Insights

Temporary Benefits of the SBA 504 Loan Program

John Finegan, Associate

The Boulos Company is a commercial real estate brokerage. While we feel strongly that our audience should be informed about the benefits of this loan program, we advise that you please seek the input of a trusted finance professional before actually applying for a loan. 

Round two of the SBA’s Paycheck Protection Program (PPP) opened on Monday, January 11, 2021. Within the bill is a $284 billion pool to help struggling businesses survive the pandemic. The bill includes temporary alterations to the SBA 504 Loan, a government-backed loan program designed to provide financing to small and medium-sized businesses to promote economic growth and job creation. These temporary changes present business owners with the rare opportunity to save on mortgage payments, loan participation fees, and CDC processing fees. In some situations, these changes can save borrowers well over $100,000. In this article, I will break down what an SBA 504 Loan is used for, how to qualify, the process for getting a loan, and the financial impact that the second round of PPP had on the SBA 504 Loan program. These benefits are only in effect until September 30, 2021, so it is important for buyers to act quickly if they want to take advantage of these temporary benefits. If you are a business owner considering buying a new property, new equipment, or making improvements on an existing property for your business, this article could help to save you a lot of money.

What an SBA 504 Loan can be used for:

SBA 504 Loans can be used by business entities for the following uses:

• • • • – Purchase of existing building
      • – Purchase land and construct a building
      • – Purchase of new facility
      • – Purchase of long-term machinery and equipment
      • – Improvement of land, streets, utilities, parking lots, and landscaping
      • – Improvements of existing facilities

One of the more appealing things about the SBA 504 Loan, compared to traditional financing options, is that the SBA 504 Loan can finance both the purchase and the fit-up of a property. For example, if a property is purchased for $1,000,000 and another $300,000 of work is required to make the property functional for a business, the total loan will cover the full $1,300,000, minus the down payment. There are a few other constraints, however. The SBA 504 Loan will only cover 40% of the total project cost, the rest will be covered by a traditional bank loan (usually 50%) and the down payment (usually 10%). The SBA loan is also limited to a maximum loan amount of $5,000,000 for just the 40% SBA 504 Loan portion.

For example, a $12,500,000 project could be financed as follows:

• • • • – 40% SBA 504 Loan ($5,000,000)
      • – 50% Bank loan ($6,250,000),
      • – 10% Down payment ($1,250,000)

In this example, the SBA 504 Loan uses its maximum amount of $5,000,000.

There are circumstances in which the SBA will require a larger down payment. One such instance is if the loan is being used to finance a special purpose property like a gas station or hotel. In this case, the SBA may require an additional 5% down payment. Another instance occurs when the loan applicant is a new business. The SBA may require an additional 5% down payment. If it is both new to business and special purpose, the SBA will require a 20% down payment. In most circumstances, the down payment is 10%, which is still more advantageous than traditional loans – usually a 20% down payment.

Which businesses can use an SBA 504 Loan:

To be eligible for an SBA 504 Loan, a business must meet the following criteria:

• – The borrowing business operates as a for-profit company in the United States or its possessions
• – Have a tangible net worth of less than $15 million
• – Have an average net income of less than $5 million after federal income taxes for the two years preceding the SBA 504 Loan application
• – Fall within SBA size guidelines

The SBA will also take following criteria into consideration:

• – The borrowing business must have qualified management expertise.
• – The borrowing business has a feasible business plan.
• – The borrowing business has good character and the ability to repay the loan.
• – The loan will promote business growth and job creation.
• – The loan can be (but does not need to be) used to purchase property that is classified as Rural by Rural Development, which includes nearly everywhere in Maine besides Portland, Lewiston-Auburn, and Bangor. See this link for an exact map: https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do;jsessionid=GD0PWoHP0RQYd7hLushutMnU.

The qualification process:

Like any loan, getting an SBA 504 Loan starts at a bank. Talk to a banker and see if an SBA 504 Loan is appropriate. If it is, the process is as follows:

1. Banker works on the loan application as they would in their normal process – the difference here being that approval is required for two loans:
   1. for 50% from the bank
   2. for 40% for an SBA 504 Loan.
2. Banker will bring in the CDC. The CDC works with both the borrower and the bank on the SBA 504 Loan application.
3. The CDC underwrites the request and submits the application to the SBA for final approval.
4. The SBA will review the application and either request more information or approve the application.
5. Once approved, the bank will close on both loans: the 50% bank loan (their permanent loan) and the 40% SBA portion. The bank holds the SBA 504 Loan until the debenture funds.
6. Debenture funding occurs roughly two months after purchase or, in a circumstance where the loan is being used for construction or fit-up, after completion of such a process.

CDCs:

Certified Development Companies (CDCs) are the SBA’s community-based partners who promote economic development within their communities. CDCs are organizations that are certified by, but independent of, the Small Business Administration (SBA). There are roughly 230 CDCs around the country. They work in conjunction with banks and credit unions to provide funding for small and medium-sized businesses around the country. Paul Collins with Granite State Development Corp is a CDC with an office in Portland, for more questions on CDCs and the SBA 504 Loan process, please contact a commercial banker or Paul directly at pcollins@granitestatedev.com.

Temporary benefits of SBA 504 Loans:

Round two of PPP had four major changes that will be temporarily in effect:

• – For all 504 loans approved between February 1, 2021 and September 30, 2021, the borrower will get three months of payment subsidies which includes principal, interest, and fees. The payments are only for the 40% SBA 504 portion of the loan. This is capped at $9,000 a month. At maximum, this could save the borrower $27,000. These payments are not deferred, they are paid by the government.
• – The Third Party Lender Participation Fee (0.5% of the 50% bank loan), which is normally paid by the borrower, is waived for all SBA 504 Loans approved between December 27, 2020 and September 30, 2021. For example, if the entire purchase price is $12,500,000, the bank’s portion would be $6,250,000. Half a percent of this would be $31,250, which the borrower is no longer required to pay.
• – The CDC Processing Fee (1.5% of the 40% SBA loan), which is normally paid by the borrower is paid by the government for all 504 loans approved between December 27, 2020 and September 30, 2021. For example, if the entire purchase price is $12,500,000, the SBA’s portion would be $5,000,000. One-and-a-half percent of this would be $75,000, which the borrower is no longer required to pay. The CDC still gets paid but by the government, rather than by the borrower.
• – Experienced CDCs are granted the authority by the SBA to establish a 504 Express Loan program for loans of less than $500,000 (just the 40% SBA portion) through September 30, 2023 that expedites the SBA 504 Loan application process. Therefore, projects up to $1,250,000 can be approved by the CDC without SBA approval. This reduces the approval process by roughly 12 business days.

An additional, non-temporary benefit of the SBA 504 Loan is lower interest rates compared to traditional financing. As of March 2021, the SBA 504 portion of the loan has the following interest rates:

• – 20-year fixed rate: 3.100%
• – 25-year fixed rate: 3.205%
• – 10-year fixed rate: 2.498%

**These are fixed rates for the entire term of the loan.

Here is an example showing the benefit of getting an SBA 504 Loan before September 30, 2021:

• – Purchase Price (acquisition plus any construction): $12,500,000
• – Down Payment (10%): $1,250,000
• – Bank Loan (50%): $6,250,000
• – SBA 504 Loan (40%): $5,000,000

Closing costs that are temporarily waived.

• • – CDC processing fee (1.5%): $75,000
  • – Third Party Lender Participation Fee (0.5%): $31,250

In this example, the borrower would effectively have the CDC processing fee and the Third Party Lender Participation Fee waived, for a total of $101,250. The first three months of SBA 504 Loan would be paid for by the government, which would be capped at $27,000. In the first year of the loan, the borrower would save $128,250. Another benefit of this process is that the borrower would be able to hold on to $1,250,000 cash, as the down payment of the SBA 504 Loan is only 10% – compared to the standard 20% down in traditional financing. This would not be “savings” because that money would still be owed, but it does significantly reduce the cash required for the purchase. Additional savings would continue as the favorable interest rates of the SBA 504 Loan program saves the borrower money on each loan payment for the life of the loan.

These benefits are enormous, but they are also temporary. If you have been on the fence about making a purchase or an investment for your business, now may be the right time to take the plunge. We at The Boulos Company would be happy to speak with you about this program.