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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 puts a minimum of 10%, a conventional lender (typically a bank) puts up 50%, and a so-called Certified Development Company (CDC) puts up the remaining 40%. 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. The maximum amount of the loan is $1 million (1.3 million in special circumstances), and if the borrower defaults, the private sector lender is paid off first, reducing the risk to the lender and encouraging loans.

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.

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 (2008). Small Business for Dummies (3 ed.). Wiley. p. 88. ISBN 978-0470177471. {{cite book}}: |access-date= requires |url= (help); More than one of |pages= and |page= specified (help); Unknown parameter |coauthors= ignored (|author= suggested) (help)
3. http://sba.gov/

External links

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

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