United States Small Business Administration 504 Loan Program
CFS has relationships with lender's who participate in the SBA's 504 loan program. This program is used for the purchase of fixed assets such as commercial real estate and machinery and equipment of a capital nature, which are defined as assets that have a minimum useful life of ten years. Proceeds cannot be used for working capital.
There are three parts to a typical SBA 504 Loan 1) A conventional first mortgage loan of approximately 50% of the purchase price of the assets. 2) SBA fixed rate debenture/second mortgage loan of approximately 40% of the purchase price of the assets. 3) Borrower contributes the remaining 10%. If the property is special use real estate, a 15% contribution is required by the borrower, and if the property is a special use and start-up operation, a 20% contribution is required. Special use properties are properties such as gas stations, motels, assisted living facilities that can only be used for the purpose that they were built.
In providing a 504 loan:
CFS works with the primary lender and local Certified Development Corporations (CDC). CFS obtains approval for the 1st mortgage portion of the financing request, and the CDC works with SBA to approve the SBA portion of the request. Since the SBA portion of the financing request is a debenture that must be arranged with the financial markets, the SBA funds are often not available until after the asset has been purchased. In order to fill this gap in the SBA financing, most lenders offer interim financing for the SBA debenture amount so that your purchase transaction is not delayed.
Loan Details
Loan Purpose Proceeds can be used to purchase, build or renovate owner occupied commercial real estate and for machinery and equipment.
Loan Amount Total loan amount up to $6,000,000 split into 2 parts. Conventional First Mortgage Loan: Up to $4,000,000 SBA 504 Debenture/Second Mortgage Loan: Up to $2,000,000
Time to Close Closing is mostly dependent upon the timing of third party reports such as appraisals, environmental reports, Title Work, etc. Most business only transactions can be expected to fund within 45 to 60 days. Transactions involving commercial real estate may take up to 90 days.
Loan To Value Up to 90%.
Interest Rate Conventional First Mortgage Loan – May be fixed for extended periods (five to ten years) with five or ten year resets or adjust monthly based on a spread over a base rate (i.e. 30 day LIBOR, 5 Year FHLB, WSJ Prime, etc.)
SBA 504 Debenture/Second Mortgage Loan – Fixed rate as set by the SBA for the term of the loan.
Interim Loan – Adjusts monthly based on a spread over a base rate (i.e. 30 day LIBOR, 5 Year FHLB, WSJ Prime, etc.)
(Interim loan provided by Conventional Lender to cover time between loan closing and SBA 504 funding of debenture).
Term First Mortgage Loan has a term of up to 25 years, fully amortizing. SBA 504 Debenture/Second Mortgage Loan has a term of up to 20 years for commercial real estate, 10 years for machinery and equipment, fully amortizing. Interim Loan has a term of up to 180 days.
Prepayment Penalty Prepayment penalties will apply.
Fees 2% origination fee on the First Mortgage loan. 1% origination fee on the Interim loan. CDC/SBA fee on the SBA 504 Debenture/Second Mortgage Loan is set by the CDC/SBA
Collateral Loan must be as secured as possible by commercial real estate or a combination of commercial and residential real estate.
Recourse All principals who own 20% or more of the business are required to provide a full guarantee. Principals or key managers owning less than 20% may be required to provide a guarantee on a case-by-case basis. The guarantee of affiliated companies may be required based on the percentage of ownership of the affiliate and the borrower's relationship with the affiliate.
Debt Service Requirements A minimum projected debt service coverage ratio of 1.20 times is required.
Industries Loans can be made to all for-profit businesses except those that do not meet SBA eligibility requirements. These are primarily firms involved in real estate investment/speculation, gambling, adult entertainment, lending money and pyramid sales schemes. Firms involved in nuclear waste, utilities, natural resource development, fishing vessels, biotechnology and internet technology are also excluded from eligibility.
Other Considerations Appraisal and Environmental reports will be required for real estate used as collateral. Borrowers cannot have filed for bankruptcy within the last three years. Payment reserves are generally required Life insurance equal to 50% of the Conventional First Mortgage Loan will generally be required.
