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| SBA 504 Loan | |||
| The US ] '''504 Loan''' or '''Certified Development Company''' program is designed to provide financing for the purchase of ], which usually means ], buildings and machinery, at below ]s.<ref>{{cite book |title=Raising Capital |last=Vance |first=David E. |authorlink= |coauthors= |year=2005 |publisher=Springer |location= |isbn=978-0387253190 |page=64 |pages=378 |url= |accessdate=25 October 2009 }}</ref> As part of its mission to promote the development of businesses, the SBA offers a number of different ] programs tailored to specific ] needs of growing businesses. The 504 program works by distributing the loan among three parties. The business owner puts a minimum of 10%, a conventional lender (typically a ]) puts up 50%, and a so-called Certified Development Company (CDC) puts up the remaining 40%. are established under the 504 ] as non-profit corporations set up to support economic growth in their local areas. There are a few hundred such CDCs nationwide.<ref>{{cite book |title=Small Business for Dummies |last=Tyson |first=Eric |authorlink= |coauthors=Jim Schell |year=2008 |publisher=Wiley |location= |isbn=978-0470177471 |page=88 |pages=410 |url= |accessdate=25 October 2009 |edition=3}}</ref>{{update after|reason=Needs to dated|2010|11}} The maximum amount of the loan is $1.5 million ($2 million for meeting , and $4 million for manufacturers and some energy-related policy goals), and if the borrower defaults, the private sector lender is paid off first, reducing the risk to the lender and encouraging loans.{{update after|reason=Needs to dated|2010|11}} | |||
| The US Small Business Administration 504 Loan or Certified Development Company program is designed to provide financing for the purchase of fixed assets, which usually means real estate, buildings, and machinery, at below market rates. As part of its mission to promote the development of businesses, the SBA offers a number of different loan programs tailored to specific capital needs of growing businesses. The 504 program works by distributing the loan among three parties: the business owner, a conventional lender, and a Certified Development Company (CDC). Certified Development Companies are established under the 504 code as non-profit corporations set up to support economic growth in their local area. There are a few hundred such CDCs nationwide. | |||
| Eligibility | |||
| In order to qualify for the program, | |||
| • A business must be operated for profit. | |||
| ⚫ | • The company's average net income cannot surpass $5 million after taxes for the preceding two years. | ||
| ⚫ | • The anticipated project size must be greater than the personal, non-retirement, unencumbered liquid assets of the guarantors/principles. | ||
| ⚫ | • Does not have a tangible net worth in excess of $15 million. | ||
| • The project being financed must have an owner-user with at least 51% occupancy if funds are for an existing building, or 60% occupancy if funds are for new construction. | |||
| Total Project Costs | |||
| In order to qualify for the program, the borrower must meet the SBA's definition of small business and must plan to use over half (51%) of the property for its own operations within one year of ownership; if the building is to be newly constructed the borrower must use 60% at once and plan to occupy 80%. The borrower may form a real-estate holding company that lease 100% to the operating business, which then subleases surplus space (up to 49%). To qualify for this program, ] or permanent residents must hold a ] of the ownership of the operating companies and the holding company.<ref>http://sba.gov/</ref> {{As of|2009}}, the 504 Loan does not contain any restrictions or ceilings; however, there are three criteria for eligibility:<ref>http://www.sba.gov/financialassistance/borrowers/guaranteed/CDC504lp/index.htm</ref> | |||
| The business owner is required to contribute a minimum of 10% of the total project cost; a conventional lender (such as a commercial real estate lending institution, a bank, etc.) puts up 50% of the total project costs and takes a first mortgage on the assets financed; a CDC, with a guaranty from the SBA, puts up the remaining 40% (up to a cap of $5 million for manufacturing and certain “green” projects, and $5.5 million for all others) and takes a second mortgage position. | |||
| Example: | |||
| ⚫ | |||
| ⚫ | |||
| ⚫ | |||
| Costs | |||
| ==Structure== | |||
| Acquisition of commercial building $ 800,000 | |||
| {{Incoherent|date=November 2009}} | |||
| Renovations of same commercial building $ 100,000 | |||
| {{Cleanup-jargon|date=November 2009}} | |||
| Machinery $ 50,000 | |||
| The are three partners in an SBA 504 loan—the borrower, a bank or other regulated lender, and a CDC. Typically the borrower must contribute 10% of the total project cost; their bank lends 50% at their own rate and term (as long as the term is at least 10 years), and has a first lien on the assets being financed; and the CDC lends 40%, with a second lien. If the financing is for real estate, as most 504 loans are, the CDC's loan is for twenty years at a fixed rate of interest. The fully amortized rate for loans funding in August 2010 was 4.931%. The funds for these loans are raised through a monthly auction of bonds that are 100% guaranteed by the U.S. Government. If the financing is for long-lasting fixed equipment such as printing presses, commercial laundry equipment, manufacturing equipment, etc., the 504 loan term is 10 years. | |||
| Soft costs $ 50,000 | |||
| Total $ 1,000,000 | |||
| Financing | |||
| First Mortgage Trust Deed Lender $ 500,000 | |||
| Second Mortgage Lender (a CDC) $ 400,000 | |||
| Equity contribution from Borrower $ 100,000 | |||
| Total $ 1,000,000 | |||
| Structure | |||
| ⚫ | If the borrower's company has less than two consecutive years of operating history or if the building or assets to be financed are considered "special purpose" (e.g., gas stations |
||
| ⚫ | If the borrower's company has less than two consecutive years of operating history or if the building or assets to be financed are considered "special purpose" (e.g., gas stations/convenient stores, limited-service hotels, etc.), the borrower must increase their contribution by 5% for a total of 15%, and the CDC lends 5% less for a total of 35%. In instances where the borrowers meet both of these conditions, they must increase their equity contribution to 20%, and the CDC lends only 30%. | ||
| ⚫ | |||
| ⚫ | A primary difference between SBA 504 loans and conventional commercial loans is that 504 loans deal with total project costs, which can include the costs for land and existing building or equipment; hard construction/renovation; fixtures, furniture and equipment (FF&E); professional fees, including appraisals and environmental investigations; soft costs; and closing costs. These total project costs can be financed in their entirety with a 504 loan, whereas most conventional commercial loans only finance a percentage of either the purchase price or the appraised value (whichever is less…typically 65% to 80% loan-to-value ), and borrowers pay closing and soft costs out of pocket. If borrowers later decide to sell their property, 504 loans are assumable. | ||
| ==References== | |||
| {{reflist}} | |||
| ==External links== | |||
| * | |||
| * | |||
| {{Use dmy dates|date=October 2010}} | |||
| {{DEFAULTSORT:Sba 504 Loan}} | |||
| ] | |||
Revision as of 14:41, 16 December 2010
SBA 504 Loan
The US Small Business Administration 504 Loan or Certified Development Company program is designed to provide financing for the purchase of fixed assets, which usually means real estate, buildings, and machinery, at below market rates. As part of its mission to promote the development of businesses, the SBA offers a number of different loan programs tailored to specific capital needs of growing businesses. The 504 program works by distributing the loan among three parties: the business owner, a conventional lender, and a Certified Development Company (CDC). Certified Development Companies are established under the 504 code as non-profit corporations set up to support economic growth in their local area. There are a few hundred such CDCs nationwide. Eligibility In order to qualify for the program, • A business must be operated for profit. • The company's average net income cannot surpass $5 million after taxes for the preceding two years. • The anticipated project size must be greater than the personal, non-retirement, unencumbered liquid assets of the guarantors/principles. • Does not have a tangible net worth in excess of $15 million. • The project being financed must have an owner-user with at least 51% occupancy if funds are for an existing building, or 60% occupancy if funds are for new construction.
Total Project Costs
The business owner is required to contribute a minimum of 10% of the total project cost; a conventional lender (such as a commercial real estate lending institution, a bank, etc.) puts up 50% of the total project costs and takes a first mortgage on the assets financed; a CDC, with a guaranty from the SBA, puts up the remaining 40% (up to a cap of $5 million for manufacturing and certain “green” projects, and $5.5 million for all others) and takes a second mortgage position.
Example:
Costs Acquisition of commercial building $ 800,000 Renovations of same commercial building $ 100,000 Machinery $ 50,000 Soft costs $ 50,000 Total $ 1,000,000 Financing First Mortgage Trust Deed Lender $ 500,000 Second Mortgage Lender (a CDC) $ 400,000 Equity contribution from Borrower $ 100,000 Total $ 1,000,000
Structure
If the borrower's company has less than two consecutive years of operating history or if the building or assets to be financed are considered "special purpose" (e.g., gas stations/convenient stores, limited-service hotels, etc.), the borrower must increase their contribution by 5% for a total of 15%, and the CDC lends 5% less for a total of 35%. In instances where the borrowers meet both of these conditions, they must increase their equity contribution to 20%, and the CDC lends only 30%.
A primary difference between SBA 504 loans and conventional commercial loans is that 504 loans deal with total project costs, which can include the costs for land and existing building or equipment; hard construction/renovation; fixtures, furniture and equipment (FF&E); professional fees, including appraisals and environmental investigations; soft costs; and closing costs. These total project costs can be financed in their entirety with a 504 loan, whereas most conventional commercial loans only finance a percentage of either the purchase price or the appraised value (whichever is less…typically 65% to 80% loan-to-value ), and borrowers pay closing and soft costs out of pocket. If borrowers later decide to sell their property, 504 loans are assumable.