504 Loan Program

WHAT IS THE 504 LOAN PROGRAM?

 

The SBA 504 Loan Program assists Small Business Owners looking to expand their business through the purchase of commercial real estate or capital equipment.
NEDCO works in conjunction with lenders (typically a bank) to provide up to 90% financing for commercial property purchases and construction.

 

HOW DOES IT WORK?

 

NEDCO provides up to 40% of the total project cost with a 10 or 20 year loan which has a fixed rate of interest for the life of the loan. The Lender finances 50%
of the project and the Borrower puts down as little as 10% equity into the project.

 

 

 

 

EXAMPLE PROJECT

 

SOURCE	PERCENTAGE	PROJECT AMOUNT	LIEN POSITION
BANK LOAN	50%	$500,000	1ST LIEN
NEDCO/SBA	40%	$400,000	2ND LIEN
BUSINESS OWNER	10%	$100,000
	100%	$1,000,000

 

 

 

WHAT ARE THE PERMITTED USES OF 504 LOAN PROCEEDS?

• Acquisition of vacant land for construction of a building
• 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 fess; 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 REQUIREMENTS

 

SBA 504 is a community lending program designed to improve the locality. Eligibility requires either:

 

1. Job creation or retention (one job per every $50,000 borrowed from CDC 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)
• Aiding rural development
• Change necessitated by federal budget cutbacks
• Change required by mandated standard (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.

 

 

AMOUNT OF 504 LOAN

 

The CDC can lend up to 40% of the project cost with a dollar cap of $1,500,000. CDC 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 helps the company expand its exporting or
• The company is owned 51% or more by a minority, woman, or veteran or
• The business is located in a rural area or
• The project will increase productivity and competitiveness by retooling, modernization, or assistance in competing with imports or
• The business was affected by federal budget cutbacks (such as defense downsizing)

 

RATE AND TERMS

 

The rate on the SBA 504 portion is set when the CDC sells the bond to fund the loan. The rate is then fixed for the loan term. 504 bands 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 10 or 20 years; self liquidating. In order for NEDCO to do a 20-year loan, the lender/bank 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 NEDCO to do a 10-year loan, the 50% lender must have
a term of at least seven years.

 

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 hat
the project could be financed by the principal without SBA 504 assistance.

 

COLLATERAL

 

NEDCO takes a subordinate (second mortgage) to secure its 40% portion of the financing, and NEDCO takes a security interest in assets financed. Key Man life insurance is
generally not required unless there is no succession of management. Other assets of the business or principals are generally not required (unless the company is a start-up 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 they can be amortized over the term of the loan. A note will be signed for the 40% of project cost plus the fees.

Payments on the SBA 504 loan are made by Ach debit to the borrower’s designated checking account on the first of each month after the loan closes. Payments on the 504
loan are separate from the payments on the 50% first mortgage loan.

 

PROCESS

 

Call NEDCO and talk to a loan officer to discuss a project. Submit the NEDCO application which consists basically of the same materials a borrower would submit to a bank.
Basic application materials include:

 

• 2 years of financial statements and federal tax returns on the company (if in existence for 2 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;
• Personal history statement of principals indication citizenship status, etc.

 

ADVANTAGES OF SBA 504 OVER CONVENTIONAL FINANCING

 

Low downpayment. Just 10%. Lets the borrower preserve cash for working capital. Most banks will lend only 60-70% of the appraised value of the project leaving the borrower to sink in 30-40% plus the cost of renovations plus the soft costs.

 

Fixed rate on the SBA 504 portion. The borrower does not have to worry about the prime lending rate going up. The borrower can plan because they know the amount of the mortgage payments for the next 20 years.

 

Long term. NEDCO 504 loans are for 10 or 20 years. Because NEDCO is in second lien position, the bank or other lender doing the 50% first lien loan is willing to lend at a longer term. Longer terms make the borrower’s monthly payments lower.

 

Low interest rate. Even with all the fees and closing costs included in the rate, it is still a low rate for a subordinate mortgage loan, particularly for small business. The blended rate as between the bank portion and the NEDCO 504 portion makes the project affordable for the borrower.

 

For the banker wishing to participate as the 50% lender, you get CRA credits; you land at a lower loan to value ratio; you keep a growing customer happy; you have lower risk because the SBA 504 loan is in second position behind you. The community gets the advantage of keeping or attracting a healthy, growing small business that will be creating jobs and doing other wonderful things in the community.

 

Nebraska Business Development Center
http://nbdc.unomaha.edu/