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Revision as of 16:43, 2 November 2009 by 208.82.161.66 (talk) (Undid revision 323494326 by Abductive (talk))(diff) ← Previous revision | Latest revision (diff) | Newer revision → (diff)Purpose
The Small Business Administration (SBA) 504 loan program was created to help small to mid-sized business owners acquire commercial property without the financial issues. In order to qualify, over half (51%) of the property must be occupied by the borrowers within one year of ownership. Another option is forming a holding company from two operating companies. This company can then take the title to the commercial property. To qualify for this program, U.S. citizens or permanent residents must hold a majority of the ownership of the operating companies and the holding company. The 504 Loan does not contain any restrictions or ceilings; however, there are are three criteria for eligibility:
- The company's average net income cannot surpass $3 million over the past two years.
- The anticipated project size must be greater than the personal, non-retirement, unencumbered liquid assets of the guarantors/principles
- Net worth of the operating companies must be $8.5 million or less.
Structure
The format of the 504 loan employs a traditional mortgage for 50 percent of the total project costs. This includes the cost of land and existing building; hard construction/renovation costs; fixtures and equipment; furniture, soft costs; and closing costs. A government-guaranteed bond is utilized for 40 percent of the loan. The borrowers' own equity makes up the remaining 10 percent, which is 50 to 66.7 percent less equity than conventional lenders require. Project costs are financed in their entirety with the 504 loan, whereas most commercial bank loans only finance a percentage of the purchase price/appraised value. For the first mortgage, the term is 25 years at market rates, and it is fully amortizing. For the second mortgage of a 504 loan, a 20 year term is used. Additionally if borrowers decide to sell their property, 504 loans are assumable.