SBA 504 Loan Program
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What is it?
The SBA 504 loan program is designed to provide long-term, below-market,
fixed-rate second mortgage money for expanding businesses. The SBA
504 loan 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, legal, 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 $7,000,000 and does
not have average net income over $2,500,000 during the last two years. Most types
of businesses are eligible except for projects held primarily for investment,
limited use facilities, airplanes and newspapers. Owners of the business may also
have to pass a personal resource test. Please consult GSBDC for details.
Loan Limits
Normally 40% of the project cost can be covered, up to a maximum SBA 504 loan
amount of $4,000,000 if the borrower is a manufacturer in NAICS Sectors 31, 32
or 33 or $2,000,000 if the loan meets an SBA public policy goal. Otherwise, maximum
of $1,500,000. 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 $10,000,000
and consists of a financial institution lending 50% in a first mortgage 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 SBA 504 loan closing. The rate
(inclusive of all servicing fees) to the applying business concern is usually
1.95% over five or ten year treasury notes and is typically .5% to 1% under market
rates.
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 are required.
Key man life insurance is 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
Fees consist of 2.16% of the SBA 504 loan amount in addition to
the GSBDC legal fees, which are financed 100% and added to the 504
note.
Application Process
- Business decides to expand via real estate and/or machinery and equipment
acquisition.
- Business contacts GSBDC to outline project and determine eligibility.
- GSBDC provides a list of required information for complete application.
- After the application is prepared (including bank commitment),
the GSBDC Loan Committee reviews with principals present. If all
is satisfactory, the Loan Committee recommends approval to the
GSBDC Board of Directors within days. Upon Board approval, the
loan application is submitted to the SBA. Approval at SBA will
usually take less than one week based upon GSBDC’s “Accredited
Lender” status.
- After written loan authorization is received from SBA, a project is usually
started with interim financing. After project completion, a closing is scheduled
and the permanent mortgage provided.
Other
Some SBA 504 mortgages through GSBDC are exempt from mortgage taxes. Therefore,
a savings of 1% of the SBA 504 loan amount may be available.
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.
A satisfactory environmental review will be required ranging from a Transactional
Screen Analysis (TSA) to a full Phase I Environmental Audit.
Contact
Peggy A. Adams, Executive Director
How to apply - Calculate
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