The federal government has doubled down on U.S. Small Business Administration (SBA) lending as a key economic recovery tool. As the COVID-19 pandemic fades, the government has enacted several enhancements to the CDC/504 loan program, which are aimed at facilitating the creation of jobs and promoting economic development.
The CDC/504 loan program provides long-term financing to small businesses for the purchase, improvement or refinance of land, buildings and equipment. These commercial mortgages are administered by certified development companies (CDCs), which are nonprofit entities that are endorsed and regulated by the SBA.
The CDC/504 refinance program, which was up-dated in July 2021, allows small-business owners to free up equity in their properties while reducing loan payments.
Last year, the CDC/504 refinance program was enhanced to make it accessible to more business owners. Now the addition of the 504 Express program will help borrowers who desire 90% loan leverage with project costs of up to $1,210,000 to have their loans approved and closed sooner while locking in long-term fixed interest rates.
In the Economic Aid Act, Congress granted the SBA authority to establish the 504 Express loan program through Sept. 30, 2023. Only select CDCs in good standing are designated to participate in the Accredited Lenders Program (ALP). The ALP designation authorizes a CDC to administer 504 Express loans that expedite the approval, authorization and closing of certain CDC/504 loans.
Typically, CDCs must obtain the SBA’s approval for these types of projects. With the 504 Express loan, however, the SBA only reviews the loan’s eligibility and leaves the analysis of creditworthiness to the CDC, thus greatly speeding up the approval process.
Note that for 504 Express loans, the SBA also will continue to review projects involving franchise agreements, historic buildings and properties with environmental issues. Additionally, CDC/504 loan requests that were previously declined will not be eligible for an Express loan. As the popularity of the 504 program continues to grow, the Express option will be a great one for smaller projects to access capital faster.
Most small- and medium-sized businesses that operate for profit qualify for the CDC/504 program. Eligibility for the program is based on the business’s net worth and average after-tax profit for the past two years.
Business owners are often surprised that based on these size standards, most types of privately owned businesses qualify. The business also must meet occupancy requirements. To finance the purchase of an existing building, a company must occupy at least 51% of the usable space. For new construction, the business must occupy 60% of the space.
The 504 Express loan program does have some limitations on which projects are eligible. The SBA-backed portion of the project from a CDC must not exceed $500,000. Since the SBA portion is typically 35% to 40% of the project’s total cost, this usually implies that 50% of the funds will come from another lender and 10% is the borrower’s downpayment. This means that a 504 Express loan can cover a $1,210,000 project with 90% financing, a $1,382,000 project with 85% financing or a $1,610,000 project with 80% financing. In these examples, the borrower would usually be responsible for the percentage of the deal not covered by the 504 loan.
On the typical 504 loan, the SBA retains the usual limit of $5 million, or $5.5 million for manufacturing facilities and projects with energy efficiencies. An additional limitation of the program is that loans cannot be made to a business in an industry listed in the Federal Register as having a high rate of default. The SBA defines “industries with a high rate of default” as those with 50 or more loan approvals per year and an annualized default rate of at least 5% during the past five years. Currently, no industries have default rates above this threshold.
The CDC/504 refinance program, which was updated in July 2021, allows small-business owners to free up equity in their properties while reducing loan payments. Business owners can refinance commercial real estate with a loan-to-value ratio of up to 90%.
In addition, business owners can obtain up to 20% of their property’s appraised value in cash. These funds can be used on business expenses such as salaries, rent, utilities and inventory, which may be just what your clients need to survive or thrive in the post-pandemic period.
Last year, the SBA published rule changes for the CDC/504 loan program and outlined enhancements to the refinance program to provide more aid to small businesses following the pandemic. The new relief bill implemented more lenient eligibility guidelines and an improved cash-out option.
Highlights of the enhancements include the provision that existing government-guaranteed debt — such as SBA 7(a) and 504 loans, as well as those through the U.S. Department of Agriculture — can be refinanced under certain circumstances. Qualified debt must be at least six months old. This is considerably less than the previous two-year requirement.
The enhancements also eliminate the requirement that the loan must have been current on payments for one year prior to the application date. And finally, the enhancements reinstate an alternate job retention goal, so all existing jobs may be counted as jobs retained (full-time and full-time equivalent jobs included).
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CDCs strive to be the mortgage broker’s advocate from application through the life of the loan. Experienced CDCs can help brokers market properties and explain the details of the new legislation to potential clients. The 504 Express program can be the optimal solution for a broker’s small-business clients who need to close quickly.
Brokers should expand their offerings and inform their small-business borrowers about the improvements to the CDC/504 loan program. They should contact any local CDCs that they have a relationship with to learn more about these federal mortgage programs, which can help their clients find low-interest loans and close deals more quickly. ●