Borrower terms and eligibility

Because the SBA does not engage in direct lending, CDCs are the conduit for providing 504 loans on its behalf. Traditional and SBA 504 refinancing loans have the same structure. A bank or third-party lender provides at least 50 percent of the loan. The SBA -- through a CDC -- provides as much as 40 percent of the loan. And the small-business borrower typically provides a downpayment of at least 10 percent.

There is no limit to the total project cost for an SBA 504 loan. The SBA-guaranteed portion, however, is limited to 40 percent of the project cost with a dollar cap of $5 million depending on the type of project. These loans can be as much as $5.5 million for eligible manufacturing projects and for projects that incorporate energy-saving technologies for sustainable design. Certain soft costs also can be financed, including architect and engineering fees, interim interest, and appraisal and feasibility studies. The 504 loan program now allows for total projects from $10 million to $20 million for purchase price or construction costs.

Because the loan size is typically linked to job creation, a small business can borrow $65,000 in SBA 504 loan funds for each job it creates or retains within two years. Growing businesses typically add staff as they expand, which makes them an ideal fit for this type of financing.

In addition to job creation, there are a couple of other ways to satisfy the SBA’s goals for 504 loans. The first is if the project meets one of the SBA’s community-development goals and the project improves, diversifies or stabilizes a locality’s economy. The second way is if the project meets one of the SBA’s public-policy goals -- e.g., when the business seeking assistance meets a defined energy-conservation goal;  is woman-owned, veteran-owned or minority-owned; is rural-based; is an exporter; is located in an enterprise zone; or is a manufacturer.

Most small businesses are eligible for 504 loans. In fact, eligible business size was increased in 2010 to allow even more businesses to qualify. An eligible small business must be a for-profit company that has a net worth of less than $15 million and an average after-tax profit of less than $5 million. It also must occupy at least 51 percent of its property for existing buildings and 60 percent initially of a newly constructed facility -- increasing to 80 percent occupancy within two years. Two or more unrelated small businesses can receive a 504 loan if they combine to meet occupancy requirements. This provision works well for office buildings.

There are numerous benefits to small-business owners who take an SBA 504 loan, from the tax benefits and property appreciation to the ability to lock in long-term occupancy costs. Also, as it allows borrowers to put as up to 10 percent down and finance as much as 90 percent of the project cost, an SBA 504 loan helps businesses conserve working capital and retain liquidity. An SBA 504 loan can be the ideal financing solution for small businesses seeking to purchase or refinance commercial real estate.

Merril Levesque is director of communications and outreach for the National Association of Development Companies (NADCO). She has been at NADCO since 2000 working on behalf of the certified-development-company industry to raise awareness of the U.S. Small Business Administration’s (SBA’s) financing program by presenting the advantages of SBA 504 loans and increasing program visibility with real estate brokers, lenders, certified public accountants and other stakeholders. Visit nadco.org or reach Levesque at merril@nadco.org.

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