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SBA 504 Loan Programs

If you’re looking for a long-term financing tool for economic development within the community this could be the right loan for you. The CDC/504 loan program helps small businesses who need “brick and mortar” financing with long-term, fixed-rate financing to acquire commercial real estate. Facilitated through Certified Development Companies (CDCs) – who are private, nonprofit corporations set up to contribute to the economic growth of their communities – they work with SBA and private sector lenders to provide funding to small businesses through the 504 program. To secure your project you’ll need a 1st and 2nd Deed to Trust/Mortgage on commercial real estate, to meet SBA qualifications and have a maximum aggregate Loan to Value between 80 to 90% depending on your property type.

 

Key features of this program include:

  • Typical project structures of
    • 50% LTV Conventional 1st Deed of Trust/Mortgage
    • 30 – 40% SBA/CDC 2nd Deed of Trust/Mortgage (depending on property type)
    • 10 – 25% equity injection (depending on property type)
  • A maximum loan amount of
    • $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

  • Maturity and Amortization up to 25 years for conventional 1st Deed of Trust/Mortgage, up to 120 day term with interest only payments for the Interim Note and up to 20 years for the CDC/SBA 2nd Deed of Trust/Mortgage
  • Maximum LTV Multi-Use of up to 90% (50% Conventional 1st/40% CDC/SBA 2nd / 10% equity injection
  • Limited or special purpose real estate up to 85% LTV (50% Conventional 1st/35% CDC/SBA 2nd/15% equity injection)

 

It normally takes between 45 to 90 days after the 1st DOT Conventional loan for the SBA to fund the SBA 2nd Deed of Trust/Mortgage. To ensure a smooth close, most lenders either require or offer an interim loan of 120 days which is paid off with the SBA Debenture. Typically the interest rates on the 120 day interim note mirror the rate on the 1st TD conventional loan.

 

If your tangible net worth is less than $7.5 million and your average net income doesn’t exceed $2.5m after taxes for the preceding two years and you operate your business for profit, then you could be eligible for this 504 program. Loans can’t be made for speculation purposes nor for investment in rental real estate.

 

Some eligible uses of proceeds could be:

  • To purchase land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping
  • To acquire commercial real estate
  • In conjunction with a commercial real estate acquisition financing request, the LCC may consider using funds for constructing new facilities or modernising, renovating or converting existing facilities and the purchase of long-term machinery and equipment.

 

Some examples of where you wouldn’t be eligible to use proceeds include for working capital, inventory or debt consolidation, repayment or refinancing.

 

The property in question must be occupied by a minimum of 51% by the Small Business Concern (60% for new construction) and of these 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.

 

Interest rate options include variable, 3 and 5 year fixed rate options for the Conventional 1st Deed of Trust/Mortgage. Your interim loan typically mirrors 1st Deed of Trust/Mortgage.  For your CDC/SBA 2nd Deed of Trust/Mortgage your rate is tied to the market rate for the 5 and 10 year US Treasury with rates fixed at the time of debenture funding for the life of the loan. Fees total approximately 3% of the SBA Debenture and may be financed with loan proceeds. The majority of these fees are not currently being charged as part of the American Reinvestment and Recovery Act.

 

To qualify, here are the underwriting requirements:

  • You must have 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% of the ownership interest or more
  • A 1.25 x Minimum Debt Coverage Ratio (DCR) for the most recent FYE and Interim period is required.
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