Key Features of the SBA 504 Loan Program
Type of business
Almost any for profit corporation, LLC, partnership or proprietorship, except those engaged in lending, investment, gaming or businesses providing prurient sexual material.
Size
The net worth of the operating business must not exceed $7 million and average net income after taxes for the past two years must not exceed $2.5 million.
Occupancy
In the case of the acquisition of an existing building, the operating company must occupy at least 51% of the usable space. In the case of new construction, the operating company must occupy at least 60% of the space immediately and plan to occupy at least 80% of the space over the next ten years; up to 20% of the space may be leased out indefinitely.
Employment Impact
The projections must forecast that one job will be created or retained for every $50,000 in SBA 504 debenture funds that are utilized during the two-year period following the completion and funding of the project.
Personal Resources
No owner of 20% or more of the borrower and/or the operating company (together with his or her spouse) can have cash or marketable securities exceeding 100% of the total financing package. Personal Resources earmarked for retirement, college funds, etc. are excluded from this formula.
Structure
The 504 Loan Program allows business owners to leverage their investment, as the 504 works in conjunction with local lenders to provide financing up to 90% of the total eligible project costs. Total eligible costs are typically split three ways; the first trust lender provides 50% of the financing, the second trust lender, REDCO, provides up to 40%* of the financing and the business owner provides 10% in the form of equity (this increases an additional 5% if the project is considered special use and/or an additional 5% for a start up or new business). *Subject to funding caps, described further in loan amount.
Loan Amount
REDCO can provide up to $1.5 million (or up to $2.0 million in certain cases where specific public policy goals are met, e. g. projects in 'rural' communities, loans to women-owned or minority-owned businesses). The size limit increases to $4.0 million for manufacturing companies. The minimum debenture amount is $50,000. There are no restrictions on the total project size. SBA 504 financing works well for projects ranging in size from $200,000 to $7 million or more.
Use of Proceeds
It is important to remember that the 504 Loan Program is project related financing for fixed assets; primarily real estate and or machinery and equipment, whose useful life is 10 years or more. The 504 Loan Program can be utilized for the acquisition, construction or improvement of real estate, to include most soft costs of the project. Examples of eligible soft costs that can be included in the total project costs are appraisals, environmental, certain professional fees, closing costs, the cost of interim financing and certain F F & E. Working capital and/or refinancing of existing debt are not eligible uses of SBA 504 loan proceeds.
Term
The term for real estate financing is 20 years and the term for machinery and equipment financing is 10 years. A minimum term of 10 years is required from the first trust lender on real estate financing and 7 years for machinery and equipment.
Interest Rate
The interest rate on the SBA 504 financing is a spread over the prevailing market rates for five and ten year U. S. Treasury issues for the ten and twenty year 504 debentures, respectively. The interest rate from the first trust lender is set at the discretion of the bank based on market conditions.
Personal Guarantees
Personal guarantees from each owner of 20% or more of the business are required.
Fees
One-time fees on the SBA 504 loan total approximately 2.75% of the amount of the 504 financing. These fees are included in the loan, so that the out of pocket cash disbursements for the borrower are minimized. The first trust lender is separately obligated to pay a one-time fee to the SBA in an amount equal to one half of one percent of the amount of the first trust loan.
Prepayment
There is a prepayment penalty charged if the SBA loan is prepaid during the first half of its term. The penalty for prepayment of a twenty-year debenture is equal to 100% of one year's interest if the prepayment occurs in the first year of the loan, declining by 10% per year to zero after ten years.
The penalty for prepayment of the ten-year debenture is equal to 100% of one year's interest if the prepayment occurs in the first year of the loan, declining by 20% per year to zero after five years. In addition, a borrower may be responsible for up to six months interest depending upon the timing of the prepayment and compliance with the notice provisions of the debenture. Partial prepayments are not permitted.
Assignment
The 504 loan is fully assumable through assignment of the loan to the purchaser of the collateral. This type of flexibility is beneficial to both the seller and the new owner from the standpoint of avoiding prepayment fees and enhancing the sale of the property. The assignment is a simple process, but it does require prior consent of REDCO and the SBA.
