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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 areas. There are a few hundred such CDCs nationwide.

Eligibility

In order to qualify for the program,

• 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.
• A business must be operated for profit.
• 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

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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.

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 or some medical clinics), 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 cases where the borrowers meet both of these conditions, they must increase to 20%, and the CDC lends 30%.

Total project costs can include the costs for land and existing building or equipment; hard construction/renovation; fixtures and equipment; certain furniture; professional fees including appraisals and environmental investigations; soft costs; and closing costs. Project costs can usually be financed in their entirety with a 504 loan, whereas most commercial bank loans only finance a percentage of the purchase price/appraised value and borrowers would have to come up with closing and soft costs out of pocket. If borrowers later decide to sell their property, 504 loans are assumable.

References

1. Vance, David E. (2005). Raising Capital. Springer. p. 64. ISBN 978-0387253190. {{cite book}}: |access-date= requires |url= (help); Cite has empty unknown parameter: |coauthors= (help); More than one of |pages= and |page= specified (help)
2. Tyson, Eric, and Jim Shell. “Small Business for Dummies.” (3 ed.). p. 88. ISBN 978-0470177471. 2008.
3. Wisconsin Business Development. http://wbd.org/eligibility. 504 Loan Eligibility. 2010.
4. Wisconsin Business Development. http://wbd.org/eligibility. 504 Loan Eligibility. 2010.
5. Hurn, Christopher G. 12 Reasons a 504 Loan is Best for your Business: A Special Report on a Better Way to Finance Commercial Real Estate. ©# TXu641262.2009.
6. Hurn, Christopher G. 12 Reasons a 504 Loan is Best for your Business: A Special Report on a Better Way to Finance Commercial Real Estate. ©# TX u641262.2009.
7. America’s PremierExperts, featuring Chris Hurn. “Big Ideas for Your Business.” P. 170. Advantage. ISBN 978-1599321073. 2009.
8. Kennedy, Nate and Mark Evans, forward by Dan Kennedy and featuring Chris Hurn. “The Insider Secrets: Of the World’s Most Successful Mortgage Brokers.” P. 66. Deal Maker Publishing, LLC. ISBN 978-0615172705.

External links

• CDC/504 loan program at the SBA
• The Small Business Administration's Website

• Misplaced Pages articles lacking focus from November 2009
• Use dmy dates from October 2010
• Small Business Administration