What is an SBA 504 loan?
The SBA 504 loan program is a partnership program between a Certified Development Company (CDC), such as Amplio, and a bank or credit union. The SBA 504 loan program is an economic development program that promotes growth and job creation in American small businesses by providing fixed-rate, long-term financing for land, buildings and manufacturing equipment or machinery.
What is the job creation ratio required with an SBA 504 loan?
The job creation requirement is one job per $75,000 of SBA loan funds received. ($120,000 for Small Manufacturers who have an NAICS code beginning with 31, 32 or 33.)
Are there any special programs or exceptions to the job creation requirement?
Yes, the SBA 504 program allows businesses to meet other community development or public policy goals in lieu of meeting the job creation goals. Alternative goals included revitalizing the local community; expanding exports; expanding businesses owned by women, veterans, and racial minorities; and aiding rural development.
Businesses can also meet Energy Efficiency/Public Policy goals that recognize the importance of ‘green’ initiatives in lieu of meeting the job creation goals. Projects that meet one of the following new energy goals are eligible for SBA 504 loans without needing to create or retain jobs:
- Reduction of energy consumption by at least 10%
Increased use of sustainable designs that reduce the use of greenhouse gas and non-renewable resources and minimize harmful environmental impact.
- Installation of equipment and/or upgrades that will process renewable energy sources.
Eligibility & Restrictions:
How does the SBA define “small business”?
For purposes of an SBA 504 loan, a business qualifies as “small” if it is a for-profit enterprise; is independently owned and operated; does not dominate in its field; does not have a tangible net worth in excess of $15 million, and does not have an average net income in excess of $5 million, after federal taxes, for the two preceding years. If a project exceeds these size standards, the alternative size standards for 7(a) loans can be used, which generally relate to the number of employees or annual revenue, depending on industry. The SBA will make loans to sole proprietorships, corporations, partnerships, limited liability companies and combinations thereof. For example, a common loan structure is to have a Limited Liability Company own the real estate, and lease it back to an Operating Company, which is an S-Corp.
Do “start-up” companies qualify for an SBA 504 loan?
Because the eligible uses for an SBA 504 loan are limited to real estate and machinery/equipment (excluding office equipment and computers), the loan program is primarily geared towards existing businesses which are seeking to expand. Start-up companies are not excluded from using an SBA 504 loan, however, the SBA will require a higher level of injection from the company than the 10% minimum.
Is an applicant with personal liquidity disqualified from receiving funds through the SBA 504 loan program?
The SBA no longer requires that the personal resources of owners be used to reduce the SBA funded portion of the total financing package. Lenders should continue to follow prudent lending practices and require that assets either be injected or pledged as collateral for a particular loan, if deemed prudent.
Is an applicant automatically ineligible if they have had a prior bankruptcy?
No. However, additional due diligence and disclosures may be required as part of the eligibility review.
What ongoing restrictions and loan covenants will the SBA require?
Some typical covenants include the following:
- A change in ownership or control of the business must obtain prior written consent of the SBA.
- Each May and October the business must furnish evidence that real estate taxes have been paid.
- The business must provide evidence of hazard insurance on business property on an annual basis in an amount equal to the SBA loan.
- Corporate tax returns or annual financial statements prepared by an accountant on at least a compilation basis must be provided.
- The business must get SBA consent in writing in order to incur any additional encumbrances on the collateral securing the SBA loan.
It is unusual for the SBA to impose covenants referring to cash flow coverage or other financial ratios, although it is acceptable for the bank to do so.
Loan Amounts & Rates:
What is the maximum loan amount available under the SBA 504 program?
For typical projects the maximum SBA loan amount is up to 40% of the total project costs with a maximum dollar limit of $5,000,000. Up to $5.5 million may be obtained if the company meets at least one of the following criteria:
- Operating Company is defined as a small manufacturing company with its primary NAICS code being in sectors 31, 32 and 33, and all of its production facilities are located in the United States
- Business facility meets certain specific environmental or energy efficiency “green” goals
Can there be more than one Project funded with an SBA loan?
Businesses can have multiple loans with the SBA, as long as the outstanding balance does not exceed $5 million.
Manufacturing businesses can have up to three loans with the SBA, up to $16.5 million.
What determines the SBA interest rate and when can I lock into the rate?
The interest rate for 10, 20 and 25-year SBA 504 debentures is loosely based on a “spread” or premium over the 5- and 10-year U.S. Treasury rates, respectively. This spread will vary from offering to offering, reflecting current market conditions.
The interest rate is set approximately six weeks after the project is totally complete, a Certificate of Occupancy is issued, all construction funds have been fully advanced and lien waivers have been collected for the project.
Loan Structure & Projects Costs:
Can seller-subordinated financing be used as the equity portion of the project?
While technically eligible, seller financing is considered a credit decision that is made on a case-by-case basis. If accepted, the seller must agree to subordinate his/her interest to the bank and SBA, and agree to sign a Subordination Agreement disallowing principal payments on the loan. If project assets are used to secure the seller’s Note, the term of that Note must match the term of the SBA loan. However, if the seller’s Note is secured by a non-project asset, the term need not match the SBA loan term.
Are SBA 504 loans assumable?
Yes, as long as the SBA/Amplio have an opportunity to review both corporate and personal financial information on the proposed borrower(s) in advance of the sale. One note of caution: the release of the original borrower’s personal guaranty is NOT automatic with a loan assumption.
Is it possible to purchase both real estate and equipment at the same time using an SBA loan?
Yes – in two possible ways. It is possible to prepare “companion” SBA 504 loans – one 20 (or 25) – year loan for the real estate, and another 10-year loan for the equipment. Or, if the weighted useful life of the equipment does not “drag” the overall life of the project too low, we can prepare a single application that includes both real estate and equipment.
Equity, Leaseback & Rental:
I bought land several years ago that is worth much more now than I originally paid for it. Can I contribute the land to my building construction project as equity? Will it be valued at cost or market value?
Land may be used as the equity injection in the project. The appraised value may be used if the land was acquired more than two years prior to the application date and the appraisal is accompanied by a title report covering the sale history for the past five years. Otherwise, the lower of cost or market value must be used.
The borrower’s contribution may include the buildings and site improvements on the contributed land as long as they are used in the project.
I am buying a building at less than market value. Can I use the equity in the property as my 10% equity injection?
No, the project value will be based on the lower of cost or appraised value. However, an exception to this rule is that a “land write-down” on unimproved land DOES qualify as equity.
My accountant told me that there are tax advantages to me if I own the real estate personally and lease it back to my company. Is this practice permissible to the SBA?
Yes, however, anyone who owns 20% or more of either the real estate OR the company will be required to sign a Personal Guaranty for the entire amount of the SBA loan.
An Employee Stock Ownership Plan (ESOP) owns a portion of the stock of the corporation and I own the remainder. Can we still qualify for an SBA 504 loan?
Yes. Certain conditions and requirements apply when an ESOP owns more than 20% of the corporation. Give us a call to discuss your specific situation.
Is it permissible for two or more owners (such as two doctors each owning his/her own practice) to jointly purchase a building using the SBA 504 loan program and then lease back space to their individual businesses?
While it is permissible for two (or more) unrelated owners to purchase or construct a building together, then each lease back a portion, borrowers should keep one important fact in mind: in order to qualify, each person who owns 20% or more of either the building OR either of the operating companies must offer a full personal and corporate guaranty on the entire project.
Another possibility would be for the two owners to turn the building into a condominium, with separate legal descriptions. In this way, each person will be asked to guaranty own his/her own portion of the building.
Because I expect my company to continue to grow rapidly, I would like to construct a building larger than what I will need at first. Is it possible for me to rent out some of the space for a few years?
For new construction, the SBA permits rental of up to 40% of the space in the short term; however, by viewing the company’s projections, the SBA expects that the borrower’s company will occupy 80% of leased space within 10 years of the loan. Only 20% of the total area may be leased out permanently.
What projects are eligible for a debt refinance loan?
- The borrower must have been in operation at least two years.
- A change in ownership during the previous two years renders the project ineligible for the debt refinance under the 504 program, unless a case can be made that the change did not result in an unproven business based on the new owner’s and management’s experience.
- Any debt being refinanced must be at least two years old by the date of the application, and must be secured by the fixed asset that is being refinanced.
- Documentation to verify liens have been in place for at least two years are required at the time of application.
- The loan(s) being refinance cannot have any late payments within the previous 12 months.
- The subject property must be at least 51% owner-occupied.
- The borrower must meet requirements such that one job must be created and/or retained for every $65,000 loaned by the SBA.
- For refinance projects, the maximum Loan-to-Value is 90%.
- This loan program does not apply to any government backed loans such as those that are presently financed by 7(a), 504 or USDA loan.
- Appraisal reports must meet all SBA’s ‘normal’ requirements and cannot be older than 12 months of the date of SBA application.