SBA 504 Program Overview
The CDC/504 loan program is a long-term financing tool for economic development within a community. The 504 Program provides small businesses requiring “brick and mortar” financing with long-term, fixed-rate financing to acquire commercial real estate. 504 loans are facilitated through Certified Development Company’s (CDC). A CDC is a private, nonprofit corporation set up to contribute to the economic development of its community and they work with SBA and private sector lenders to provide financing to small businesses through the 504 program. Projects are secured by a 1st and a 2nd Deed to Trust/Mortgage on commercial real estate, meeting SBA qualifications, having a maximum aggregate Loan to Value between 80% and 90% depending on the property type.
Typical Project Structure
• 50% LTV Conventional 1st Deed of Trust/Mortgage
• 30% to 40% SBA/CDC 2nd Deed of Trust/Mortgage (depending on property type)
• 10% to 25% Equity Injection (depending on property type)
Maximum Loan Amount*
• $4,000,000 1st Deed of Trust/Mortgage
• $1,500,000 2nd Deed of Trust/Mortgage when meeting the job creation criteria or a community development goal
• $2,000,000 2nd Deed of Trust/Mortgage when meeting a public policy goal
• $4,000,000 2nd Deed of Trust/Mortgage for small manufacturers
*Up to $6,000,000 of aggregate financing
Typically it takes 45 to 90 days after execution of the 1st DOT Conventional loan for the SBA to fund the SBA 2nd Deed of Trust/Mortgage. To facilitate a smooth closing most lenders require/provide an interim loan for 120 days that is paid off with the SBA Debenture. Interest rates on the 120 day interim note typically mirror the rate on the 1st TD conventional loan.
Maturity and Amortization
• Conventional 1st Deed of Trust/Mortgage – Up to 25 years
• Interim Note – Up to 120 day term with interest only payments
• CDC/SBA 2nd Deed of Trust/Mortgage – Up to 20 years
• Multi-Purpose Properties – Up to 90% LTV (50% Conventional 1st / 40% CDC/SBA 2nd / 10% equity injection)
• Limited or Special Purpose Properties – Up to 85% LTV (50% Conventional 1st / 35% CDC/SBA 2nd / 15% equity injection)
SBA 504 Eligibility
The subject business/borrower must be operated for profit and fall within the size standards set by the SBA (Tangible Net Worth less than $7.5MM and Average Net Income does not exceed $2.5MM after taxes for the preceding two years). Loans cannot be made to entities engaged in speculation or investment in rental real estate.
SBA 504 Eligible Use of Proceeds
• To purchase land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping.
• 504 Loans facilitated through LCC will be primarily used for the acquisition of commercial real estate. Other eligible uses of 504 loan proceeds such as construction of new facilities or modernizing, renovating or converting existing facilities, and the purchase of long-term machinery and equipment can be considered by LCC in conjunction with a commercial real estate acquisition financing request.
SBA 504 Ineligible Use of Proceeds
The 504 loan program cannot be used for working capital; inventory; or debt consolidation, repayment, or refinancing.
Eligible Property Types
• Office: Professional, Condominium, Medical, Dental, and Veterinarian.
• Industrial: Heavy and Light Manufacturing, Warehouse and R&D Flex
• Retail: General
• Special Use: Assisted Living Facilities, Adult Care, Day Care Facilities, Restaurants, Funeral Homes, Hotels/Motels.
Rate Option / Fees
• Conventional 1st Deed of Trust/Mortgage – Interest rate options include variable, three (3), and five (5) year fixed rate options.
• Interim Loan – Typically mirrors 1st Deed of Trust/Mortgage.
• CDC/SBA 2nd Deed of Trust/Mortgage – Rate is tied to the market rate for the five and 10 year U.S. Treasury with rates fixed at the time of debenture funding for the life of the loan.
• Fees total approximately 3 percent of the SBA Debenture and may be financed with loan proceeds. Currently the majority of these fees are not being charged (through 2/28/10) as part of the American Reinvestment and Recovery Act.
• Prior Ownership and Management Experience
• Minimum FICO of 680
• All loans are Full Recourse and require the personal guarantee of any and all individuals or entities holding 20% ownership interest or more.
• 1.25x Minimum Debt Coverage Ratio (DCR) for the most recent FYE and Interim period is required.
The subject property must be occupied by a minimum of 51% by the Small business Concern (60% for new construction).