10% Down Commercial Real Estate Financing with the SBA 504 Loan
The SBA 504 loan program (aka CDC 504 loan program) has historically been under-utilized and it is safe to say that it is currently the best commercial real estate loan available for small and mid-sized businesses - especially in light of the credit crisis.
SBA 504 Uses
The SBA 504 is a commercial property loan for healthy businesses.
It can be used for:
- Purchase and acquisition - of "owner occupied" commercial property
- Refinance - including a limited amount of debt refinancing (if undergoing an expansion)
- Renovation and remodeling - if you need to remodel your business property
- New construction - if you need a new building or if you are constructing a new facility
- Green Construction, Retrofit or Remodel - please see The Green Choice Loan™ page for more info
- Purchase of "long term" machinery or equipment - including renewable energy equipment like solar panels and wind turbines - as long as the equipment has a useful life of 10 or more years.
Advantages of the 504 Loan
- Low down payment - low equity injection of as little as 10%
- Most Closing and "soft costs" can be financed - allowing a 90% loan to cost transaction
- Second mortgage is fixed for 20 years with a below market interest rate - no balloon or call later
- The first mortgage is typically a 25 year term allowing for lower payments
- Multiple options for title and ownership giving you flexibility with tax benefits
- Maximum projects costs upwards of $12 million*
Who Can Qualify?
The loan is for viable U.S. businesses that have a tangible net worth of less than $8.5 million and net - after tax - income of less than $3 million on average for the last 2 years. (In other words, most healthy businesses).
The business must occupy 51% of the "owner occupied" commercial property if financing an existing building and must occupy 60% of the building if it is new construction.
How is the SBA 504 structured?
The 504 is typically a 50/40/10 structure which means there are 2 loans:
- First mortgage loan at 50% loan to cost
- Second Mortgage loan at 40% loan to cost from a CDC - Certified Development Company and backed by the SBA
You put down 10% or possibly more depending on age and viability of business, credit and type of facility.
What is the maximum 504 loan amount and project costs?
We can currently assist in financing projects of approx $12,000,000 ($12MM) if you are a qualified manufacturing business, if you are constucting an energy efficient building or if you use or produce renewable energy.
80 to 90% "Loan to Cost
Loans are typically either 80 or 90% "loan to cost."
Loan to Cost is different from "loan to value" since the 504 program allows you to "roll in" or finance most closing costs, soft costs and construction and renovation costs.
Technically there isn't a maximum first mortgage loan amount, but most banks and lenders have a limit between $4 and $6 million.
The maximum 504 second mortgage is $4,000,000 if you meet one of the following conditions:
- if you can reduce your energy needs by 10% by making your property more energy efficient during construction or renovation.
- If you are purchasing, building, renovating or doing a purchase/renovation of a manufacturing facility.
- if your business produces Green or Renewable Energy. ("Producing" green energy does not mean that the production of alternative energy has to be your primary business).
As an example an $8,000,000 purchase or purchase/renovation at 90% loan to cost would look like this:
1st Mtg $4,000,000
SBA 504 2nd $3,200,000
Equity $800,000
Total $8,000,000
As you can see, the 504 is a loan for small and mid-sized businesses because of the possible project size.
Because of it's limited equity requirements, low rates and long term amortizaiton, the 504 is an excellent option for a mid sized business to finance a relatively large project.
More About The Green Energy Incentive
You do not have to cover your roof with solar panels to qualify for the Green Energy Incentives - although you might consider it, since you could cut your energy bills, save money on maintenance, make less of an impact on the environment and take advantage of some extremely generous tax deductions on both the state and federal level for installing green or renewable energy in a commercial environment.
The SBA's Energy Efficient Public Policy Goal states that you can qualify for a larger loan if your business reduces it's energy consumption by a mere 10% with the use of green or alternative energy. You might be able to do something as simple as:
- Installing a new and improved HVAC system
- Installing better insulation or windows
- Putting in more energy efficient lighting
Or you could do something on a larger scale to qualify by using or producing solar power, wind power, biomass, hydropower, geothermal power or ocean thermal power.
Keep in mind that businesses generating renewable energy can be, but do not have to be in the energy business, it just has to be a method of decreasing your own energy needs.
Typical Uses of the 504 Loan
- The Purchase of a Building, Land and Improvements*
- Renovation, Remodeling, Modernization or Conversion of Existing Facilities
- Construction of a New Building
- The Purchase of "Build to Suit" Facilities
- The Purchase of New (Long-Term) Machinery and Equipment with a useful life greater than 10 years
Because of the flexible structure of the 504 you will be hard pressed to find more attractive financing in the current economic climate.
*"Land and Improvements" may also include current/existing buildings on property, street improvements, grading, parking lots, utilities and landscaping.
Multi-use vs. single purpose
If you are looking at new construction or renovation of a commercial building that would not be considered "multi-use" (able to be used by multiple businesses without much need for re-construction) then you will likely be required to put down 15 or possibly 20%.
Recourse vs. Non-recourse
The first mortgage in a 504 transaction may or may not have a "declining" prepayment penalty and a personal guarantee. Any prepayment penalty would be reasonable and typical for commercial financing and would phase out over time. The personal guarantee is something that many lenders got away from during the past decade but now almost all commercial loans require it. (See bottom of page for more info)
SBA Required Documentation
The following documentation is typically requested in order for us to prequalify a project:
- Three years Business/Corporate Tax Returns and financial statements (Schedule C’s for sole proprietors)
- Personal Financial Statement(s)
- 3 years Individual Tax Returns for business owners with 20% or more ownership in the company
- Interim Financial Statement - no more than 90 days old
The 504 loan provides commercial mortgage financing for many types of businesses including:
- Manufacturing Facilities
- Industrial Buildings
- Hotels
- Motels
- Physicians
- Dentists
- Attorneys
- Retail
- Restaurants
- Day Care Facilities and Child Care Facilities
- Preschools and Schools
- Assisted Living Facilities and Nursing Homes
- Movie Theatres
- Bowling Alleys
- Golf Courses
- Rural Properties - especially those that elect to use renewable energy
- Many Others
Please visit the following pages or contact us at 1-800-414-5285 for more information:
SBA 504 Purchase
SBA 504 Refinance
SBA 504 New Construction
Energy Efficient Commercial Financing
Commercial Renovation and Remodel Loan
The SBA 504 Loan Program is used to finance "fixed-assets." It is not used for general business needs like working capital - the SBA 7a loan is for working capital -and it has some significant benefits for businesses utilizing or producing Green Energy.
*To finance projects upwards of $12 million your business will have to use or produce renewable energy or be a qualifying manufacturing business
More info on Personal Guarantee
A little history...it used to be that most commercial mortgage loans required a personal guarantee. It was a provision of a loan that gave a bank or lender an extra layer of protection in the event of default. As you can imagine, it was a large deterrent that prevented people from biting off more than they could chew, because if a business owner defaulted on the loan they could lose personal assets.
In recent years the commercial loan market was dominated by loans backed by commercial mortgage-backed securities (CMBS's) without personal guarantee requirements and all kinds of commercial loans were more or less invented - including commercial loans with no down payment and loans where you did not have to verify income or provide tax returns.
These practices eventually caught up with everyone and now just like in the residential market, defaults on commercial mortgages are skyrocketing. Part of the problem with all of the defaults that have occurred is that without the guarantee it was too easy for business owners to walk away from their obligation on the property.
As a result of all of the defaults, commercial lenders are back to more common sense underwriting and requiring the guarantee.
