Lender Frequently Asked Questions
What is a 504 loan?
Why should I be interested in the 504 loan program?
Who is eligible for a SBA 504 loan?
What is the owner-occupied rule?
How do I or my client get started?
What are the project limitations and loan structures?
Example of a typical structure
What is a 504 loan?
A SBA 504 Loan provides financing for owner-occupied purchase or new construction of commercial real estate. This loan program is a partnership loan between a lender and an SBA Certified Development Company (CDC). This loan features low down payment (as little as 10%) and long term fixed rate financing.
Why should I be interested in the 504 program?
An SBA loan has a low down payment which increases the pool of potential buyers for a given property. Using a 504 loan reduces the borrower’s down payment to as low as 10% of project cost. This is a true 10% of project costs, with virtually no other out-of-pocket expense. A CDC second mortgage is a fixed rate 20-year term loan. The first mortgage may be on better-than-average terms, since loan-to-value is about 50% however, some first mortgages can be amortized for as long as 30 years.
Who is eligible for a SBA 504 loan?
Almost any type of business ( retail, wholesale, service, manufacturing, hospitality). The project must create or retain jobs or meet one of several SBA exceptions (contact us for more information). Debt refinance is usually not eligible; working capital is not eligible.
What is the owner-occupied rule?
For the purchase of an existing building the business must occupy at least 51%, for new construction the business has to occupy at least 60%.
How do I or my client get started?
Any bank or other lender can do a 504 financing package. The borrower or broker should contact us and the bank lender. It is best to have the borrower or lender call us as early as possible. We are able establish eligibility and work with the other lender towards obtaining simultaneous approvals. We require the same information as most lenders. We will make copies of all the application materials for the other lender to make the process easy for the business owner.
What are project limitations and loan structures?
The 10% down payment is for existing businesses (15% - 20% is required for new businesses or special-use properties, such as motels), in some cases the down payment can be financed from other sources. The maximum 504 2nd mortgage is $1.5 million for standard projects, $2.0 million in certain situations (rural, minority, etc.), and can be up to $4.0 million for manufacturers. The project costs may include building purchase or new construction, new equipment, furnishings, and all project soft costs (including construction contingency, construction interest, architecture, appraisal, environmental, loan fees). The overall loan-to-value can exceed 90%. Including equipment and furnishings and having no set loan-to-value targets are major advantages. Loan amounts are based on cost, not appraised value. The basic total project maximum is $6-$8 million, depending upon the first mortgage lender with a project cost minimum about $250,000. Projects that meet certain criteria (rural, minority, etc.) can be as high as $8-$10 million. The project limit for manufacturers can be as high as $16 million or more.
Example of a Typical Structure
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