SBA 504

By
Mortgage and Lending with Commercial Capital Funding

The CDC/504 loan program is a long-term financing tool for economic development within a community. The 504 Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. A Certified Development Company is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 270 CDCs nationwide, with each covering a specific geographic area.Typically, a 504 project includes a loan secured with a senior lien from a private-sector lender covering up to 50 percent of the project cost, a loan secured with a junior lien from the CDC (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business being helped.Maximum Debenture
The maximum SBA debenture is $1,500,000 when meeting the job creation criteria or a community development goal. Generally, a business must create or retain one job for every $50,000 provided by the SBA except for "Small Manufacturers" which have a $100,000 job creation or retention goal (see below).The maximum SBA debenture is $2.0 million when meeting a public policy goal.The public policy goals are as follows:
· Business district revitalization.
· Expansion of exports.
· Expansion of minority business development.
· Rural development.
· Increasing productivity and competitiveness.
· Restructuring because of federally mandated standards or policies.
· Changes necessitated by federal budget cutbacks.
· Expansion of small business concerns owned and controlled by veterans (especially service-disabled veterans)
· Expansion of small business concerns owned and controlled by women.
The maximum debenture for "Small Manufacturers" is $4.0 million. A Small Manufacturer is defined as a small business concern that has:Its primary business classified in sector 31, 32, or 33 of the North American Industrial Classification System (NAICS); and All of its production facilities located in the United States.In order to qualify for a $4 million 504 loan, the Small Manufacturer must 1) meet the definition of a Small Manufacturer described above, and 2) either (i) create or retain at least 1 job per $100,000 guaranteed by the SBA [Section 501(d)(1) of the Small Business Investment Act (SBI Act)], or (ii) improve the economy of the locality or achieve one or more public policy goals [sections 501(d)(2) or (3) of the SBI Act].
What funds may be used for :
Proceeds from 504 loans must be used for fixed asset projects such as: purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernizing, renovating or converting existing facilities; or purchasing long-term machinery and equipment.The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing.Terms, Interest rates and Fees:
Interest rates on 504 loans are pegged to an increment above the current market rate for five-year and 10-year U.S. Treasury issues. Maturities of 10 and 20 years are available. Fees total approximately three (3) percent of the debenture and may be financed with the loan.Collateral:
Generally, the project assets being financed are used as collateral. Personal guaranties of the principal owners are also required.Eligible Business:
To be eligible, the business must be operated for profit and fall within the size standards set by the SBA. Under the 504 Program, the business qualifies as small if it does not have a tangible net worth in excess of $7.5 million and does not have an average net income in excess of $2.5 million after taxes for the preceding two years. Loans cannot be made to businesses engaged in speculation or investment in rental real estate.

Andrew Martinez
Vice President
Commercial Capital Funding

Comments (4)

Vicente A. Martinez
Prudential Douglas Elliman Licensed Real Estate Salesperson - Woodhaven, NY
Realtor, Brooklyn - Long Island - Queens Homes

Hi Andrew and welcome to active|rain.

We need more professioanls like yourself educating the public as to their options and expalining them in detail like you have. 

There are thousands of tips, tools, and tricks of the trade here. Be sure to check them out. Best of luck and see you around.

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Jan 05, 2009 05:54 AM
Sergio Rebollo Jr.
Real Estate TeamMates - Miami, FL

Andrew....Welcome to ActiveRain.  This is a great community to network with others as well a great place to learn from other's experiences and knowledge.  I've enjoyed it; I hope you enjoy it as well.

Sergio Rebollo Jr.
Exit Prime Realty
Coral Gables, FL  33134
305-582-4062

Miami Short Sale Specialist - Profile

Jan 05, 2009 10:01 AM
Dan Magstadt
Paramount Residential Mortgage Group, Inc - Lake City, FL

Congrats on your first post - Welcome to ActiveRain!!

DM

Jan 05, 2009 02:20 PM
Joe Sosky
KW Commercial - Vancouver, WA
Commercial Real Estate Broker - (360) 816-9652

Andrew,  nice information on the SBA 504.  To take this a step further, a cash flow analysis demonstrating the effective annual SF cost for lease vs purchase makes this loan a no brainer. 

Mar 13, 2010 08:37 AM