As a mortgage broker, you understand the limitations of traditional lending caps for ambitious businesses, particularly in capital-heavy industries. Fortunately, the Small Business Administration’s (SBA) 504 lending limits have expanded for businesses that ‘go green,’ offering new opportunities for you to support your clients.
The SBA’s 504 loan program provides long-term, fixed rate financing for major assets that promote business growth and job creation. The 504 loans are available through Certified Development Companies (CDCs), SBA’s certified community-based nonprofit partners which promote economic development in their communities.
Some of the main benefits of the CDC/504 program include allowing businesses to access up to 90% financing at below-market rates with no future interest rate fluctuations. Choose from 10-, 20- and 25-year amortization terms. The loans can also be used to finance equipment, associated fees and soft costs in the loan, such as legal fees, appraisal fees and environmental studies.
For most businesses, the SBA’s CDC/504 loan offers up to $5 million in financing, which typically represents 40% of the total project cost. However, for real estate projects that incorporate green energy initiatives or for businesses classified as manufacturers, unlimited below-market fixed-rate financing is available. This provides a unique selling point for a broker’s services.
Raising limits
The SBA 504 Green Loan Program allows business owners to qualify for additional CDC/504 financing when they meet the energy efficiency requirements. A broker can help their clients access this financing, where the CDC/504 second mortgage is increased to a maximum of $5.5 million per project. There is no limit on the first mortgage amount, and therefore no limit on the total project cost.
Additional updates to the CDC/504 program, effective starting last April, specify that there is no limit to the number of CDC/504 loans a business can take out or the aggregate dollar amount outstanding when energy efficiencies are implemented. This creates significant opportunities for brokers to offer continued financial solutions to their clients even after they have reached traditional SBA lending caps.
For instance, a business owner with an existing $5 million SBA 7(a) loan or a CDC/504 loan could still qualify for another CDC/504 loan to purchase a building. To do so, the business owner could install solar panels or replace lighting, windows and heating and cooling systems to make the building more energy efficient, thus allowing it to qualify.
To qualify for the program, business owners must either produce or reduce energy at the subject property. To reduce energy, the business must be replacing an existing location where the energy used at the new location will be at least 10% lower than that of the current location. This reduction can be met by installing LED lighting, better HVAC, energy efficient windows, etc. For energy production, the business can either be replacing an existing location or opening an additional location. The business would need to include improvements to the project such as solar panels that would produce at least 15% of the building’s energy needs.
Going green
Brokers can guide their clients through these options, helping them to understand the benefits and navigate the requirements to qualify for additional CDC/504 financing. Here are some approaches:
● Energy-efficient building design: Encourage clients to invest in construction projects that prioritize energy efficiency from the ground up. By incorporating sustainable building materials, advanced insulation techniques and high-efficiency HVAC systems, businesses can achieve significant energy savings, making them eligible for increased financing.
● Renewable energy integration: Advise clients on the benefits of integrating renewable energy sources such as solar panels, wind turbines or geothermal systems into their properties. Not only do these systems reduce energy costs, but they also align with the green energy requirements of the CDC/504 program, allowing for additional loan opportunities.
● Retrofitting existing buildings: For businesses that own or plan to purchase existing buildings, suggest they retrofit projects to improve energy efficiency. This can include upgrading lighting systems to LED, installing energy-efficient windows, and implementing smart building technologies to optimize energy usage.
● Energy audits and certifications: Recommend that clients conduct energy audits to identify areas for improvement.
Wide eligibility
Small- to medium-sized manufacturers can also access unlimited CDC/504 financing without implementing green efficiencies. If the business has a North American Industry Classification System (NACIS) code on their business tax returns, they qualify for extra financing.
While $5.5 million remains the CDC/504 per project financing limit on the second mortgage amount, there is no limit to the number of CDC/504 projects a manufacturing business can obtain. There is also no limit to the CDC/504 aggregate dollar amount outstanding. This means more opportunities to support manufacturing clients in securing necessary funds to expand their operations and drive economic growth.
“Promoting the benefits of the CDC/504 program can help brokers attract and retain clients looking for long-term, stable financing options.”
Most small for-profit businesses are eligible for CDC/504 loans, if the net profit of the company is less than $6.5 million and the net worth of the company is below $20 million. If these size standards are exceeded, the operation may still qualify as a small business, based on employee count or annual revenue. The business must also occupy at least 51% of the building or 60% of ground-up construction projects. Promoting the benefits of the CDC/504 program can help brokers attract and retain clients looking for long-term, stable financing options.
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The expanded capabilities of the CDC/504 loan program’s green energy initiative provide small businesses with unparalleled opportunities for growth and development. Mortgage brokers can leverage these loans to help their clients meet immediate financial needs and contribute to long-term sustainability and economic health. The future is bright for those who take advantage of these enhanced funding options, paving the way for innovation, job creation and a stronger economy.
By understanding and promoting the benefits of the CDC/504 program, brokers can differentiate their services in a competitive market. Brokers should educate their clients on how these loans can help them achieve their business goals while supporting environmental sustainability. This dual focus on economic growth and green initiatives not only benefits the broker’s clients but also contributes to a healthier planet and a more resilient economy. Stay informed about the latest updates to the CDC/504 program and continuously seek opportunities to educate and inform your clients about these financing options. By doing so, you can position yourself as a knowledgeable and proactive broker who is dedicated to helping businesses thrive in an evolving financial landscape.
