This is an old revision of this page, as edited by Abductive (talk | contribs) at 19:34, 16 March 2010 (Undid revision 350246373 by 208.82.161.66 (talk) too jargon-y). The present address (URL) is a permanent link to this revision, which may differ significantly from the current revision.
Revision as of 19:34, 16 March 2010 by Abductive (talk | contribs) (Undid revision 350246373 by 208.82.161.66 (talk) too jargon-y)(diff) ← Previous revision | Latest revision (diff) | Newer revision → (diff)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.
Eligibility
In order to qualify for the program, 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. As of 2009, the 504 Loan does not contain any restrictions or ceilings; however, there 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
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A small business can get a fixed rate SBA-504 loan for real estate construction or purchases or equipment purchases when a banker is willing to structure the loan in the following way: The bank agrees to create a loan for 50% of the project amount. This loan takes first lien position and is priced at market rates with a term no less than that of the 504 portion of the loan. The applicant business is required to contribute equity in the amount of 10 to 20% (50 to 66% less down payment than conventional loans). A Certified Development Company (CDC) provides the remaining 30 to 40% of the total project costs through the 504 loan, taking second lien position. Total project costs can include the costs for land and existing building or equipment; hard construction/renovation; fixtures and equipment; furniture, soft costs; and closing costs. Project costs can 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. For the first mortgage--the bank loan--the term is 25 years at market rates, and is fully amortizing. For the second mortgage--the CDC portion--the loan will be a 20-year fixed rate term for real estate projects or a 10 year fixed rate term for equipment. Weighted averages are used to determine the term of the loan when the project includes both real estate and equipment. For example if 55% of the total project costs are comprised of the real estate costs and 45% equipment, the project qualifies for the 20-year term. Additionally if borrowers decide to sell their property, 504 loans are assumable.
References
- 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) - 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) - http://sba.gov/
External links
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