504 Loan Program Information and GuidelinesEligibility for SBA 504 Loans- Organized as a for-profit business.
- Legal entity-corporation, partnership, sole proprietor, limited liability company.
- Any type of legitimate business- manufacturing, wholesale, service, professional service or retail. See prohibited businesses.
- Located in or planning to locate in any area of the United States.
- Small business - either: net worth under $7 million & net profits after taxes under $2.5 million or meet SBA's other size standards (by sales or number of employees depending on NAICS code).
- Planning to use the loan proceeds for capital investment (land, building, leasehold improvements, renovation, construction, machinery & associated soft costs). The SBA 504 loan program is not a working capital program. See uses of loan proceeds section for more details.
- Another lender must be willing to participate in the financing. The SBA 504 loan finances up to 40% of the total project cost and the other lender finances 50%. The business or its owner typically puts in 10%. Economic development goals must be achieved through the project being financed. See section on economic development requirements.
- Owner-user of the project being financed (51% occupancy if existing building; 60% occupancy if new construction) Two or more unrelated small businesses may receive a 504 loan to buy or construct a building as long as they, together, will occupy at least 51% an existing building or 60% of new construction.
Companies that are not eligible for SBA 504 loans are: not-for-profit businesses; businesses engaged in lending; passive holders of real estage and/or personal property; life insurance companies -- however an insurance agency is eligible;) businesses located in a foreign country; businesses selling through a pyramid plan; illegal businesses; businesses which restrict patronage; government owned entities (excluding Native American Tribes); businesses engaged in promoting religion; consumer and marketing cooperatives (producer cooperatives are eligible); businesses engaged in loan packaging; businesses owned by persons of poor character; equity interest by lender; businesses providing prurient sexual material; businesses that have previously defaulted on a Federal loan; businesses engaged in political or lobbying activities; and speculative businesses.
What are the Permitted Uses of 504 Loan Proceeds?- Acquisition of vacant land
- Acquisition of land and building
- Leasehold improvements
- Renovation of building; addition to building
- Construction of a building
- Acquisition of a commercial fishing vessel or party boat
- Acquisition of heavy duty machinery & equipment (such as printing press)
- Associated soft costs: title searches & insurance; attorneys fees; appraisals; environmental reports; architects; permits;surveys; installation of machinery; points on bridge loans, small amount of furniture and fixtures, etc.
- Not permitted are mortgage broker fees; points on permanent financing;moving expenses.
- Refinancing is not permitted except to take out financing on property acquired within last 9 months with interim funds.
Economic Development RequirementsSBA 504 is acommunity lending program designed to improve the locality. Eligibility
requires either:
1) Job
creation or retention (one job per every $50,000 borrowed from CVC
under SBA 504)
OR
2) One of the following public policy goals to:
-
Revitalize
a business district of a community with a written revitalization or
development plan
-
Expand exports
-
Expand
minority business development (owned 51% or more by minority business
person)
-
Change
necessitated by federal budget cutbacks
-
Change
required by mandated standard re health, safety, environment
-
Increase
productivity & competitiveness (retooling, robotics, or
modernization)
-
Expand
woman-owned business development
-
Expand
veteran-owned business development
One of the following community development goals to:
-
Help
to improve, diversify or stabilize the economy of the locality
-
Stimulate
other business development in the community
-
Bring
new income into the community
-
Assist manufacturing firms
-
Assist
businesses in a labor surplus area.
SBA 504 is not a real estate investment tool. It exists to help the
community by helping small business have an impact on the community-by
creating jobs or in other ways benefiting the community.
Typical Deal StructureYou determine the total project cost (hard and soft costs). A bank or other financial institution finances 50% of the cost and takes a first mortgage (lien) position on the assets financed. CVC, through the SBA 504, finances 40% of the project cost up to a cap and takes a second mortgage position. You can put in as little as 10% equity. Typical 504 Loan Project Financing Deal Structure
| | Cost | | Acquisition of building | $800,000 | | Renovations | $100,000 | | Machinery | $50,000 | | Soft costs | $50,000 | | Total | $1,000,000 | Financing Structure
| | Bank - first mortgage | $500,000 permanent loan | | SBA 504 - second mortgage | $400,000 permanent loan | | Equity | $100,000 | | Total | $1,000,000 |
Note: the seller can provide the 50% permanent financing but, under current regulations, the seller must be co-equal to or subordinate to the SBA 504 loan. The 50% can come from a variety of nonfederal sources.
Amount of 504 LoanCVC can lend you up to 40% of the project cost with a dollar cap of
$1,500,000. For the purposes of manufacturing projects, the maximum
amount is $4,000,000. CVC can exceed $1,500,000 and go up to $2,000,000
of SBA 504 financing under the following conditions:
-
the
project will help revitalize a business community with a written
revitalization plan or
-
the
project will help your company to expand its exporting or
-
your
company is 51% or more minority, woman or veteran owned or
-
you
are in a rural area or
-
the
project will increase productivity and competitiveness by retooling,
modernization or assistance in competing with imports or
-
your
business was affected by federal budget cutbacks (such as defense
downsizing).
Rates and TermsThe rate on the SBA 504 portion is set when the SBA sells the bond
to fund your loan. The rate is then fixed for the loan term. 504 bonds
are amortized securities. For comparable rates, look at treasury rates.
The effective rate (APR) will include program fees and a loan loss
subsidy.
Loans are ten or
twenty years; self liquidating. In order for CVC to do a 20-year loan,
the lender doing the 50% permanent first mortgage must have at least a
ten year term. That lender can have a longer payout. Typically, lenders
will lend with a 15-20 year term and 20-year payout. For CVC to do a
ten-year loan, the 50% lender must have a term of at least 7 years.
Many lenders will match CVC's ten year term.
Principals (owners)-
Owners
must be US citizens or registered aliens with green card.
-
Owners
cannot be convicted felons currently on probation.
-
Anyone
who owns 20% or more of the operating company must personally guarantee
(unsecured general guarantee).
-
Liquid
assets of the principals are taken into account in determining
eligibility. Too much liquid assets owned by a principal could
disqualify the loan because it will be deemed that the project could be
financed by the principal without SBA 504 assistance.
CollateralCVC takes a subordinate (second mortgage) to secure its 40% portion of
the financing, and takes a security interest in assets financed. Key
Man life insurance is generally not required unless there is no
succession of management. Should you need information on insurance
visit the 504 Easy Term Life
Insurance Center. Other assets of the business or principals are
generally not required. (unless the company is a startup or the credit
is unusually risky or the asset being financed is considered a single
purpose asset or doesn't appraise high enough).
Fees and Payments All of the fees on the SBA 504 loan are added to the loan amount so
that you can amortize their cost over the loan term.
Payments on the SBA 504 loan are made by ACH debit to the borrowers
designated checking account on the first of each month after the loan
closes. Payments on the 504 loan are separate from your payments on the
50% first mortgage loan.
Special NotesThere is a prepayment penalty for the first half of the loan term on
the SBA 504 loan. In start up situations or single purpose buildings
being financed, an equity injection of 15% is required.
The Certified Lender is a permanent lender only. This means the 50%
first mortgage lender will have to bridge the Certified Lender's 504
loan portion until the project is complete. The Certified Lender will
sell its bond and fund its loan when the Certificate of Occupancy is
issued. Interest and fees on the bridge loan can be included in the
project costs to be financed.
Loan Application ProcessCall CVC and talk to a loan officer to discuss your project. Talk to
your bank of account to see if the bank wants to participate by doing
the permanent first mortgage and bridge loan. Meet with the CVC loan
officer and structure the deal. Submit the application which consists
basically of the same materials you will submit to your bank. Basic
application materials include:
-
3
years of financial statements and federal tax returns on the company
(if in existence for 3 years); if
there is no historical cash flow ability to service the proposed new
debt, submit 2-3 years financial projections;
-
personal
financial statement (assets and liabilities) on the owners of the
company;
-
written
history of the business, reasons for expansion, plans;
-
copy of contract of sale; appraisal; construction cost estimates;
-
personal
history statement of principals indicating citizenship status, etc.
CVC's staff will investigate and evaluate you and your company. CVC
will draw credit reports, do supplier, bank and trade checks, visit
your existing and proposed operations/facilities; assess your credit
ability and character. Once your bank or other 50% first lien lender
has indicated an interest in financing the 50%, CVC staff prepares a
loan memorandum and presents it to the CVC Board. Once the board
approves the project, CVC presents the application to the SBA to
acquire its agreement to guarantee the bond. This generally takes a few
days. CVC then issues a commitment and your bank closes its first
mortgage loan and bridge loan. You take the bank's funds to complete
the project. When the project is complete, you close with CVC and CVC
wires its money to the bridge lender. You then pay CVC back for the SBA
504 loan. CVC services the loan for its life.
Advantages of SBA 504 over Conventional FinancingLow downpayment.
Just 10%. Lets you preserve your cash for your working capital. Most
banks will lend only 60-70% of the appraised value of the project
leaving you to sink in 30-40% plus the cost of renovations plus the
soft costs.
Fixed rate on the SBA 504 portion.
You don't have to worry about the prime lending rate going up. You can
plan because you know the amount of your mortgage payments for the next
20 years.
Long term.
504 loans are for 10 or 20 years. Because CVC is in second lien
position, the bank or other lender doing the 50% first lien loan are
willing to lend at a longer term. Longer terms make your monthly
payments lower.
Low interest rate. Low fixed interest rate for the term of the loan.
504 Loan Application
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