB120251896065155631.html?mod=googlenews_wsj

{snip}
{After its worst January since 2000, the Dow Jones Industrial Average fell 561.06 points, or 4.4%, for the first full week of trading in February, to 12182.13. The blue chips lost 64.87 points, or 0.53%, on Friday. It was the Dow's biggest weekly percentage drop in nearly five years.

Tough news about the economy all week added to worries that the U.S. is sliding into recession. "Everything is slowing more than people expected," said Kurt Karl, chief U.S. economist at Swiss Re. "We do expect a strong recovery once there's light at the end of the tunnel" in the form of stronger economic data, he said, but that might not happen until the fourth quarter.}

 

[Ben's Car Wash]

Do what Allen suggested. Lock in a rate now. Or put your money aside and sit this one out for the next 18 months.

 

[Greg Pack]

I think that if the project makes good sense and your margins are very comfortable, the next few months are a great time to finance.

 

[Jimmy Buffett]

I told you there were even economists who agree with Doug.

Allan, Do you have to do SBA to get that? Isn't SBA a pain in the a$$ and time consuming? 6.13 for 20 years would be nice.

 

[Alan Bussey]

Jimmy -

The 2nd lien is a SBA debenture sold into the secondary market, so yes, to get the 6.13% 20-year fixe rate on the 20-year fully-amortizing loan you'd need to go with the SBA product.

We closed a 504 loan for the purchase of a combination ss/iba within the last 60 days. That took no longer than a conventional loan would take, but even if it was two weeks longer would not be a problem for most buyers and sellers. The longest single task is usually getting the appraisal ordered and completed. If time is critical issue the appraisal can be ordered even before the loan is presented for formal approval.

 

[Jimmy Buffett]

Any prepayment penalty? Are fees any higher than a bank loan? What would they need down, 20%? That looks like a pretty strong offer. I sold a business to a guy 1 time that used sba. They actually took his toaster (and everything else he owned, which wasn't much) as collateral.

 

[Alan Bussey]

Jimmy -

All 504 second lien loans nationwide with any lender do not allow prepayment, but they ARE assumable by a future buyer. The second lien prepayment penalty schedule is one year of interest in the first year, then declining by 10% per year so that there is no prepayment penalty in the 11th year.

A good way to offset the 'no prepayment' provision with the second lien loan is to invest any excess cash flow, which could allow you to save for a rainy day or to use for a future car wash. Or, you could put all of your prepayment against the first lien loan, which typically has a higher interest rate anyway.

First liens have a variety of prepayment penalty schedules depending upon the lender, most often a flat 5% for the first five years, then none; or a 10-year declining as with the second lien, then none. The 5% flat prepayment penalty schedule typically allows up to 20% prepayment per year without penalty; and with the 10-year declining, up to 10% per year. The margin above the rate index depends upon the prepayment penalty schedule, and with the 10-year declining has a slightly lower margin.

The fees usually somewhat higher with a 504 loan than a conventional bank loan, but then again you get a long-term loan with no balloon payment and no demand clause. And the fees are financed into the loan, so that the down payment is 20% of the Total Project Cost, NOT 20% of the Hard Cost PLUS all of the fees that a bank typically charges. So, a 504 has a lower overall cash investment into the project than a conventional loan. 504 loans do not need any additional collateral. Sometimes the 7a program, a different SBA program, does require the lender to take additional collateral, as would a conventional loan in the same situation.

Of course, since the 1st lien under the 504 program is a conventional loan, the index, the margin above the index, and the prepayment penalty schedule is set by the lender. There are no balloon payments, and no demand clauses with first liens under the SBA 504 program.

 

[Ben's Car Wash]

My SBA did NOT require ANY COLATERAL other than the property that the wash was being built on. I did not cross colleteralize my home, investments, other land or a toaster! I did have a pre-payment penality of 3% that delcined each year by 1 point for three years. I refied after the third year to a fixed rate with a local bank.

The SBA loans are nearly the only way to buy & sell car washes, Assisted Living Facilities and other "non-conforming business". Not every lender can do one properly. I would ALWAYS SUGGEST TO USE ALLEN!

 

[Jimmy Buffett]

Alan,
What exactly do you do in the process? I'm guessing that you facilitate the paperwork and red tape. If someone was already working with a bank but wanted to use sba could they go through you and use their hometown bank?