SBA 504 Loan Program

What is it?
The SBA 504 loan program is designed to provide long-term, below-market, fixed-rate second lien funding for expanding businesses. The program is normally used in conjunction with conventional bank financing to provide up to a total of 90% project cost financing. Funds are available through the Greater Syracuse Business Development Corporation (GSBDC) for projects in Upstate New York.

Eligible Projects
Owner occupied projects should create or retain jobs or meet a community or national objective. The acquisition of land, buildings, machinery and equipment, building expansion and new construction qualify for funding. Under some circumstances leasehold improvements may be eligible. Most related soft costs are eligible, such as surveying, engineering, appraisals, environmental audits, architectural, some legal expenses, accounting and construction period interest.

Eligible Businesses
The business concern must be creditworthy and eligible as a small business as defined by the U.S. Small Business Administration (SBA). Generally, a business is "small" if it has a tangible net worth under $15,000,000 and does not have average net income over $5,000,000 during the last two years. Most types of for-profit businesses are eligible except for investment and finance companies. Owners of the business will also pass a personal resource test.

Loan Limits
Normally 40% of the project cost can be covered, up to a maximum SBA 504 loan amount of $5,000,000; or $5,500,000 per project if the borrower is a manufacturer in NAICS Sectors 31, 32 or 33 or meets certian SBA public policy energy goals.

In all cases 10% must be injected as equity by the business concern or principals. A typical project can range in size from $200,000 up to $13,750,000 and consists of a financial institution lending 50% in a first lien position, GSBDC providing 40% in a second position and the business concern or principals injecting 10% equity.

Exceptions to the above are as follows: When an applicant is either a start-up business (defined as 2 years old or less) or the collateral is special purpose/limited use, the minimum equity is 15%, or 20% if both a start-up and of limited use. In these situations, the financing structure would be either 50/35/15 or 50/30/20.

Term
Ten years - Machinery and Equipment
Twenty years - Real Property

Interest Rate
Interest rates are fixed and established at the time of SBA 504 loan funding. The rate (inclusive of all servicing fees) to the borrower is based on five or ten year treasury notes depending upon the loan term.

Lien Position
The SBA 504 loan program is normally a second mortgage or security interest in real estate and/or machinery and equipment. Personal guarantees and key person life insurance are required.

Prepayment
Prepayment is only allowed in full. A prepayment penalty will apply during the first half of the loan term. However, SBA 504 loans can be assumed by an eligible small business.

Fees
Typically, fees consist of 2.16% of the SBA 504 loan amount. These fees in addition to the GSBDC legal fees are financed 100% and added to the 504 note.

Application Process

  1. Business decides to expand via real estate and/or machinery and equipment acquisition.
  2. Business contacts GSBDC to outline project and determine eligibility.
  3. GSBDC provides a list of required information for complete application.
  4. After the application is prepared (including bank commitment), the GSBDC Loan Committee reviews with principals present. Upon Loan Committee approval, the GSBDC Board of Directors will review within days. Upon Board approval, the loan application is submitted to the SBA. Approval from SBA will usually take less than one week based upon GSBDC’s “Accredited Lender” status.
  5. After written loan authorization is received from SBA, a project is usually started with interim financing from the primary lender. After project completion, a closing is scheduled and the permanent financing is provided.

Other
SBA 504 mortgages through GSBDC are exempt from mortgage taxes. Therefore, a savings of 1% of the SBA 504 loan amount is provided.

Seller financed mortgages are allowed if subordinate to the GSBDC/SBA 504 loan.

On new construction, up to 20% of the building may be leased to another tenant permanently and up to 40% on a temporary basis.

If purchasing an existing building, the applicant must occupy 51% of the space. The balance may be leased, as long as no proceeds of the 504 loan are used to remodel or convert the rental space.

Environmental reports will be required for all realty projects.